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4.2 Broad international comparisons
4.2.1 Direct tax mix in respect of individuals and payroll
Like other OECD countries, Australia raises the majority of its taxation revenue (60.9 per cent in 2003) from direct taxation levied on incomes — wages, salaries and profits, however, the composition of Australia’s taxation of earned income is different from that of most other OECD countries (Chart 4.2 and 4.3).
As discussed in Chapter 3, payroll taxes are levied on a similar basis to social security contributions and as such are considered a form of tax on labour. While it is difficult to substantiate the actual incidence of payroll taxes, it is widespread practice to assume that taxes levied in respect of remuneration are ultimately borne by the employee.
Chart 4.2 compares Australia’s direct tax mix in respect of individuals and payroll with the average for the OECD-10. Australia’s income tax from individuals accounts for over 85 per cent of the total direct tax mix in respect of individuals and payroll, compared with the average for the OECD-10 of around 60 per cent of the total tax mix. Social security contributions and payroll taxes account for the remaining 40 per cent of the total tax in respect of individuals and payroll for the OECD-10.
Chart 4.2: Australia’s direct tax mix in respect of individuals and payrollOECD-10, 2003 | |
Australia |
OECD-10 unweighted average |
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Source: OECD Revenue Statistics, 2005.
4.2.2 Direct taxation in respect of individuals and payroll
As discussed in detail in Appendix 3.1, classification issues make comparisons of the headline income tax burden on individuals difficult. Despite these limitations, including the need to exercise care when analysing income tax data disaggregated into its personal and corporate components, this is the most frequent measure used in commentary about tax burden.
Chart 4.3 compares Australia’s direct tax burden in respect of individuals and payroll with the OECD-10. Casual observers often conclude that Australia has relatively high levels of taxation on individuals’ incomes because Australia’s individual income tax burden is second highest in the OECD-10.
However, once social security contributions and payroll taxes are accounted for, Australia has the second lowest level of direct taxation on individuals and payroll in the OECD-10 (14.0 per cent of GDP). This is below the unweighted average of 16.3 per cent of GDP. In Japan, the Netherlands and Spain, social security contributions are a larger source of taxation revenue than individuals’ income tax.
Chart 4.3: Components of direct taxation in respect of individuals and payrolls(a)
OECD-10, taxation revenue as a proportion of GDP, ordered by tax burden, 2003
- For the purpose of international comparison, there are significant risks in relying on disaggregated data, especially in disaggregating taxes on income, profits and capital gains into its individuals, corporate and other components. A description of these is provided in Appendix 3.1.
- OECD Revenue Statistics, 2005.
Australia has always had a low tax burden in respect of individuals and payroll, when compared with the OECD-10 (Chart 4.4). In fact, Australia’s tax burden has on average been around 20 per cent lower than the OECD-10 over the period since 1965.
Chart 4.4: The Australian personal tax burden in perspective
OECD-10, total direct taxation revenue in respect of individuals and payroll
as a proportion of GDP, 1965-2003
Source: OECD Revenue Statistics, 2005.
Over the past 40 years Australia’s personal tax burden has increased from around 8 per cent of GDP to 14 per cent of GDP. After an increase in the tax burden in the early 1970s, the burden has remained relatively stable between 13 and 16 per cent of GDP.
4.2.3 History of average and marginal tax rates
Chart 4.5 shows the top marginal tax rate, the marginal and average tax rates applicable to a male earning an average wage (male total average weekly earnings or MTAWE). Both measures include the Medicare levy where applicable.
Chart 4.5: Marginal and average personal tax rates
Australia, 1965-66 to 2004-05
Source: Australian Treasury estimates.
Australia’s top marginal tax rate has decreased over the past 40 years from almost 70 per cent to its current level of 48.5 per cent (including the Medicare levy). The marginal tax rate for MTAWE has ranged from 28 per cent to 47 per cent. Since 2000-01, the marginal tax rate for a person on MTAWE has been 31.5 per cent (including Medicare levy).
The average tax rate (total tax as a proportion of income) for a person on MTAWE in Australia has been steady at around 22 per cent over the past 40 years. In comparison, the marginal tax rate (the rate of tax paid on an additional dollar of income) for the same person has averaged around 35 per cent.
4.2.4 Tax wedge
The tax wedge captures the overall difference between the disposable income of an employee and the corresponding costs incurred by their employer. It is the standard measure used for comparing tax burdens on wage income across countries and through time and is the cornerstone of the OECD’s publication Taxing Wages.
Tax wedge analysis demonstrates how personal income tax, social security contributions paid by employees and employers and cash benefits affect various types of families in different countries in the OECD. This allows for a country-based comparison of labour costs and the overall tax and benefit position of families. This analysis is discussed in greater detail in Appendix 4.1. Another measure of tax burden is the net personal average tax rate and this is considered in Appendix 4.2.
Chart 4.6 shows the composition of the tax wedge for the OECD-10 for an average worker with no dependent children. Cash benefits are not included as the average worker with no children does not receive any cash benefits in any OECD country. Chart 4.6 shows that the tax wedge for an average worker with no children in Australia is the fourth lowest in the OECD-10.
Chart 4.6: Tax wedge for an average worker
OECD-10, 2005(a)
- Refers to a single average worker with no dependants. The tax wedge includes income tax plus employee and employer social security contributions. The OECD’s Taxing Wages publication includes payroll taxes in its treatment of employer social security contributions.
Source: OECD Taxing Wages, 2005.
Chart 4.7 shows the composition of the tax wedge for an average worker with no children in Australia against the OECD-10. This shows that while Australia’s structure of direct taxes on individuals and payroll varies from the average, the end result is that the proportion of labour costs that the average worker receives as disposable income in Australia is very similar to that for the average worker for the OECD-10. The actual disposable income depends on the wage levels as well as tax wedges.
Chart 4.7: Comparison of the tax wedge components for an average worker(a) |
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Australia |
OECD-10 unweighted average |
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- Refers to a single average worker with no dependants.
Source: OECD Taxing Wages, 2005.
The tax wedge varies depending on the level and composition of the family and private income. In order to compare tax systems, the OECD calculates tax wedges for eight different hypothetical family scenarios. Appendix 4.1 outlines these family scenarios and illustrates and compares the tax wedge across the OECD-30. Comparisons between the different family scenarios are considered in Appendix 4.3. The comparisons show the effect of the inclusion of dependants for single-and dual-income households as well as the effect of secondary earners entering the workforce.
In summary, the tax wedge for workers in Australia is consistently ranked among the lowest eight in the OECD-30 for each of the eight family types considered and among the lowest six in the OECD-10 countries. Australia’s tax wedge is lower than the average for the OECD-10 for all eight scenarios except for a single-income person earning 167 per cent of average wages.
Another measure of the tax burden is the net personal average tax rate. The net personal average tax rate is a measure of the employee’s total wage-based tax burden. The net personal average tax rate can be described as a measure of a family household’s wage-based disposable income, and is important since it is a measure of the employee’s incentive to increase the number of hours they work or to seek promotion.
The net personal average tax rate is the sum of personal income tax plus employee social security contributions, minus cash benefits as a percentage of gross wage earnings. That is, this measure excludes employer social security contributions and payroll taxes and the base is gross wages rather than total labour costs. The results of the net personal average tax rate for the eight different family types are contained in Appendix 4.2.
Australia’s net personal average tax rate is generally higher than the average for the OECD-10 with two exceptions, sole parents with two children earning 67 per cent of average wages and single-income families with two children earning 100 per cent of average wages.
Box 4.2: Measures of wage earningsThe wage measure used in this chapter is the average wage for an average worker (AW). This measure is the OECD’s average wage measure and therefore allows for international comparisons. The average wage is the average gross wage for persons engaged in full-time manual or non-manual labour for a certain range of industries.2 In 2004-05 Australia’s average wage was A$51,169 (on a US dollars purchasing power parity basis this is US$36,851). The OECD’s average wage measure differs from other commonly used average wage indicators in Australia. One measure of wage earnings is average weekly ordinary time earnings for full-time adults (AWOTE). This measure includes all cash earnings of an employee which are received on a regular and recurring basis but excludes overtime payments. The average value of AWOTE for 2004-05 was A$51,206. Another Australian measure of wage earnings is average weekly earnings (AWE). AWE is calculated on both full-time and part-time workers. AWE includes all cash earnings of an employee which are received on a regular and recurring basis, such as ordinary time and overtime payments. The average value of AWE for 2004-05 was A$40,356. Male total average weekly earnings (MTAWE) is the same as AWE, but is calculated across males only. MTAWE has been used in the analysis in Chart 4.8 as it is the only wage series in Australia that is available back to 1960s. In 2004-05, MTAWE was around A$48,056. Chart 4.8 shows the average wage across the OECD-10 on a purchasing power parity basis. Chart 4.8: Gross wage earnings for an average workerOECD-10, 2005 (US dollars)
Source: OECD Taxing Wages, 2005. |
2 The average gross wage of a person engaged in full-time manual or non-manual labour in industry sectors C-K (inclusive) in the international classification. For Australia these sectors are: manufacturing, electricity gas and water, construction, wholesale trade, retail trade, accommodation, cafes and restaurants, transport and storage, communication services and finance and insurance.
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