Australia’s total wage and salary tax take as a proportion of GDP is low compared with the OECD-30 and the OECD-10. While Australia’s individual income tax burden is relatively high compared to the OECD-30 and OECD-10, 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.
The components of wage and salary taxation considered in this chapter include personal income tax, social security contributions and payroll taxes.
Different countries use various methods of taxing wages and salaries and different methods of providing assistance to groups such as low income earners, families and the unemployed. In order to make meaningful comparisons, a comprehensive measure is required that considers all components of the tax burden. The most comprehensive measure available is the ‘tax wedge’. This measure encompasses the entirety of wage-based taxes imposed by governments, taking into account the interchangeablity of cash benefits and tax relief.
The average tax rate (total tax as a proportion of income) for a worker earning the male average wage in Australia has been steady at around 22 per cent over the past 40 years. The marginal tax rate (the rate of tax paid on an additional dollar of income) for the same worker has averaged around 35 per cent.
Australia’s personal income tax structure (including rates and base) has similar characteristics to the OECD-10 and OECD-30. Australia’s top marginal tax rate of 48.5 per cent is slightly higher than the average top marginal tax rate for both the OECD-10 (second highest) and the OECD-30 (eleventh highest). Australia’s threshold, to which the top marginal tax rate applies, is sixth highest in the OECD-10 and twelfth highest in the OECD-30. Based on available information, at least three of the OECD-10 (Canada, the Netherlands and the United States) automatically index their national personal income tax thresholds to inflation. Many of the other OECD-10 use some form of partial indexation.
The combined progressivity of Australia’s personal income tax system and welfare system is higher than for most of the OECD-10. This particularly reflects the targeted nature of the welfare system. However, it should be noted that progressivity does not in itself equate to equity.
Australia’s tax wedge is ranked amongst the lowest four in the OECD-10 for seven of the eight different family scenarios considered by the OECD. However, Australia’s tax wedge for a single person earning 167 per cent of the average wages1 is ranked fifth highest in the OECD-10. Australia’s tax wedge is ranked amongst the lowest eight in the OECD-30 for the eight different family scenarios.
As a result of Australia’s tightly targeted welfare system, effective marginal tax rates are generally ranked higher against the OECD-10 than is the case for average tax rates. Australia’s marginal tax wedge is ranked second highest in the OECD-10 for two of the eight family scenarios. Comparisons with the OECD-30 vary considerably depending on the income of the household.
Another measure of tax burden considered in this chapter is the net personal average tax rate. The net personal average tax rate includes personal income tax plus employee social security contributions minus cash benefits. Australia’s net personal average tax rate is generally higher than the OECD-10 average, but lower than the OECD-30 average. The marginal equivalent for this measure for the eight family types show that Australia generally has a higher net personal marginal tax rate than the OECD-10, while the results for the OECD-30 vary depending on the family type considered.
Comparisons between the different family situations are considered in Appendices 4.3 and 4.4. The comparisons show the effect of the tax treatment for singles and families, the inclusion of dependants for single- and dual-income families, and the tax burden for secondary earners entering the workforce.
- Generally, across all OECD-30 countries the tax wedge for single- and dual-income families decreases with the inclusion of children. Australia is no exception; in fact, the decrease in the tax wedge in Australia exceeds both the OECD-30 and OECD-10 average decrease for both the single- and dual-income families considered.
- Australia’s marginal tax wedge increases for families with dependent children owing to the phasing-out of cash benefits.
Wage and salary income is often described as earned income and is distinguished from more passive forms of income such as investment income or capital income. More detail on capital income is considered in Chapter 7.
Wage and salary income is subject to three forms of direct taxation — personal income tax, social security contributions and payroll tax. All three of these aspects are considered in this chapter. For a discussion on social security contributions and Australia’s Superannuation Guarantee see Box 2.1.
This chapter presents a methodology for considering the overall tax and benefits position for households. This comprehensive measure is the tax wedge and it takes into consideration the key factors that determine an individual’s disposable income. Much of the analysis contained in Appendices 4.1 and 4.3 compares the tax wedge for a number of different family situations.
No single measure can capture all the salient aspects of any given taxation system. The optimal insight into a country’s taxation system is obtained through the collective consideration of all available measures, rather than through any particular measure in isolation.
This chapter also considers other important aspects of the personal income tax system such as the system’s rates and thresholds, progressivity and base.
Box 4.1: Tax wedge
The tax wedge is a measure of the difference between the total labour cost to an employer and the corresponding disposable income of an employee. The tax wedge is the sum of personal income tax (at all levels of government), employee and employer social security contributions (SSC) and payroll taxes minus any cash benefits from government welfare programmes. The tax wedge is usually expressed as a percentage of the total labour costs. This measure is illustrated diagrammatically in Chart 4.1.
Chart 4.1: Illustration of the tax wedge
1 Average wage is as defined by the OECD. This is explained in Box 4.2. In Australian dollar terms, 167 per cent of average wages in Australia in 2004-05 was A$85,452; 100 per cent of average wages in Australia in 2004-05 was A$51,169; 67 per cent of average wages in Australia in 2004-05 was A$34,283.