Ideas@TheCentre

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Tax Freedom Day

Robert Carling | 11 April 2014

robert-carling One of the more effective ways to illustrate the tax burden is to think of all Australians working solely to pay taxes until the annual demands of federal, state and local governments are met. This year they would have been doing so in that hypothetical situation from 1 January until 22 March to pay federal taxes and then until 9 April to pay state and local taxes. This makes Thursday, 10 April Tax Freedom Day.

The CIS has been calculating Tax Freedom Day for many years. This year it falls three days later than last year, but it has been as late as 22 April in earlier years. There are forces at work that will push Tax Freedom Day towards a late April date over the next several years.

The strongest of those forces is the momentum of government spending in a situation where politicians have made spending promises that cannot be honoured from the existing tax base. Under current policies and promises of new programs, government spending is destined to claim a rising share of gross domestic product (GDP), which will place upward pressure on taxation.

Already government spending goes well beyond the amount of tax revenue raised. In fact, federal, state and local governments combined will go on spending the equivalent of all GDP until 12 May. Part of that extra spending is financed by non-tax revenue, but another part is financed by borrowing, which needs to be reined in.

A hands-off approach to the tax system will see the overall tax burden grow through the insidious process of income tax bracket creep. Reform is needed to address bracket creep among other structural problems with the tax system. Calls for tax reform are growing louder, but many of those calling for reform see it not just as restructuring but a route to higher overall taxation to finance growing government expenditure.

We need tax reform to fix structural problems and make the tax system more supportive of productivity growth, but we also need root-and-branch reform of government expenditure programs to halt the growth of spending and the pressure that will place on taxation.

Robert Carling is a Senior Fellow at The Centre for Independent Studies.