MEDIA RELEASE: Australia does not have a tax revenue problem

28 September 2015

Claims that Australia needs to increase taxes to ‘restore’ taxes to historical levels are wrong, according to analysis of official data by the Centre for Independent Studies (CIS).

The Budget forecasts Federal Government tax revenue will be 22.3% of GDP this financial year, and this ratio is either above or about equal to historical averages, CIS research fellow Michael Potter said.

“This does not justify a tax increase to return to previous levels of tax revenue.”

“Instead of comparing with an average over time, the former Secretary to the Treasury, Dr Ken Henry, has said that taxes are currently too low compared to one year, 2002.

“But tax revenue was unusually high in 2002, just after the introduction of the GST, because some taxing power was transferred to the Federal Government. In the following years, taxes were abnormally high due to the mining boom. By comparison, taxes were atypically low in 2011, during the middle of the GFC.

“It isn’t clear why a year with abnormally high taxes should be used, rather than a year with abnormally low taxes. This is why a comparison with averages over time is better.”

Mr Potter said data showed the current tax to GDP ratio of 22.3% is:

  • Well above the 10-year average of 21. 7%;
  • Just below the 20-year average (22.5%);
  • Equal to the 30-year average (22.3%); and
  • Above the average for the post-Whitlam period 1976 to 2016 (22.0%).”

“This data can’t justify substantial tax increases,” Mr Potter said

“If taxes today went up to match the taxes in Dr Henry’s preferred year of 2002, this would mean a tax increase of around $15.6 billion. Unfortunately, the tax system is forecast to deliver a tax increase of more than this over the next four years (mainly due to bracket creep).

“This tax increase will mean a tax-to-GDP ratio of 23.4% in 2018-19 — well above the historical average. If tax policy is decided on historical comparisons of tax to GDP, we should be seeing large tax cuts, not increases.

“However, we shouldn’t decide tax revenue based on the ratio of tax to GDP. This is less important than the impact of taxes on the economy,” Mr Potter said.

Modelling from the Treasury, KPMG and others indicates that some taxes, particularly company tax, have substantially adverse effects on the economy. These taxes harm productivity, employment, investment and innovation, and these serious effects could be worsening over time.

“So keeping tax at the same proportion of the economy, let alone increasing tax, will have a more and more detrimental impact as time goes on. A simplistic focus on the tax-to-GDP ratio misses this issue.

“Of course, it is up to commentators to argue for an increase in the tax to GDP ratio, but they must acknowledge the costs of this approach. They shouldn’t hide behind the incorrect argument that taxes must be increased to ‘restore’ taxes to historical levels”.

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