Add up all the charges and fees, and the tax system’s not progressive
Australia has a habit of collecting new taxes without retiring old ones. As a consequence, once all the taxes on earnings, consumption and even savings are added up, an average worker can find themselves paying close to 50 per cent of their gross income in tax.
A joint report by the Australian Taxpayers’ Alliance and the Liberal Democratic Party, released today, calculates the total amount of tax paid by a resident of Victoria.
Regressive: fines hurt those on low incomes because they are fixed rather than based on a percentage of income or even a percentage of expenditure It finds that the typical Victorian, earning the state’s 2019 average income of $63,440, costs their employer about $73,200 to hire once superannuation, payroll tax and extra benefits are all added up.
We’re not just taxed on our wages and when we spend our money; we’re taxed for saving too. Of that gross income, the government collects a whopping 55 per cent – more than $40,000.
Hence the Australian taxation system is not as progressive as policymakers would like to think. Of course, the tax burden starts with income tax. But for years Australians have been like boiled frogs, with new taxes imposed while old taxes linger. In some cases the government even imposes taxes on taxes; the luxury car tax, for example, is levied on the vehicle’s value including GST. Many cars that would ordinarily fall below the LCT threshold are subject to the LCT because the GST pushes their value over the threshold.
In addition to multiple taxes, the government collects revenue through fines and fees. These particularly hurt those on low incomes because they are fixed rather than based on a percentage of income or even a percentage of expenditure. A sales tax, while regressive, does not have the same negative impact because low-income earners spend less on taxable items. Paying over $1000 a year in fees and charges to keep a vehicle on the road may be an inconvenience for someone earning over $100,000 a year, but to those on the minimum wage of $39,000 a year it represents a significant proportion of their income.
But we’re not just taxed on our wages and when we spend our money; we’re taxed for saving too. First, Australia’s capital gains tax makes no allowance for inflation. Second, tax must be paid on interest or other earnings even when the savings on which they are based do not increase in real buying power — meaning the price of goods increases at the same rate as their savings. A tax is imposed on savings even though it has not earned any real money.
Not even our retirement savings are safe, with fees and triple taxation cutting into superannuation. If the government were to remove taxes on super, Australians would have about 25 per cent more for retirement — far more than what the scheduled 12 per cent increase in the superannuation guarantee would provide.
If we are to achieve a lasting recovery from this pandemic induced economic downturn, we need tax reform. According to the Henry Tax Review, Australia has 125 separate taxes, of which only 10 account for 90 per cent of the revenue. Policymakers could repeal many of these without substantially affecting the government’s bottom line.
If inefficient taxes that bring in little revenue at high expense were cut, Australians could get to work building back our economy. In particular, the states need to cut some of Australia’s worst taxes, including payroll taxes, stamp duty and other indirect forms of revenue-raising such as fines and fees.
This might require giving some taxing power back to the states to make up for the lost revenue. The states previously relinquished most of their taxing powers to the federal government in exchange for handouts, which is why we now face the current absurd tax burden.
Every level of government needs to get involved in tax reform because every level of government contributes to the high tax rate.
Let’s take an axe to outdated and burdensome taxes. More money in the pockets of everyday Australians will lead to higher levels of consumption, which means businesses will thrive. When businesses make significant profits, wages increase, and when wages rise, everyone wins.
This article first appeared in the Australian Financial Review on 30 April 2021.