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Taxation: How much tax do we pay?
The main roles of government include providing non-market goods and services (such as roads, hospitals, defence, public health and education services); regulating economic activity; maintaining law and order; and providing income security to those in need such as the retired, unemployed and families. These activities are primarily financed through taxation. The total level of taxation, the mix of taxation on income and on goods and services, and the equitable distribution of the tax 'burden' on individuals, families and businesses are issues of discussion and debate in Australian society today.
Increasing levels of taxation
Total taxation revenue as a proportion of Gross Domestic Product (GDP) has risen from 23% in 1966-67 to 32% in 1996-97. Over half of this increase was from personal income taxes which rose from 8% of GDP in 1966-67 to 13% of GDP in 1996-97. After peaking at 14% in 1986-87, revenue from personal income taxes as a proportion of GDP declined to mid-1970s levels (around 12%) by 1992–93 but has risen slightly since then.
Revenue from company taxes, as a proportion of GDP, was slightly higher in 1996-97 (4%) than it was in 1966-67 (3%). The level of revenue from company taxes has fluctuated between 3-4% of GDP throughout the period, apart from a dip during the eighties where it reached a low of 2% of GDP in 1983-84.
Contributions to total taxation
In 1996-97, the combined taxation revenue of the Commonwealth Government, State and local governments in Australia was $163 billion. By far the largest component was personal income taxes which raised $66 billion or 41% of total taxation revenue - up from 35% in 1966-67 but a lower proportion than in 1986-87 when personal income taxes contributed 46% of total taxation revenue.
The proportion of total taxation revenue raised by taxes on goods and services has also declined during the decade, from 31% in 1986-87 to 28% ($46 billion) in 1996-97. Of this amount, the two largest components were excises and levies ($14 billion) and sales tax ($13 billion).
Company taxes, payroll tax and fringe benefits tax together contributed $32 billion, about half as much as personal income taxes, and represented 20% of total taxation revenue in 1996-97. This is an increase since 1986-87 when these taxes contributed 13% of total taxation revenue, about a third as much as personal income taxes.
Property taxes accounted for 9% of total taxation revenue in 1996-97. Fees and fines raised 2% and income taxes levied on non-residents accounted for a further 1% of taxation revenue.
NET TAX RATE(a)
Source: Australian Taxation Office, Taxation Statistics.
Personal income taxes
In 1995-96, 8.2 million Australians (57% of the population aged 15 years and over) paid an average of $6,900 net tax (after deduction of rebates and credits and including the Medicare levy). A further 1.7 million people who submitted income tax returns incurred no net tax.
Levels of personal income tax are closely linked to level of taxable income (after deductions allowable under taxation legislation). In 1995-96 average net tax ranged from $460 in the lowest decile of taxable income to $24,960 in the highest decile.
Moving up the taxable income scale, the impact of the tax-free threshold decreases, and the impact of higher marginal tax rates increases, so that the share of net tax incurred rises at a faster rate than the share of taxable income. Consequently, in 1995-96, the share of net tax borne by the three highest deciles was greater than their share of taxable income. This difference was particularly marked for the ninth and tenth deciles which, together, had 41% of total taxable income and paid 53% of total net tax.
On the other hand, the share of net tax borne by the lower seven deciles of the taxable income distribution was less than their share of taxable income. This was particularly so for the lowest four deciles which, together, had 19% of total taxable income but paid only 9% of total net tax.
The overall net tax rate (net tax as a proportion of taxable income) declined slightly from 24% in 1985-86 to 23% in 1995-96. This was mainly because of an increase in the level of rebates and credits which more than doubled as a proportion of taxable income in the period (to almost 3% in 1995-96). Changes in marginal tax rates and the tax-free threshold also had an impact on net tax rates, affecting high and low income recipients in different ways.
Marginal tax rates were lower in 1995-96, particularly the top marginal rate which dropped to 47c in the dollar, from 60c in the dollar in 1985-86. Lower marginal tax rates had the effect of reducing the rate of tax payable for the majority of taxpayers, but particularly favoured those with the highest incomes.
The tax-free threshold was also lower in 1995-96, 21% of the median taxable income compared to 28% in 1985-86. This offset the effect of lower marginal tax rates, to some extent, for all taxpayers but particularly for those with the lowest incomes.
Another factor which tended to offset some of the gains associated with lower marginal tax rates and higher levels of rebates and credits was the increase in the Medicare levy, from 1% of taxable income in 1985-86 to 1.5% of taxable income in 1995-96. However this did not affect those taxpayers (e.g. pensioners, beneficiaries and low income earners) who were eligible for special relief provisions.
The overall result of these changes was that the average net tax rates were lower in 1995-96 than in 1985-86 for almost all levels of taxable income. However, there was considerable variation in the magnitude of these decreases. The biggest decrease was in the highest decile (5 percentage points). The fourth decile also had a relatively large decrease (3 percentage points) in its net tax rate. There was little or no change in the sixth and seventh deciles. Only those taxpayers in the lowest decile of taxable income paid a higher rate of net tax in 1995-96 than in 1985-86.
AVERAGE TAXABLE INCOME AND NET TAX, 1995-96
SHARE OF TOTAL OF TAXABLE INCOME AND NET TAX, 1995-96
Taxation and income redistribution
The combined effect of government taxes and benefits is to redistribute resources and reduce income inequality. For example, by imposing a higher tax burden on high income earners, differential rates of tax on personal income reduce inequality in the distribution of private incomes. In addition, individuals and households with lower incomes tend to receive a greater share of government benefits. These include direct cash benefits such as social security pensions and allowances, and non-cash benefits such as government services in the areas of health, welfare, housing and education. (See Australian Social Trends 1996, Household income redistribution).
Tax structures and levels of taxation vary considerably throughout the world. In relation to other OECD countries Australia has a relatively low overall level of taxation. In 1995, Australia ranked 24th among the 29 OECD countries, with taxation revenue equal to 31% of GDP.
In terms of the relative contribution of personal income tax to total taxation revenue, Australia (41%) ranked third behind Denmark (54%) and New Zealand (44%). Australia, unlike the majority of OECD countries, does not have specific social security contributions as part of its tax structure. Consequently, when employee contributions to social security were added to personal income tax, Australia ranked only ninth for contribution of total personal taxes to total taxation revenue.
In terms of the contribution of corporate income tax to total taxation revenue, Australia (15%) ranked third behind Luxembourg (18%) and Japan (15%). However, when payroll taxes and employer contributions to social security were added to corporate income tax, Australia ranked seventeenth for contribution of total corporate taxes to total taxation revenue.
The importance of goods and services taxes varied considerably among OECD countries, contributing less than 20% of total taxation revenue in some countries such as Japan and the United States and over 40% in others such as Korea, Greece, and Portugal. Australia ranked seventeenth, with goods and services taxes contributing 29% of total taxation revenue.
COMPOSITION OF TAXATION REVENUE FOR SELECTED OECD COUNTRIES, 1995(a)
(b) Comprises personal income tax and employee contributions to social security.
(c) Comprises corporate income tax, employer contributions to social security and payroll taxes.
(d) Mainly property taxes.
Source: OECD, Revenue Statistics, 1965-1996.