Monday, 14 November 2011

Some Great Big New Facts - On Tax

A few ill informed commentators enjoy rattling off the changes to the tax coverage in the four years since Labor won the 2007 election. They try to create an impression that the current government "is addicted to tax". It is also a line the Opposition have used when trying to attack the government over the flood levy, the price on carbon, the mining tax among other things.

Unfortunately for them, the claim of "tax addition" is not supported by any facts.

Mark Textor this morning tweeted a list of recent tax changes with the introductory line "Tax Addiction Tally". He mentioned:

"Alcopops Tax (2008), Increased luxury car Tax (2008), Working Overseas Tax (2009), Increased Cigarette Tax (2010) Mining Tax (2010), Up'ed Ethanol Tax (2010), Up'ed LPG Tax ( 2010), Flood levy Tax ( 2011) Carbon Tax (2011) NEXT!"

The "Tally" from Mr Textor includes some temporary tax changes, some that didn't become law and others which were designed to influence behaviour that raised trivial amounts of money. Fair enough if he and others wish to pursue that line, but it opens the door for some analysis of the recent history of taxation in Australia.

So how intrusive has the tax system been in Australia over recent decades?

Let's start with the Hawke/Keating years which for annual budget purposes, I will take to be 1983-84 to 1995-96. The average tax to GDP ratio over those 13 years was 21.6% and only in one of those 13 years did the ratio exceed 23% (it hit 23.1% in 1986-87). When the Howard Coalition Government took office from Keating in March 1996, the tax to GDP ratio was 21.7% - a touch above the average for Labor over 13 years.

For the next 11 years under the Howard Government, the tax to GDP ratio rose, never once falling below 22% of GDP. It averaged, over those 11 years, 23.3% of GDP, some 1.7 percentage points above the average of the Hawke/Keating years. In today's dollars, that is about $25 billion a year or a total of about $275 billion over the course of the Howard government when compared to the tax take under Hawke/Keating.

Since Labor took office in November 2007, in the three completed years of budgeting, the tax to GDP ratio has averaged a comparatively tiny 20.7% - a stark number highlighting the revenue loss from the GFC and the income tax cuts that were delivered in its first three years of office. If we take the forward estimates out to 2012-13 (which may actually overstate the tax take), the average rises to 21.4%. This number is 1.9% of GDP below the average of the Howard government and is 2.7% of GDP below the highest taxing years in Australia's history which Howard delivered in 2004-05 and again in 2005-06.

If you think that 1% of GDP is small, it isn't. Even 1% of GDP in 2012-13 dollar terms is a whopping $15 billion. The 1.9% of GDP lower tax take at the moment is around $30 billion per year or about $130 billion over the 4 years of the forward estimates when compared to the peak tax take under the Howard Government.

Or think of it this way, if the current government were to raise the tax take to the peak level under the Howard government, it wound be the equivalent of $4,000 a year, every year, for each household.

The facts are the facts. They might be uncomfortable or inconvenient, but this is a low taxing government despite that little tally that excitable characters like Mark Textor trot out from time to time.


Note: The MYEFO, due soon, will provide an update of these numbers. Stay tuned.

1 comment:

  1. Surely this is just an observation of our tax system acting as expected under the "automatic stabiliser" hypothesis. Supprised that it didn't fall more when the effects of the Asian financial crisis were upon us. Something to do with the GST maybe?