Australia's Future Tax System

Architecture of Australia's tax and transfer system

6.2 Taxes on labour, capital and consumption — Australia in the OECD

Chart 6.4 shows the balance of taxes on labour, capital and consumption in OECD countries. In this chart, taxes on labour include taxes on labour income, social security contributions and payroll taxes. Taxes on capital include company tax, taxes on personal capital income and property taxes.1 Taxes on consumption include value added taxes (like the GST) and excises, as well as taxes such as motor vehicle stamp duties and gambling taxes.

The position of a country in the chart shows its relative reliance on revenue from the taxation of labour income, capital income or consumption. A position on the vertical axis in the centre of the chart represents an equal weighting between revenue from taxes on labour and taxes on capital. To the left of the vertical axis, relatively more revenue is derived from labour taxes than capital taxes while the converse is true to the right of the vertical axis. The closer the country is to the horizontal axis, the lower its reliance on taxes on consumption. For example, the United States (Point 'USA' in Chart 6.4) derives a greater share of its revenue from taxes on labour income than from taxes on capital income and has the lowest share of revenue derived from taxes on consumption.

Compared with other OECD countries, and the OECD‑10, Australia has a relatively low reliance on tax revenue from labour, representing around 37 per cent of tax revenue by this measure. In other OECD countries, the reliance on labour taxation is significantly greater. This reflects the significant use of social security contributions in other countries, which are levied on wages, salaries and similar income. Social security contributions represent a significant source of revenue for many OECD countries. For many, this is a larger source of revenue than personal income taxes, in some cases contributing up to 40 per cent of total tax revenue. Australia's closest taxes are the payroll taxes levied by the States, which account for around 5 per cent of tax revenue.

Australia's reliance on consumption taxes, such as the GST and excise, is around the middle of the OECD‑10 countries but at the lower end of the OECD as a whole.

Chart 6.4: Estimated tax mix, Australia (dark dot), OECD‑10 (light dots) and
other OECD countries (squares) — 2005(a)

Chart 6.4: Estimated tax mix, Australia (dark dot), OECD-10 (light dots) and other OECD countries (squares) — 2005(a)

  1. Does not include Mexico. For Korea, Iceland, Switzerland and Turkey the share of personal income tax revenue derived from capital has been estimated using the average share of other OECD countries.

Source: OECD (2007a); Eurostat (2008), national governments; Australian Treasury estimates.

Chart 6.5 provides a perspective on the relative weight given to capital taxation in Australia. It is a surprising result in a globalising world with increasingly mobile capital flows for a small open economy to have the highest weight given to the taxation of capital income.

This overall result for Australia flows from a combination of the relatively high contribution of company tax to total tax compared with other OECD countries (driven by a relatively broad base and Australia's superannuation arrangements), a relatively high share of tax revenue from property, and relatively high taxation of personal capital income. The contributions of company and property taxes to total tax revenue are discussed in Section 5 and shown in Charts 5.5 and Chart 5.7. A comparison of top personal tax rates on capital income is also included in Section 5.

The relative contribution of taxes on labour, capital and consumption is indicative of the distribution of the tax burden but it does not necessarily give an indication of the absolute size of the tax burden on labour, capital or consumption. While Australia's reliance on capital taxes as a share of total tax revenue is the highest in the OECD (Chart 6.5), the total tax burden, measured in terms of tax to GDP, is relatively low (Chart 6.6).

Nevertheless, as a share of GDP, the total tax burden on capital is around 11 per cent, which is the fourth highest in the OECD. The total burden on labour is around 12 per cent of GDP (the fourth lowest in the OECD) and the total burden on consumption is around 9 per cent of GDP (also the fourth lowest in the OECD).

Chart 6.5: Estimated capital taxation revenue in 2005(a)

OECD‑30 and OECD‑10 countries

Chart 6.5: Estimated capital taxation revenue in 2005(a) - OECD-30 and OECD-10 countries

  1. For Korea, Iceland, Switzerland and Turkey the share of personal income tax revenue derived from capital has been estimated using the average share of other OECD countries.
  2. Data for Mexico not available.

Source: OECD (2007a); Eurostat (2008), Treasury estimates.

Chart 6.6: Estimated contribution of capital, labour and consumption taxes
to total tax burden — OECD 2005(a)

Chart 6.6: Estimated contribution of capital, labour and consumption taxesto total tax burden — OECD 2005(a)

  1. For Korea, Iceland, Switzerland and Turkey the share of personal income tax revenue derived from capital has been estimated using the average share of other OECD countries.
  2. Disaggregated data for Mexico not available.

Source: OECD (2007a); Eurostat (2008), national governments; Australian Treasury estimates.

Chart 6.4 and Chart 6.6 indicate the relative contribution to tax revenue from taxes on labour income, capital income and consumption. However, differences in the weightings do not necessarily imply differences in tax competitiveness across countries. The amount of tax revenue derived from a particular base and its relative contribution to total revenue will be a product not only of the rate of tax and the comprehensiveness of the tax base but also of size of the activity of the base to which the tax applies. For example, while Australia has one of the highest levels of corporate tax as a percentage of GDP among OECD countries, and this ratio has increased in recent years, the average effective rate of tax on corporate income, which is a better measure of competitiveness, has not increased markedly (Chart 6.7). The increase in the corporate tax to GDP ratio has been due primarily to strong growth in corporate income, particularly in the resource sector. However, there is no readily available data on how average effective rates of tax on corporate income have moved in other OECD countries. These may or may not have shifted downwards relative to Australia in line with the reductions in the statutory company tax rate.

Chart 6.7: Measures of the effective corporate tax rate in Australia

Chart 6.7: Measures of the effective corporate tax rate in Australia

Source: Australian Treasury estimates.


1 There are some differences in the classification of taxes on capital income and labour income between Charts6.4 to 6.6 and Chart 6.1, due to differences in available data.