Taxes budgets and business

Feeling over-taxed? Phil Ruthven’s reality check reveals that we are better off than we think.

Businesses tend to worry about government budgets for all sorts of reasons: Will the economy and its markets grow or contract? Will there be incentives or disincentives to investment? What will happen to income taxes and payroll taxes (in the case of state budgets)? Will interest rates be affected? And lots more.

In the case of the 2015 financial year (F2015) Federal Budget, Australia was already in a relatively sound position by historical and OECD standards. Admittedly, that is not saying much, given the debt levels, tax levels and deficits of so many of its members.

Our taxes are low by the standards of developed economies, as Figure 1 shows. Further, our total tax level is still below the 30 per cent level that prevailed through the 1990s and most of the 2000s. There is room to raise some taxes, preferably the GST (not done in the F2015 Budget) to balance the Budget while still having the developed world’s lowest tax level.

Total income for all governments is higher as a share of GDP, due to revenues derived from government business enterprises and other sources.

In F2015, total income is headed for some $550 billion or more, of which nearly 80 per cent is collected or received by the federal government, but spent more by the states and territories.

The federal government will still raise around $440 billion in F2015. The mix of taxes and other revenues is shown in Figure 2, covering the period from 1910 to 2014.

These days, direct or income taxes account for around two-thirds of the total income and have done so for over three decades. Company tax has doubled from 11 per cent of the total to 22 per cent this year while individual taxes have shrunk from 51 per cent to 43 per cent over the same period.

However, it is relevant to note that the gross profit share of corporations in the economy has increased substantially over recent decades, as Figure 3 reveals.

Its share of GDP has risen from 17 per cent in the late 1980s to a recent peak of over 24 per cent in 2011.

So, are we heavily taxed as companies? Not really, as Figure 4 suggests. We are among a cluster of nations sitting on the average of some 30 per cent, with most nations below that being developing economies.

Interestingly, payroll taxes – a state tax on companies – is also low. Including the superannuation levy, it is 14.25 per cent, which is one of the lowest in the OECD developed economies.

Japan and the UK are 26 per cent, Germany 41 per cent and France at a whopping 66 per cent.

Our GST is one of the lowest too, at 10 per cent, given the OECD average of 17.5 per cent and with too many exemptions such as health, education, some food et al.
In short, Australia is a lowly taxed nation and that includes our companies.

Businesses have little to complain about in that regard.

Arguably, it is red and green tape, industrial relations regulations and practices, innovation and productivity that are the more important areas for focus by governments and the corporations themselves.

We are indeed the country with the most reasons to be smiling these days.

Our taxes are low, our consumer confidence is better than most, our unemployment is not far off “full” (defined as <5 per cent), we have low racial tensions, fast population growth, low interest rates, some very good recommendations from the recent Committee of Audit and we are integrating rapidly into the world’s largest and fastest growing region (of the eight) being the Asia Pacific.

We are better off than we think or are told these days.