14 November 2024

Executive summary


Australians pay a variety of taxes, at different stages of their economic life. Some are taxes on income, some are taxes on what we consume, and some are taxes designed to reflect the economic impact of what we do.

Most of the time, Australians discuss particular taxes, like income tax and what it means for them. But how do the different types of taxation relate to each other? Do some play a bigger role than others in generating revenue?

The common term for thinking about the taxes taken together is the ‘tax mix’. It is ultimately the ‘tax mix’ that determines what we pay.

But many readers are less familiar with the ‘tax mix’ than they are with individual taxes. They also know that the tax system can work differently in other countries. They sometimes wonder if Australia’s tax system could be different to what it is now. Could we have a different tax mix?

Some readers may be interested in the level in which individual taxes should be set, as they have varying beliefs about the role and size of government. Nevertheless, given any target level of tax revenue, it is likely that a combination of taxes will be needed to reach that amount.

This paper provides background information about how Australia’s taxes work, and about what it would mean to change the tax mix in a significant way.

Changing the tax mix is not easy, and this paper shows that only very large policies would significantly change the relative shares of taxes within the mix.

We start by reviewing the composition of Australia’s tax mix since Federation, introducing the major taxes that have funded Australian governments' expenditure over time.

Chapter 2 looks at the interplay between taxes, transfers (such as social assistance payments) and ‘tax expenditures’ (concessions) as tools governments can use to achieve policy outcomes.

Following this we describe several common methods for assessing the relative efficacy of taxes. Chapter 3 explains how any system of taxation involves trade-offs between multiple objectives and illustrate the various roles that taxes play within the overall mix.

Chapter 4 suggests other lenses for looking at taxes, particularly personal income tax, such as through industries, age and gender.

Finally, we consider some scenarios which illustrate what these trade-offs mean for the mix of taxation in Australia.

Introduction


Governments raise taxes to fund spending commitments and redistribute resources in alignment with the Aussie notion of a ‘fair go’. Taxes are typically collected from a variety of sources, through a variety of mechanisms. The relative sizes of those different taxes, and the way in which they are collected, is referred to as the ‘tax mix’.

Australia’s tax mix has been relatively stable since the Second World War. It involves a strong and growing reliance on personal income tax, with ‘bracket creep’ resulting from increasing incomes, through both economic growth and inflation and a progressive tax scale. This pattern has been supported by periodic tax cuts to return a proportion of that bracket creep. 

The relative contribution of personal income tax to the overall tax mix involves a high-degree of ‘lock-in’. Major changes would be required if that reliance were reduced. Some of the changes that would achieve that result may have significant and broader benefits but would be very large.

This paper provides a brief introduction to Australia’s tax mix. It is intended to assist those who are new to the topic in understanding this complex area of government finances.

Although this paper focuses on Australian Government taxes, we discuss taxes applied at various levels of government, particularly in our sketch of history in Chapter 1. Some taxes have switched from one level of government to another, within constitutional boundaries. In general, the impact of a particular tax does not depend on which level of government is responsible for its administration but in the way the tax works and is implemented.

Note that State and Territory tax revenue is sometimes referred to as ‘State taxes’ for brevity. The ‘Australian Government’ refers to the national government of Australia alone, not to the total of all governments.

The high-level modelling presented in this and other Parliamentary Budget Office (PBO) reports shows that, in the absence of government intervention, the tax mix will continue to be weighted more strongly towards personal income tax over time.

Tax data and definitions

The PBO's online budget glossary defines many of the technical terms used in this report. In general, a tax is a compulsory payment to government. Many taxes do not have the term ‘tax’ in their name (e.g. stamp duties and visa application charges). However, not all government revenue is tax. Non-tax revenue includes items such as interest, royalties, dividends, rents and fees for services. Over time, some government revenue items have been reclassified from non-tax to tax, and vice-versa. Common cases are various fees and fines. This means that total tax revenue may be revised from when first published. A list of all Australian government taxes is included in Appendix A.

For consistency, the primary source for tax revenue data is the Australian Bureau of Statistics, which publishes tax based on the Government finance statistics (GFS) standards. The GFS principles are issued by the International Monetary Fund (IMF) and the Australian Bureau of Statistic (ABS) publish an Australian version of the GFS manual providing guidance on the application of GFS by the Australian public sector.

As such, some amounts may differ slightly from those shown in Government publications such as the budget. For example, government financial reporting documents do not separately report interest and dividend withholding taxes, leaving them included within the category of ‘individuals and other withholding taxes’, while these are separately reported in the Australian Bureau of Statistics publication, Taxation revenue.

The spreadsheet published with this explainer includes data for taxes back to Federation for each State and Territory. Where possible, this data is shown on a consistent basis over time. However, it is sometimes not possible to precisely determine how reporting changes from year to year so small inconsistencies are likely.