Australia recorded the biggest increase to average tax rates in the developed world last financial year due to bracket creep and the end of a tax offset that disproportionately affected low- and middle-income earners.
Data released by the Organisation for Economic Cooperation and Development (OECD) on Thursday showed Australia’s average tax rate increased by 7.6 per cent in financial year 2022-23 — the largest out of the 38 countries in the OECD.
The figures, published as part of the OECD’s annual Taxing Wages report, showed a single Australian without children earning the average wage paid $24,791 in income tax, equivalent to 24.9 per cent of their gross wage.
The OECD said the 7.6 per cent increase occurred for two reasons: the end of a tax offset, and bracket creep.
The report stated that the end of the Low and Middle Income Tax Offset (LMITO, colloquially known as the Lamington) on June 30, 2022 resulted in an increased tax burden for low- and middle-income earners, something ABC News flagged early that year.
The OECD found nominal earnings — or the money paid by employers to workers — increased due to higher inflation, which resulted in a greater proportion of workers’ pay crossing into a higher tax bracket and being taxed at a higher rate, also known as bracket creep.
(Australia is one of the OECD countries with an income tax system that does not automatically adjust its tax brackets as incomes increase.)
Lower middle-income earners bore brunt of tax rise: OECD
The effects of the tax offset expiration and bracket creep are evident in OECD data that showed the income tax increase for Australians earning two-thirds of the average income.
Last year, those earning two-thirds of the average wage ($66,709) paid 20.2 per cent in income tax, equivalent to $13,475. It is the highest the tax burden has been since 2000.
Comparatively, those earning two-thirds of the average wage in 2022 ($64,142) had a much lower income tax burden of 17.2 per cent, or $11,033.
In other words, despite wages for this group increasing by $2,567 in a year, a single Australian worker without children on two-thirds of the average wage is only $125 better off in nominal terms, and much worse off when the effects of inflation on the cost of living is taken into account.
Meanwhile, single Australians earning 167 per cent of the average wage in 2023 — or $166,274 — had their tax burden increase to 34 per cent, equivalent to $56,533.
In 2022, those single Australians earning that same percentage of the average wage — or $159,877 — had a tax burden of 33.2 per cent, equivalent to $53,079.
OECD data shows the average wage for this group increased by $6,397 in a year but, despite the slight increase to the tax burden, this group is $2,943 better off overall, excluding the effects of inflation that have dramatically raised the cost of living.
Their current tax burden of 34 per cent is the same as it was in 2015 and 2017.
The data comes ahead of the Stage 3 tax cuts, which come into effect on July 1 this year.
Those tax cuts, passed by the Coalition government in 2018 and 2019, would have resulted in large tax cuts for upper-middle and high-income earners, modest tax cuts for middle-income earners and no tax cuts at all for many low-income earners.
However, the Albanese government passed legislation this year, reducing the tax benefits for those earning more than $146,486 a year and increasing the tax cut for those on incomes below that level.
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Is Australia over-reliant on income taxes?
Australia’s average income tax rate of 24.9 per cent was the fourth-highest of the developed world, behind Denmark, Iceland and Belgium, and well above the 15.4 per cent average for the 38 OECD countries, the report showed.
However, Australia’s average income tax rate ranking does not take into account social security contributions in many other nations — and that means it does not provide an accurate comparison between OECD countries, according to senior economist at the Australia Institute Matt Grudnoff.
He said that, while the OECD income tax percentage comparison is used to argue that Australia is heavily reliant on income tax to fund government services, it is based on a narrow definition of what income tax is.
“The claim Australia is over-reliant on income tax is based on a semantic trick about what ‘income tax’ really is,” he said.
In a separate report published on Friday examining Australia’s reliance on income tax, Mr Grudnoff said that “trick” is the OECD’s exclusion of social security contributions.
He said by excluding the contributions, which refer to compulsory levies on workers’ income to pay for unemployment benefits, as well as senior and disability pensions, it exaggerates the importance of income tax for Australia.
“Excluding social security contributions from income tax might help to make it look like Australians pay a high amount of income tax relative to others in the OECD, but it is not an accurate way to compare countries,” Mr Grudnoff said.
“Social security contributions are levied on the gross wages of employees, [and] the OECD specifically includes social security contributions and income tax together when calculating the take-home pay of workers.
“Therefore, to get a more accurate comparison of how reliant Australia is on taxes on income, it is necessary to include social security contributions.”
Australia does not collect any social security contributions from workers or employers, and the OECD report does not factor in compulsory superannuation contributions because “they are not a form of taxation” as individuals retail control of the money.
The OECD provided separate data to factor in social security contributions in its Taxing Wages report.
When taken into account, Australia is the ninth-lowest-taxed nation at 29.2 per cent — significantly reducing its total tax burden and putting it well below the OECD average of 34.8 per cent.
For a better comparison of different nations’ income tax rates, Mr Grudnoff said it should be measured as a proportion of its gross domestic product (GDP), also known as the tax to GDP ratio.
Looking at 2021 data for OECD countries, he said Australia also had the ninth-lowest tax to GDP ratio at 29.5 per cent. Comparatively, the OECD average was 34.2 per cent.
“If Australia collected the average rate of tax for the OECD, then it would collect an additional $105 billion in tax each year,” Mr Grudnoff said.
Given this, he said the reality was that Australia was a low-tax country compared to other OECD nations, and one of the least reliant on income taxes.
“Claims that Australia is over-reliant on income tax do not stand up to scrutiny,” Mr Grudnoff said.
“Australia sits well below the OECD average when it comes to both income taxes and the amount of tax collected overall.”