PAYG workers are copping the most pain to pay off the deficit

Are we over-taxed? The answer to this question depends on who "we" are and what constitutes excessive taxation. Some object to paying any tax at all. Typified by the statement "get your hand out of my pocket", they see the role for government as being limited to protecting their private property rights. Others are willing to pay for the public services they receive and a more equitable distribution of income or, at least, of opportunity. Yet there are objective ways of determining whether "we" are overtaxed.

To begin, let's look at Australian government tax revenue as a proportion of all income produced in the economy, as measured by GDP. It's commonly suggested that Australia's public sector has been increasing inexorably at the expense of the private sector, that Labor governments are high-taxing governments and that, when elected, Coalition governments put the books back in order, cutting both taxes and spending.

Yet the highest-taxing government in Australia's history, by a long way, was the Howard government, followed by the present Coalition government. The Fraser government was a much higher taxer than the Whitlam government, while the Rudd-Gillard governments were on par with the Hawke-Keating governments, but well behind the Howard, Abbott and Turnbull governments.

Perhaps Australia is a high-taxing country by international standards? Well, no. In making comparisons, we gain the clearest picture by looking at taxes at all levels of government, not just the national government, since some countries rely more heavily on state or provincial taxes than others. On this count, Australia ranks as the sixth-lowest taxer among 35 OECD countries.

While Australia is not a high-taxing country, some types of taxpayers cop it in the neck while others have the means at their disposal to make the payment of income tax largely voluntary. It's not just the 48 millionaires who paid no income tax in the latest year for which statistics are available and who shelled out an average of $1.07 million to their tax advisers to achieve their desired result of not even paying the Medicare levy. On a less spectacular scale, independent contractors, individuals who set themselves up as companies, and the beneficiaries of family trusts, pay much less tax than ordinary Pay-As-You-Go wage and salary earners.

Way back in the Fraser government, when there was no fringe benefits tax or capital gains tax, and when family trusts were a favoured vehicle to minimise tax, Treasurer John Howard was forced to limit distributions from trusts to children under the age of 18. 

Since that time, two Liberal Treasurers – Peter Costello and Joe Hockey – called for a further tightening of the family trust provisions, but in the face of party-room opposition, failed to act.

It is on the shoulders of ordinary wage and salary earners that the Turnbull government's mythical projected return to surplus in the fourth year of the budget period is built. Unlike business owners, contractors and beneficiaries of family trusts, these Pay-As-You-Go wage and salary earners can claim very few deductions and cannot split their incomes. Only those earning more than $180,000 per annum are receiving a tax cut. Everyone else who has tax automatically taken out of their pay packets will pay more tax through bracket creep, as inflation takes more of their income into higher tax brackets.

A common misconception is that you need to cross a higher tax threshold to be hit by bracket creep. In truth, bracket creep occurs within tax brackets not just when crossing over them.

Most economists consider the budget projections of wages growth to be far too high, since wages are growing at their slowest rate on record. If the economists are right and the government is wrong, the projected surplus will fail to materialise, just as it has done for the last six years. But that would result in less bracket creep rather than none at all.

Now we can answer the question: are we paying too much tax? By developed-country standards we are not, but many Australians soon will be. They are the everyday working men and women who have tax automatically taken out of their pay packets and are earning less than $180,000 a year. They don't have an opportunity for aggressive tax planning and it is them upon whom the Turnbull government is depending to pay for its company tax cut and to return the budget to surplus.