Are taxes a barrier to prosperity? > Check the facts
Who: ‘One thing is for sure: no country has ever taxed its way to prosperity’. Treasurer Joe Hockey, delivering the Mid-year Economic and Fiscal Outlook.
The claim: High taxes are a barrier to increasing national income.
The facts: The following graph plots the International Monetary Fund’s measure for GDP per person for various OECD countries against the tax to GDP ratios in those countries.
The graph shows a positive relationship between the two axes represented as the straight line on the graph. This relationship means that if the tax to GDP ratio increases then GDP per person also increases. Australia is shown to have a tax ratio below the majority of OECD countries.
The finding: As it stands, Joe Hockey’s statement is very misleading.
Discussion of evidence: If, as Joe Hockey suggests, higher taxes are inconsistent with prosperity then the relationship between a tax to GDP ratio and the GDP per person would be negative. The line in the above graph would slope downwards rather than up. A negative relationship means higher tax ratios are associated with lower GDP per person. This is not the case.
The government has set a target of reducing debt and deficit. It faces significant spending pressure because it has committed to policies introduced by the previous government, in particular in education and disability and its own policy agenda including a one off cash injection for the Reserve Bank and an expanded Paid Parental Leave scheme.
The government has made it clear that it does not want to increase taxes. Hockey has attacked the policy stance of those who suggest higher taxes may be needed. The Australia Institute is among many groups that have analysed the merits of addressing government revenue shortfalls with fair taxation. The Grattan Institute has nominated increasing the GST and other groups have been critical of the superannuation tax concessions going to high income earners. It is far too simplistic to suggest higher tax ratios would be inconsistent with higher incomes over time.
“This relationship means that if the tax to GDP ratio increases then GDP per person also increases.”
It should be that if GDP per person increases, then tax to GDP will increase.
I would think tyou have the order wrong. In times of prosperity it is easier for governments to raise the relative tax burden to put money in the bank, like a good Keynesian should.
There is another facet to the quotes from the Treasurer and the Prime Minister reviewed on this web site: the use of “… its way to prosperity”, with the strong implication that we are not yet prosperous. I’m not sure if I have seen it on this web site or elsewhere, but I understand that all the evidence points to Australia’s being prosperous by both historical and current international standards, and I suspect that our problem is much more one of inequality than a lack of prosperity.