Tax time turns into a horror show for many

It may not be fashionable to feel sorry for tax accountants but a recent anecdote from my colleague Robin Bromby shows the depths of the problems they face.

When Robin visited his tax accountant he was told that the abolition of the so called lamington or LMITO – Low and Middle Income Tax Offset – has created plenty of anger among many low and middle income earners who once would have been thought of as the sort of people who were natural Labour voters.

According to Robin’s account, “swathes of retirees and low paid people who always got a tax refund now get a tax demand on top of what they have paid, and these people are red hot.’’

You might think this is just a one-off anecdote but the overall numbers strongly support the concept that tax refunds are becoming much rarer and that overall taxation levels are reaching record levels.

Indeed, the picture Robin’s tax accountant was getting of many angry taxpayers is actually even worse than they could imagine.

Almost half of some household incomes going to tax

A recent study by the centre-right leaning Centre for Independent Studies found that Australian households are devoting up to 45% of their income to taxes, with the total amount of revenue collected by federal and state governments set to hit a 23-year high this year.

Overall, Federal, state and local government tax revenue is also expected to amount to a near-record 30% of gross domestic product in 2023-24.

That figure would represent the highest tax take since 2000-01, when taxes amounted to a record 30.3% of GDP.

Staggering amount of $29,700 collected per head

The strong increase in tax revenue meant the federal and state governments collected $29,700 in tax for every adult and child this financial year.

CIS senior fellow Robert Carling put it this way, saying: “Governments are not focused on the overall tax burden and are not attempting to control it.”

The report which was titled The Truth About the Tax Burden, estimated that between 35% and 45% of household gross income was spent paying taxes, including those which at first glance were paid by businesses, but ultimately came out of household budgets.

Business passing taxes down to consumers

“Taxes for which the business sector are legally responsible are in effect passed on to the household sector through higher prices and lower wages and shareholder returns,” Mr Carling said.

“The goods and services tax is a good example of this: businesses are legally responsible for paying the GST and they collect the revenue by building it into the prices they charge consumers.”

Payroll tax and company tax are also passed on to consumers in the form of lower wages, higher prices, and lower shareholder returns.

Government’s ducking responsibility for tax rises

Mr Carling said the reason that tax as a share of GDP has been rising steadily over the past decade was that tax policy decisions were being taken by different governments with the result being that no one level of government can be held responsible.

Mr Carling proposed that national cabinet should co-ordinate efforts to control taxation levels.

Incredibly, the soon to be unveiled income tax cuts which take effect on July 1 will only make a small and temporary dent in total taxation, with the cuts set to be erased by bracket creep over time.

Ironically, the fairly recent resumption of real wages growth has only had the effect of actually increasing the real tax take and boosting collections.

Governments strip out $785 billion in taxes

Recent figures from the Australian Bureau of Statistics found that total federal government taxation hit a record $644 billion last year, while state and local government tax revenue rose to $141 billion in calendar 2023.

Mr Carling’s answer to the problem is to stop talking about tax reform through the lens of changing the composition of tax between income and consumption and instead to focus on the need to cut overall government spending.

“Long-term projections of expenditure suggest a continued pressure to increase the tax burden unless efforts are made to curb spending and improve its effectiveness in achieving objectives,” Mr Carling said.

All of which suggests that there will be plenty of frustration being felt by tax accountants and their customers for a long time to come.

The only thing that might cause some relief would be some sort of Federal/State agreement to concentrate on reducing the amount of government spending and increasing its effectiveness.

Without that, the overall tax take looks set to keep rising in real and absolute terms as governments of all levels try to tax and spend their way out of trouble.