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.

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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.

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