Personal Income Tax

Consumption Taxes in Australia and the OECD: A Comparison

At present, fresh food, educational products and services, and health care are exempted from GST. Also, the GST represents only 12.1% of the total tax revenue in the country. This pales in comparison to the proportion of personal income tax (47.1%) and company tax (22.6%).

Australia’s GST is a type of consumption tax. Other countries have different variants of consumption tax usually labeling theirs as Value Added Tax (VAT). With impending tax reforms, a comparison with other nation’s consumption tax may prove educational.

OECD member nations

The OECD in late 2014 conducted a study on the consumption trends of OECD countries. The study found that although some countries have raised their VAT rates, only a few countries have expanded their VAT base. The report stated that “Many OECD countries continue to use reduced VAT rates and exemptions mainly for equity and social objectives.”

The report further suggested that broadening the tax base can increase revenue and cut down on compliance and administrative costs. Additionally, the report stated that “A reduction of the standard rate may even be possible by broadening the tax base.”

The items GST or VAT apply to, vary considerably across the OECD, with some countries mirroring Australia’s base items (medicine, water supply, and food). In 17 OECD countries, it is also common to find that countries have reduced VAT for food, rather than totally exempting it from the tax base.

The consumption tax of some OECD member nations is summarized below:

New Zealand: The GST rate for New Zealand presently stands at 15% which falls below the GST average rate (19.1%) for OECD countries. The country has some items exempted for the GST. In the past five years, almost 60% of the OECD countries have increased their VAT or GST at least once. New Zealand’s last increase came in 2010 when it increased its VAT to 15% from 12.5%. In the OECD report cited above, the country’s GST is 30% of the country’s overall tax revenue. This figure is higher than the average (19.5%) for all OECD countries.

Britain: The VAT rate in Britain has been a rollercoaster ride in recent times, which saw it change five times within three years. The VAT rate presently stands at 20% after fluctuating between 15% and 17.5% within the last three years. Britain’s VAT revenue accounts for 20.8% of its total tax revenue.

Canada: The country’s GST rate of 5% is amongst the lowest of the OECD countries, which hasn’t changed since 2008 when it was reduced from 6% to 5%. In Canada, however, some select provinces can impose their own tax rate as Ontario does with an 8% rate. Canada’s GST revenue is only 13.7% of its total tax revenue.

The USA: The USA uses a retail sales tax rather than VAT, and it is the only country in the OECD that does this. This tax, however, is not a federal tax, Instead, state and local governments are responsible for its administration. Presently, 45 states of the USA levy this tax including thousands of local government levies which are similar to the retail sales tax.

Since the OECD categorizes retail sales tax and VAT under the same heading of consumption tax, it estimates that consumption tax represents only 8% of the total tax revenue of the USA, making it the lowest in the OECD.

Korea: Korea maintains a similar consumption tax rate as Australia, which it hasn’t changed since the first introduction in 1977. Presently, the nation’s consumption tax revenue represents 17.2% of its total tax revenue.

Denmark: The country’s tax system is usually held up as the posterchild for an exemplary tax system. Denmark’s VAT is presently 25%, which is higher than the OECD average of 19.1%. Denmark has also not changed its VAT rates since 1992, and VAT accounts for 20.6% of the nation’s total tax revenue.

Sweden: Also another exemplary tax system according to various analysts. Its VAT rate is the same as that of Denmark. The country has reduced VAT rates for various select items. The country’s rate has remained stable since 1995, and its consumption tax revenue accounts for 21.1% of its total tax revenue.


Band of disparate jurisdictions

Member states of the European Union (EU) charge various VAT rates, and this varies between 17% and 27%. The average VAT rate across the EU is 21%. For some countries, items like food products are taxed at reduced rates. Also, northern Europe has a relatively higher VAT rates than other EU countries due to their extensive welfare packages.

A fact to note about the EU is that the movement of goods within its member countries is not subject to duty and taxes at the border. This has prompted the introduction of an anti-avoidance measure, which states that goods are to be taxed only at their final destination. This is to prevent what is termed ‘carousel fraud”, which occurs when goods from outside the EU are first taken to countries with lower GST/VAT, and then taken to countries with higher GST/VAT in order to avoid higher tax rates.

Complexity in construction: A lesson from Australia’s recent past

When the first ever GST proposal was made to Parliament in the late 1990s, then Prime Minister John Howard had to allow some form of concession to smoothen the passage of the tax bill. Part of the concession included exempting education, fresh food, and health from taxable items. The concessions were taken to offset the supposed effects of the extra 10% citizens had to pay for everyday essentials.

Food, in particular, became a contentious issue and one that still causes confusion. Some of these issues relate to determining what the ATO defines as foods that are taxable and which are not.


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