* OECD Urges Australia To Cut Marginal Tax RatesWhile the Australian government was praised in the report for introducing a broad-based good and services tax and improving the business tax regime, particularly with regard to international taxation, the Paris-based organisation noted that there remains “unfinished business in the area of tax reform”.
“A large gap between the top personal marginal income tax rate and the company tax rate creates an incentive for a redefinition of personal income as company income,” the OECD report observed.
“Also, while the maximum marginal income tax rate is around the average by international standards, it cuts in at a relatively low income level, which may harm work incentives and discourage skill acquisition,” it added.
According to the OECD, Australia’s top marginal tax rate (calculated as the additional personal income tax resulting from a unit increase in gross wage earnings) currently stands at 48.5%. This compares to a top marginal rate of 41.4% in the United States, 40% in the United Kingdom, 47.1% in Japan, 37.9% in France and 51.2% in Germany.
Despite recent reforms, it is argued that the marginal rate remains excessive for many low income earners, deterring labour force participation by secondary earners and older workers.
The report continued: “The priority for tax reform should be the simultaneous continuation of policies which contribute to the lowering of these high effective marginal tax rates, and the raising of the threshold at which the maximum marginal income tax rate cuts in, consistent with budgetary objectives.”
In addition, the organisation went on to recommend a “rapid abolition of remaining distorting state taxes,” and reform of the narrow-based and “exemption-ridden” payroll tax.
The OECD argued that these measures would “further increase the efficiency of the Australian tax system and improve resource allocation.”