As part of the process towards the government tax white paper, last week the Productivity Commission released a working paper on Australia’s tax and transfer system. It confirmed that Australia’s current tax system is strongly progressive – not just in a particular year but also across people’s lives. It also confirmed that raising a greater share of tax via the GST would make the system more regressive.

The release of the working paper was greeted with a good deal of joy from certain sections of the media who saw the data on the amount of GST paid by households as vindication that it was not an unfair tax.

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The Australian Financial Review, for example, trumpeted that the paper found the GST was “less regressive than critics suggest”. Just who these critics were that were suggesting it was more regressive was left unsaid – certainly the PC was not among those suggesting the findings were surprising.

Indeed, the working paper noted that “GST represents a slightly larger share of disposable income for low-income earners than for high-income earners”. It also found that “behind these averages lies substantial variation within income groups”.

And certainly there were variances – but few that made the GST look less regressive. For those earning up to $25,000 a year, the median level of GST paid as a percentage of disposable income is 5.7%, compared with 4.4% for those earning between $150,000 and $175,000 a year:

But the top 5% of GST payers in the poorest income bracket pay 21.8% of their income in GST, compared with just 8.5% for the top 5% of GST payers earning between $150,000 to $175,000.

And when we look at the amount of GST paid as a percentage of expenditure, the regressivity of it becomes even more pronounced:

And yet this had the Financial Review editorial boasting that the PC’s paper “debunked the myth of a GST rise”, because it showed that the critics’ argument that “increasing the 10% rate of GST would be regressive because poorer families spend more of their income on essentials” was wrong.

Of course it did nothing of the sort – it confirmed that the GST is regressive – but for the GST diehards, that the GST burden is “only slightly more for a family on welfare than for a family on $150,000” makes it OK now.

The AFR may be right to suggest that broadening the GST to include education could make it more progressive (something I argued early last year), but proponents of a rise in the GST would be better served to acknowledge the reality rather than put up straw men to be beaten down.

And it also should be noted that the Productivity Commission did not investigate the impacts of broadening the GST.

What it did investigate was the current tax and transfer (i.e. welfare payments) system, and it found that overall it is quite progressive.

For example, it found that in 2014-15 the median welfare payment to those earning up to $25,000 was $18,040, but that it dropped off significantly for those earning above this amount – just $4,562 for those earning between $25,000 and $50,000.

This is because mostly those in the lowest bracket are aged pensioners – which is by far the biggest slice of Australia’s welfare pie.

But the PC also looked at welfare payments over people’s life cycle, according to average income over one’s life. On this measure it found that the welfare payments were less progressive but still strongly so:

And the same goes for tax paid. The poorest pay much less tax in any given year, and also over the course of their life:

If the report busted any myths, it busted the myth of Australia being a land of moochers with a plethora of middle-class welfare just churning through the system.

It found that 32% of all Australian adults paid no tax and were welfare recipients. But 90% of these people earned less than $25,000 a year.

And of every income group earning more than $25,000, a plurality were tax payers who received no welfare:

All up, only 7.7% of those who paid tax and received welfare were “net recipients” (i.e. they received more welfare than they paid tax), and 50% of adults only paid tax and received no welfare.

But the paper also noted that it is more difficult to assess how well the redistribution of national income through the tax and transfer system reduces inequality.

Before taxes and transfers, Australia has one of the more equal distributions of income in the OECD, using the Gini coefficient. After the distribution, however, we are back in the middle of the pack:

But while this would suggest our system is poor at redistributing income, as the PC notes, the level of welfare expenditure and the level of taxation in Australia is among the lowest in the OECD. The PC also notes that while the Gini coefficient is a standard measure of income distribution, it is “most sensitive to changes in the middle of the income distribution” rather than at the lower end of the scale.

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Unlike most other OECD nations, our welfare system is “flat-rate, means-tested and continues indefinitely for as long as individuals remain entitled”. That makes it much more targeted at reducing poverty than it is in smoothing out differences in income between the wealthy and middle incomes.

But even given that, when you compare the level of reduction in the Gini coefficient, after taxes and transfers, with the level of welfare payments, Australia’s system comes out as one of the most effective in the OECD:

The PC’s paper provides some excellent research on our taxation and welfare system. And while some might suggest it provides evidence that we could increase the GST and reduce income tax without being overly unfair, the paper also highlights that our system is also very well targeted and efficiently redistributes income, and any changes to the system need to acknowledge that.