mnot’s blog

Design depends largely on constraints.” — Charles Eames

Sunday, 2 May 2004

Taxing Wages

Filed under: Economics

I probably shouldn’t go around interpreting OECD statistics, as I’m not an economist (I just play one on the Web). However, the OECD’s Centre for Tax Policy and Administration has made some excerpts of its 2002/2003 edition of “Taxing Wages” available, and there’s some interesting reading therein.

The Man Giveth, The Man Taketh Away

Let’s start by comparing taxation and wages in developed countries.

The average production worker in the United states will pay 16% of their gross wages in taxes, and a further 8% for social security, for a total of 24%. Their wage will be $33,459.

In Australia, that same worker pays 24% in taxes and 0% in government-mandated social security. The interesting thing here is that if you believe — as I do — that the current generation of US workers will never see a dime of social security money, these figures are equal; the American and the Australian effectively pay the same taxes.

I think it’s fair to make this kind of assumption about Social Security, because the US congress has, for several years, treated it as an alternate source of funding for regular programs; they’re treating it like a tax, not as the savings of the American people. Therefore, Social Security is effectively a tax.

What’s interesting is that the Australian’s wage, when thought of in terms of purchasing power parity (i.e., adjusting for the cost of goods and services locally), is higher — to the tune of $37,396. In other words, your average worker in Australia will be taxed the same as his American counterpart, but will be paid more.

(Anitra debates this, by the way; she says that based on comparisons between her and Inger — her twin sister / control subject — consumer goods in AU are much more expensive.)

The Scandinavian Factor

Turning to everybody’s favourite whipping-country when it comes to taxes — Sweden — we see that our hypothetical average worker pays 24% in taxes (the same as Australia, and the same as the US, if we make the same assumptions about Social Security there), and 7% for social security (that they will see some day, presumably).

This debunks the popular notion that Swedes are taxed at an incredibly high rate. The average wage is lower, however; when adjusted for purchasing power parity, it’s only $25,111.

One interesting thing here, though, is that, as far as I can tell, the PPP for each country focuses only on consumer prices; it’s not adjusted for the variation in the services that governments provide to their taxpayers. So, even though our Swede makes less in PPP than their Australian or American counterpart, they get more direct benefits for their tax dollars, that arguably translates to a higher quality of living.

For example, an American will shell out big bucks for childcare — something on the order of $12,000 a year — and get a comparatively meagre tax break for their trouble. The Swedish government, on the other hand, requires localities to provide adequate, high-quality and price-capped day care for all children. In effect, this lowers the cost of being Swedish, at least for those with children.

(Anitra thinks I’m just obsessed with living in Sweden. She may be right, but there’s a reason for it.)

Special Interests

These numbers, of course, are averages; as with all statistics, YMMV. If you’re not an “average production worker,” you may be better off in one place than another.

This is where countries really differentiate themselves. Groups like high wage-earners, retirees, families and investors will be advantaged or disadvantaged according to the tax and benefit structure of each country. This is only right; the function of government is to represent the interests of its people, and different peoples have different priorities.

The question, I think, is to carefully consider what interests your government — wherever you live — is promoting, in terms of who it gives tax breaks to, and who it hands money and benefits out to.

For example, Ireland and Luxembourg like single-earner, two-child families so much, they have an effective negative tax load; instead of giving money to the government, they get it. Sweet deal if you can get it.

So, what does my American tax dollar buy me? As far as I can tell, I get a fairly small subsidy for having a child, some degree of a penalty for being married (the amount is an issue of debate), and a huge incentive to buy a house. On the other side, my tax dollars are used to generate lot of suburban sprawl, well-fed automotive and oil industries, and the ability to project power across the globe. Hmm.

Sweden, on the other hand, seems to have a strong emphasis on education, family and building a community. It’s remarkable to walk around a city like Stockholm and see the public-mindedness of its people, a crèche in every neighborhood, and lots of public museums and events.

Australia is somewhere in the middle, although it seems to be swinging towards the States.

All of these are impressions, because AFAIK OECD doesn’t compare how governments allocate their budgets; does anyone know of another organisation that does (the UN, perhaps)?

In any case, it’s clear to me that Americans, at least, spend too much time complaining about the amount of taxes they pay, and not enough thinking about how they’re used.


James Tauber said:

To your point about mileage varying if you’re not an “average production worker”: earn USD45,000 in Australia and your marginal rate is 48.5%.

Monday, May 3 2004 at 8:44 AM

James Tauber said:

The problem with the Australian case is two-fold: Firstly, the 48.5% kicks in at only one-third above average wage (compared with three times in 1980). Secondly, income earners start paying tax at one-seventh average income (compared with one-third in 1980).

The point of my original comment was to agree with you that ones mileage does vary if you are not an “average production worker”.

I also agree that the cost of living is different and difficult to quantify. If you use purchasing power parity, the cost of food and rent seemed comparable in my experience between AU and US. What seemed cheaper (as a proportion of salary) in US was cars, books and electronics. The reverse of this can be seen when Singaporean students come to Australia to study and discover how much cheaper cars are in Australia than they are in Singapore (which has a huge car tax, I believe).

Bottom line is (and I think you’re saying the same thing) that a comparison can’t be made between one country and another without taking into account what your job is and how you spend your money.

We haven’t even touched on the variance within a country :-)

Sunday, May 9 2004 at 1:11 AM

F J Oatley said:

this discussion is of great interest to me. I live in the UK. I am a full time mother to 2 small children and my husband is an officer in the Royal Navy. We are currently researching moving to Australia where he would serve in the Australian Navy doing the same job. In the UK he earns UK£49000, but 30% goes in tax and SS, then there is the 17.5% sales tax, average house prices that are completely mad, the world’s highest car prices and petrol prices at £0.80 per litre. I know he would get paid much less in Australia, but we would not need a mortgage and have a nicer house, school fees would be 1/3 what they are in the UK. What is considered good pay in Australia?

Monday, May 10 2004 at 2:11 AM

Chui said:


You’d also be coming to a country with cleaner air, government assisted childcare, and warmer weather. However, it’s a one way trip. Once you sell up in UK, you’d not be able to afford moving back.

If you feel homesick, you’d be pleased to know the Australian PM barracks for the same US president, but you may have to cheer for the enemy in the Ashes.


Monday, May 17 2004 at 3:37 AM

bill elder said:

I’ve been thinking of migrating to AU from the US, but first getting a working holiday visa. I wonder how hard it is to get one. The AU gov web site says they only give out so many a year. I am interested in moving from here because I beleive in the near future, the US is gonna be a very economically unstable place to live and Australia is truely a safe haven.I would be happy to pay whatever tax there is to pay for the comfort of knowing that it’s not gonna be utter economic chaos in the near future. The world is running out of oil supply and the US is very dependant on oil. The AU is much less. The term for it in the energy sector is “peak oil” and the longer the media remains silent about it, the worse it’s gonna get, till it crashes the economy. I was amazed when I found out that the population of the AU is only around 20 million. That is amazing to me! The continent is practically uninhabited in many places, and I bet with a whole lot less traffic!

Friday, August 26 2005 at 9:06 AM

Howard said:

Response to Bill:

I emigrated to AU from the US two years ago–more for ethical and social reasons than economic concerns. Although the current federal gov’t in Australia is tyring very hard to move toward a U.S. system of “winner takes all”, the country still has a vastly superior social safety net. And a consequently safer, more relaxed, and more stable society.

Although I’m a relatively high-income earner (by no means wealthy, though), my taxes are not a great deal higher than in the U.S. For that extra, I get to live where there’s a national health-care system for everyone, a minimum wage of $12.30 AU per hour ($9.35 US) versus the $5.15 in the U.S., and a MUCH smaller disparity between rich and poor.

Given the huge and growing gap between haves and have-nots in the U.S., I foresee the situation getting extremely ugly there over the next 10 to 20 years. As history shows, every time that gap gets too wide, major bloodshed eventually results.

After spending two decades voting, writing letters to senators and newspapers, and donating 4% of my gross income to organisations trying to make the U.S. a more equitable place, I decided to quit swimming against the tide and “pick up my marbles and go play somewhere else”.

It’s the best move I’ve ever made and I’d never go back.

Saturday, October 15 2005 at 9:09 AM

Dave said:


Yep, there are a lot of reasons to migrate to Australia. I did in the mid-eighties. Everything you say with regard to social safety nets, national health care, subsidation of living cost, higher minimum wage etc. is correct. On arrival there, I too was overwhelmed by the massive expanse of the country, clear skies, clean air. And bonus, there is only 20 million people.

Shortly after I arrived I noticed that there was an air of entitlement. The unions, the populace in general all, without exception, believed to the core of their collective bone marrow, that they were entitled to a fair a equitable distribution of wealth. They also felt free to demonstrate a symptom called, in their own language, “cutting down the tall poppy”

For example, if you worked hard, wanted a better life, were trained or educated, went to work, put in the effort, were self motivated, disciplined and enthusiastic about having more or earning more and you did it, you were looked upon as, unusual. If you actually did achieve success and accumulated the benefit and a few toys, you would be looked at suspiciously or your efforts would be minimized.

On top of that, the incentive to grow your income was penalized by the top marginal tax rate. As an employee, in sales for example, the harder you worked to earn a great income, the more tax you paid. A huge disincentive. Over and above that, whilst you were working 6 days a week trying to earn that income you were comforted by the fact that your tax dollar was supporting someones surf habit at one of the beaches. Someone has to pay for those “wonderful social safety nets”.

On one hand, I loved the idea that my children were breathing clean air and that poverty, homelessness were only something that they would see on TV. I loved the idea or concept that they were living in Utopia in terms of a lower crime rate, a minimal drug population, and a smattering of hand guns. On the other, I began to fear the absence of real world reality. And quite frankly, a development of a very real attitude of “entitlement”. “No worries mate” is a scary proposition when you have to grow children who will someday have to stand on their own two feet.

Australia, as utopia, is just about to reach it’s use by date. Globalization is going to eat it up. I say this because the ideal time or the optimum time to have moved to Australia was about 25 years ago. What will change everything for Australians is exactly the same that has changed everything for all of us global citizens, only worse. There will be a huge mind and attitude shift in Australia. They have been isolated for the most part from the global impact of downsizing and offshoring. Their workforce is just now starting to see what the effects of that will be. There real unemployment figure has been disquised by clever political spin.

Real wages are in decline, tax rebates and incentives will be there for the top percentage of earners and wealth. Interest rates will increase, cost of housing has reached stratospheric heights. The country was built on a large manufacturing base (gone or going) and a abundance or natural resources (going cheap. Major corporations have gobbled up the majors there and are downsizing and out sourcing.

Education and training has never been a priority in Australia. It used to be easy to just get a job,(if the waves were small) and now it’s not. Only a very small percentage of high school leavers continue on to higher education. There are more overseas students attending Australian universities than their own students, they just don’t publish it. Those overseas students will leave once they get an education drawn by a compelling need to get a good job, because there won’t be anything left there but a need to import goods, not design, development or manufacturing.

Would I still live there?? It’s a great country. It’s a wonderful place to live. But, if you are working, be prepared to adopt the neighborhood, take shots at your success and listen to a littany of complaints about how poorly the government takes care of you. Be prepared to pay and extrodinary amount for goods and services that most western countries take for granted. Be prepared to pay $40,000.00 for an automobile that cost $20,000.00 in the USA. Be prepared to buy a house for $450,000.00 that you could buy in any CBD in the USA for $150,000.00.

Remember, the Asians and mostly the Japanese discovered Australian property, golf courses and cattle farms, 25 years before the rest of the west, knew they existed. So be prepared to settle for scraps or pay the price.

A better plan is to stay where you are, make a boatload, educate your children, teach them the value of effort and a good days work, retire and then take your USA/UK LBS./YEN and settle there on a pristine coastline on either coast.

Monday, December 12 2005 at 8:55 AM

Steve said:

I am a 38 year old finance professional and my fiancee is a 32 year old investment banker. We make a very good combined salary and currently do not have any major ties (kids, mortgage, etc). We are considering moving to Chicago, USA where we both have jobs lined up - alternatively, she has an offer to join her banking firm in Sydney, Australia. I would be following her and try to find work in my field.

I’d be grateful for any insight on being an (American) expatriate in Australia for an extended period of time. Main questions that I have are:

1) How ‘isolated’ does one feel in Australia from the rest of the world? And how does this affect one’s mindset there.

2) What is the prevailing view on the economy going forward?

3) Is there a good balance on work-play and quality of life? My concern is that a banking/finance job in New York would be similarly intense with long hours in Syndey as well with infrequent opportunities to enjoy Australia.

If anyone knows of any good resources for better understanding what to consider in a move to AU, do let me know. And many thanks for the messages posted to date - very much appreciated!

Wednesday, March 8 2006 at 11:10 AM

Shan said:

Australia is a great place to raise a family and retire in, but it is not the place for young professionals or entrepreneurs to kickstart their career in. I’m sorry to make such a sweeping generalization, but most Aussie expats would agree with me on this one. I’m making AU$83,000/year in the US as a software engineer for the same skills that would land me AU$60,000/year in Australia (using I’ve lived in Australia for 15 years and the USA for 15 years as well, being a dual citizen of both (Dad is American, Mum is Australian), and the most frustrating aspect of life in Australia is the lack of decent jobs, as everyone says. To elaborate further: After graduating, American Uni students ask themselves “how much will I be making with this degree?” whereas graduates in Australian Unis ask themselves “can I get a job now?” Ironically, the first year of Uni in America is about as difficult as grade 11 in Australian high school, so go figure that one out!? This socioeconomic disparity almost encourages the brain drain that everybody complains about so often in Australia, but with only 20 million people, the lack of resources tends to make it inevitable.

Steve, being “isolated” from the rest of the world means perfecting English and acquiring more acute social skills, whereas other countries struggle with multilingualism and the corrupt politics that come with larger populations. I find there’s more honesty coupled with cynicism in Australia then there is in the US, but I feel that the tall poppy syndrome may be doing more harm than good by cutting down people’s confidence.

Wednesday, November 1 2006 at 12:55 PM

Marcus said:

I’m 46 and am looking at possibility of moving to Adelaide from the UK. My salary here is around £48,000 and my salary in Adelaide would be much less - around $61,000. Given the difference in cost of living, what sort of lifestyle could I expect with this salary? I have a house worth around £330,000 and no mortgage (thankfully). Grateful for any advice anyone is able to give me as this is a difficult decision. Thanks.

Sunday, March 4 2007 at 10:21 AM

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