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Australia's high tax
Families badly hit

THE average Australian worker, supporting a family of two children on one income, has the second-highest marginal tax rate in the developed world, a new report has found.

The Organisation for Economic Co-operation and Development report Taxing Wages, provides support for government backbencher demands for tax cuts and welfare reform in the May Budget.

Prime Minister John Howard warned his colleagues to prepare for a tough Budget.

The OECD called for Australia to tackle the way taxes discourage people returning to work.

The report found Australia's tax and welfare system for single workers ranked relatively well against other countries.

But Australia performed much worse if the worker had a family. On income tax rates alone, the average Australian worker on $53,222 has the fourth-highest tax burden, losing 24.36 in every dollar in income tax.

The only higher-taxing nations in 2004 were Denmark, Belgium and Iceland.

After taking into account government cash payments and superannuation, Australia's tax ranking improved to 18 out of 30 developed countries but only when the taxpayer was single with no children.

A sole breadwinner lost out, paying an effective marginal tax rate of 51.6 in every dollar, making Australia's one-income families the second-highest-taxed in the OECD.

Only mothers and fathers in the UK paid a higher rate, losing an average of 70¢ in every extra dollar.

"These higher marginal rates are due to the existence of income-tested tax reliefs and/or cash transfers," the report said.

"When an income-tested measure is being phased out, the reduction in the relief or benefit compounds the increase in the tax otherwise payable."

The report found Australians paid a higher proportion of their wages in income tax last year than in 1996 when the Howard Government came to power.

This was despite a large income tax cut in 2000.

A single person in 1996 paid an average 22.7 per cent of their income in tax, rising to 24.3 per cent in 2004.

Leading economic forecaster Access Economics said from July this year households on $58,000 a year or more would enjoy the second phase of the Government's $14.7 billion tax cuts announced last year.

But interest rate rises would begin to bite and Access warned "there is a risk there will be two or three such rises over 2005".