Australia isn’t short of tax ideas. It’s short of reasons to use them
The reforms are obvious and have been for twenty years. The reason they don’t happen is that the current system quietly funds government without anyone having to defend it.
By Aiden Garrison
Australia does not have a tax-reform problem. It has a tax-reform incentive problem, and the distinction matters more than almost anything said in the annual ritual of budget commentary. The ideas required to build a competitive, growth-oriented tax system are not contested among people who understand the mechanics, and they are not buried in some unwritten Treasury paper waiting to be discovered. They have been understood, roughly costed, and argued over for the better part of two decades. Their absence from law has very little to do with economics and almost everything to do with the structure of incentives facing the people who would have to enact them.
Start with the quiet engine that funds a great deal of Commonwealth spending without anyone having to defend it: bracket creep. When income-tax thresholds are not indexed to inflation, every year of nominal wage growth pushes taxpayers into higher effective rates even when their real incomes have not moved. The government collects more, in real terms, without legislating, announcing or owning anything in front of voters. It is a tax increase delivered by arithmetic rather than by Parliament. Indexing the thresholds would end it permanently, and the technical difficulty of doing so is close to zero. The political difficulty is the opposite, because indexation converts an automatic, invisible revenue stream into one that has to be raised deliberately and justified in public. That is precisely why it has not happened. The system is not failing. It is doing exactly what the people who benefit from it intend.
What an alternative looks like is no great secret either. The personal scale could be collapsed into a handful of bands — a tax-free zone of around $20,000, then steps at roughly 15, 30, 38 and a top rate in the low forties — so that the structure stops punishing the move from one income tier to the next. Companies could be taxed at one flat rate near 20 per cent regardless of size, scrapping the two-tier arrangement that currently treats a firm differently the moment it grows past the small-business threshold. People who build a business from nothing could be spared capital gains tax on the first chunk of their lifetime gains — call it the first $20 million of real value created — and taxed lightly above it, with the staff who took equity instead of wages riding on the same terms. Income earned from intellectual property actually created here could sit in a low single band. And rather than depreciating capital over years, firms could write off productive assets in full the moment they buy them, which collapses the tax penalty on new investment almost to nothing.
Every figure in that sketch is arguable, and any economist worth listening to will quarrel with at least one of them. Maybe the lifetime capital-gains shelter should be half the size. Maybe the company rate settles a few points higher. Maybe the intellectual-property concession needs guardrails so it does not quietly become a vehicle for shifting profits offshore. Argue all of it — none of it touches the load-bearing point, because the argument was never about a particular number. It is about a direction: stop the silent threshold drift, simplify the scale, bring down the cost of capital, let risk earn its reward, and tax new investment at close to nothing. The dials can be set wherever a sensible negotiation lands them. The direction of travel — the shape rather than every parameter — draws far broader agreement among people who actually study how tax changes behaviour than the political stalemate around it would ever lead you to believe.
That design matters because tax is not merely a mechanism for collecting revenue. It is a set of prices attached to work, saving, investment and risk, and people respond to prices. Consider the problems Australia actually has. Productivity growth has been weak for most of a decade, which means real incomes cannot rise sustainably regardless of how the existing pie is divided. Business investment as a share of GDP is lower now than it was in the early 2000s, and the decline has been larger among more productive firms, meaning capital has been allocated less productively as well as more sparingly. That is the proximate cause of weak productivity, because workers become more productive largely by being equipped with better capital. Participation, while historically high, still carries sharp disincentives at the margins where effective marginal tax rates collide with withdrawn benefits. And the country competes for mobile capital against jurisdictions that have spent years making themselves more attractive while we have stood still.
Each element of the reform speaks to one of those problems directly. Full expensing drives the effective tax rate on new investment toward zero, which is the most direct lever a government has to lift the capital stock per worker, and therefore productivity, and therefore real wages. A flatter income-tax scale reduces the penalty on additional effort at exactly the margins where participation decisions are made, particularly for second earners and older workers weighing whether another day of work is worth it after tax. A single low company rate lowers the cost of capital and makes Australia a more rational place to locate a regional headquarters rather than a branch office. The founder and intellectual-property concessions target the thin, high-value layer of the economy where the next generation of software, biotech, defence-tech and medical-device firms will either be built here or, as has too often been the case, be built elsewhere by Australians who left to find a friendlier environment.
This is where the revenue cost is routinely overstated, because the dominant modelling approach is static. Static models hold behaviour fixed: they take the existing base, apply the new rate, and report the difference as the cost. That is a reasonable first approximation for some taxes and a poor one for the taxes that most influence decisions about whether to invest, expand or locate here. Lower company tax mechanically reduces franking credits, which raises the personal tax paid by many resident shareholders and recovers part of the headline cost before any behavioural response at all. Beyond that, a lower cost of capital attracts investment that would not otherwise have occurred, and that investment generates wages, profits and consumption that are themselves taxed. The point is not the supply-side fantasy that the reforms pay for themselves, because in the main they do not. The point is narrower and more defensible: static costings systematically overstate the true cost of pro-investment tax changes, and that overstatement happens to be useful to anyone whose preferred answer is to do nothing.
Which brings us to the objection that always arrives next: how do you pay for it. Part of the answer is the dynamic offset just described, and part is the franking interaction. But the honest answer is that some of these measures would, in the near term, leave a genuine gap, and that gap has to be met by explicit decisions about spending — decisions that currently hide behind automatic revenue no minister ever has to defend in an election campaign. That is not a weakness of the argument. It is the entire argument. The defining feature of bracket creep is that it lets governments expand spending without ever asking permission, because the money arrives silently. Remove it, and every dollar of new spending has to be legislated, defended and owned. The question stops being “how do you pay for tax cuts” and becomes “which spending are you prepared to stand behind in public.” That is a harder political world to live in, and a far more accountable one. None of this pretends the package is costless to everyone: any serious reform creates winners and losers, and parts of this one plainly favour capital and risk-takers over the status quo. The honest question is not whether every individual is better off on day one, but whether the economy as a whole becomes more productive, more attractive to investment, and therefore richer over time. On that test the direction is clear.
None of this requires a royal commission or a decade of consultation. Every measure described here could be drafted inside a fortnight by people who already work in the building. The obstacle has never been intellectual. It is that an indexed, flatter, pro-investment system would force the political class to fund its choices in the open, with votes attached, rather than drawing quietly on the gap between nominal and real incomes each year. They will not surrender that advantage willingly, and it is naive to expect them to. So the task for everyone else is to stop treating the absence of reform as a puzzle, and to start describing it accurately: not a failure of ideas, but a system performing exactly as its beneficiaries designed it to.
