by Jae Lubberink (Blueprint Institute Researcher)

Labor’s revised Stage 3 tax cuts make welcome improvements, but let's not pretend that this is big tax reform.

Australia’s tax melodrama continues to play out with the tabling of Labor’s revised Stage 3 tax cuts—scored by a familiar cacophony of acquiescence and apoplexy.

Rejuvenated vignettes about fairness were offered, and hastily dismissed. Line charts were heroically produced by generous economists. The opinion class opined indulgently—the column inches filling up like the nosebleeds of a Taylor Swift concert. Some were deafening in approval, others guffawed at Labor’s brazen about-face in disgust. Even the moralists amongst us had a go, clamouring to hang Albanese, a politician, for the irredeemable sin of a broken promise—mostly, it should be noted, by other politicians.

And while we too, can’t avoid the temptation to briefly weigh in (we’d argue that the revisions to the 6-year old proposal are a sensible reflection of reality, revenue-neutral, but more equitable and efficient, without being too inflationary), the Stage 3 debate remains a distraction from that we should be having on wholesale tax reform. Our tax debate continues to be held hostage by incrementalism’s harrowing echo.

Australia has not seen substantive tax reform since the GST was introduced—and most of the reforms in the decades since have been cuts or concessions. When elections roll around, we retreat to our familiar, choreographed political battle about personal income tax—a result of not having indexed income tax brackets to inflation. But that’s about maintaining the status quo in real terms.

Political gain, rather than long term thinking about productivity seems to prevail as our primary motivation. The result—a productivity crisis, driven in part by a tax system that has bloated the wealth of passive asset owners rather than channelling capital into the most productive sectors of the economy. Proposals for paradigm-shifting reforms—such as those concerned with pricing environmental externalities—have been palpably absent, lobbied against, or laughed out of parliament. 

The last intervention on big tax reform was the (in)famous Henry Tax Review in 2009. The objective of a tax system is to generate sufficient revenue to underwrite fiscal sustainability, without compromising efficiency, system complexity and fairness. To these ends, Henry has noted that Australia’s tax system fails every test. Indeed, only three of the 138 recommendations were ever implemented—one of which being the resource super profits tax, which would ultimately form the sword Kevin Rudd fell on. Not surprisingly, Henry continues to urge Albanese and Treasurer Chalmers to show temerity in initiating larger reforms.

We echo these calls. It has been a long time since Australia has had a tax base that optimises for equity, efficiency and productivity. It’s time for our politicians to show some genuine leadership and courage, and put some big reforms on the table.

For starters, our reliance on income tax needs a good hard look. In 2023–24, half of Commonwealth tax revenue is expected to come from taxpayers—more than double the OECD average. But it’s a strategy that creates fiscal drag—disincentivising work isn’t a strategy for lifting productivity. It’s also one ill-suited to our demographics—with revenue reducing as our population ages. It also fails the fairness test—today’s young workers, already locked out of the housing market, buried in HECS, on the hook for colossal public debt, and facing rising insurance premiums and the costs of an overdue energy transition, will shoulder the burden of supporting a rapidly greying population.

Income tax should be indexed, and we must reduce our reliance on it. 

Narratives around Australian mercantilism and the Australian dream have persisted long enough to harden into both lore and law—constraining the ambition of citizens and governments eager to preserve the traditional ideals of mining and homeownership like they are sacred cultural pastimes. Such civil romanticisms have lulled middle Australia from cottoning on to an economy accelerating toward a banana republic. Failure to tax passive wealth accumulation (through concessions on property investment) or mining (through a resource rent tax or a carbon tax) is the architecture of these jaded cultural narratives that continue to permeate our national identity. Yet again, we have a whole generation priced out of the market by retirees who earn tax-free capital gains from negatively-geared houses exempt from pension asset tests.

Negative gearing, capital gains tax concessions, closing loopholes for family trusts, and a more fulsome approach to resource rent taxes should also be on the list. 

And finally, we urgently need to talk about getting sophisticated in genuinely pricing pollution (from things like greenhouse gases, fine particulate matter, plastics and a range of heavy metals and toxic substances). A system like ours that ignores key environmental externalities, and forces the cost of pollution to be borne by citizens and governments in the form of rising health costs, rising insurance premiums, and big bills from adverse weather events, is unsophisticated, inefficient and a system ripe for reform.

The flurry of inquisition over the last few weeks on Stage 3 could be dismissed as snide point-scoring if it wasn’t so telling. Our calls to depend less on income tax, clean up rent seeking concessions and price pollution are not novel suggestions—but that is the point. Everything is still on the table. 

While both major parties will publicly tear the face off the other, there is certainly bipartisanship in method: take income tax minutiae to the alterations studio and fashion it into window dressing useful in political gain but meagre in substantive change. Bracket creep has been a convenient can to kick down the road, but it is not a sustainable one. Real action takes courage. It’s politically challenging, but it’s long overdue.

Jae Lubberink is a Researcher at Blueprint Institute—an independent public policy research institute. Contact Jae at: [email protected]

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