Meaningful tax reform is generally treated as politically radioactive and no party wants to rattle the cage. But as the economy changes, the logic behind taxing wages as the primary source of government funding is increasingly being questioned and the reality is that Australia’s tax system is increasingly misaligned with how the modern economy works.
Independent MP Allegra Spender wants the Prime Minister and federal Treasurer to pursue ambitious revenue-neutral tax reform in the May budget, arguing it needs rebalancing to deliver reward for effort, to encourage productivity and ensure that taxpayers aren’t facing the heaviest burden when they can least afford to pay.
If we are serious about long-term economic growth, productivity and fairness then one idea that deserves far more attention is taxing what we spend rather than what we earn with the abolition of income tax and the introduction of a broader consumption tax.
Instead of taking a portion of every dollar Australians earn, the government would collect more revenue when money is spent in the economy.
Personal income tax provides nearly half of the federal government’s revenue. The more we work and earn, the more we are taxed. Taxing income effectively taxes effort.
The harder people work, the more they earn, and the more tax they pay. While progressive taxation has an important role, relying too heavily on income tax can discourage productivity and entrepreneurship.
A consumption-based system allows people to keep more of what they earn. Those who spend more contribute more to government revenue, while those who save or invest are not penalised.
For everyday Australians, this could mean bigger take-home pay packets. Instead of seeing a large portion of wages disappear before they reach your bank account, people would keep more of their earnings and decide how to spend or save it.
It would increase the purchasing power of a worker on $90,000, because they would have more money when they got paid. Buying power has been shrinking by more than $2,700 a year since 2020, with predictions by the Reserve Bank this will only worsen as inflation rises.
It’s also easier to track spending than monitor every form of income.
Countries like New Zealand and Singapore have managed to do this successfully with tax systems that place greater emphasis on broad-based goods and services taxes.
Australia’s GST is relatively low and has numerous exemptions, with income tax continuing to do the heavy lifting. This is going to become much harder to sustain.
Australia’s population is ageing, which means fewer workers will be paying income tax while more retirees draw on government services. Relying heavily on taxing wages will place increasing pressure on a shrinking share of the population.
A broader consumption tax spreads that burden more widely because everyone who participates in the economy contributes through their spending, including retirees and international students. While lower income households could be protected through targeted payments and increased support.
The bigger challenge is the political courage to rethink a tax system we have lived with for generations.
Australians deserve a tax system that rewards work, supports investment and remains sustainable for the next generation. Moving from income to a tax on consumption deserves serious consideration and will require real leadership, careful design, public debate and a gradual implementation.
It is a conversation worth having, the question is, are we brave enough?
Gareth Croy, founder of Your Future Strategy
Great ideas but no hope of implementing any major tax reforms like this with the current government who are clueless.
Far to sensible for Canberra clown show to pursue
Everyone who has a fundemental understanding of economics gets that a consumption tax is more fair and equitable than taxing income. That said, governments are reluctant to introduce it or broaden it because it’s hard to sell. Meanwhile, with Australia’s population ageing and moving into the largely income tax free era of retirement, using income tax as the primary source of raising revenue for government expenditure is an increasingly-flawed model that places the heaviest burden on those who can afford it least!
Spot on
The trouble with consumption based taxes ( gst vat etc ) is governments get lazy, don’t reform and the circus goes on with increased gst. How about some real work such as reducing public servant numbers, reducing social security costs like the NIDS and becoming more efficient / like all small businesses have to do. Then look at taxing consumption.
Consumption taxes are regressive–punishing those without means. They also hamper economic activity (see calls to end stamp duty).
This is a basic economic concept. Perhaps the real conversation would be around taxing wealth more than labour.
Totally agree – and why arent the billionaires paying their fair share of tax (though i can see a debate on “what is their fair share”)
The part that was missing to the above is to absolutely provide a safety net for those that earn less and have less means. Eg I saw one suggestion that we increase GST to 15% and everyone has a “GST tax-free threshold” of $20k. So everyone gets $3000 back as a tax refund at the end of the year. Or however the numbers work out. this idea of tax reform simply being to increase taxes is by definition not reform at all. Allegra Spender is surely too intelligent to be in Canberra. Her suggestions and white paper was produced way too quickly and was way too sensible.