Australia is spending to much, not taxing too little

As debate over Australia’s 47 per cent top marginal income tax rate intensifies, economists, business leaders, politicians, and union figures have all weighed in. Yet one voice has been conspicuously absent. Treasurer Jim Chalmers, the person who holds the nation’s fiscal levers, has declined to engage. The silence matters because the arithmetic is uncomfortable.

Shadow treasurer Tim Wilson has described the 47 per cent rate as punitive, but criticism of Australia’s income tax structure is not confined to one side of politics. Paul Keating, the subject of the Treasurer’s doctoral thesis, has argued that marginal rates above 40 per cent are confiscatory. Former ACTU secretary Bill Kelty, architect of the Prices and Incomes Accord, has called the top rate absurdly high and cruel to younger workers. When figures from across the political spectrum converge on the same conclusion, it is worth examining why.

Australia’s top marginal rate of 47 per cent, including the Medicare levy, applies from $190,000 of taxable income, around 180 per cent of the average full-time wage. In the United States, the top federal rate is 37 per cent, and even including high State taxes the combined rate approaches the mid-40s only at eight to nine times average earnings. At 180 per cent of average wages, where Australia’s top rate begins, the comparable US federal marginal rate is 24 per cent.

In the United Kingdom, the 45 per cent top rate applies at roughly four to five times average earnings, the equivalent of around $450,000 in Australia. New Zealand’s 39 per cent top rate applies at about 2.5 times average income. Singapore’s top rate is 22 per cent and Hong Kong’s is 17 per cent.

Among advanced economies, Australia imposes one of the highest top marginal rates at one of the earliest entry points. That is not a badge of progressivity. It is a structural problem.

The problem compounds through bracket creep. Unlike the United States, where federal income tax brackets are indexed for inflation, Australia’s are not. As nominal wages rise, workers are pushed into higher brackets without any real increase in purchasing power and without any parliamentary vote. Inflation, driven in no small part by expansionary government spending, erodes the real value of every threshold year after year. The Treasurer’s restructuring of the stage three tax cuts exacerbated the effect. The 37 per cent bracket had been legislated to disappear, but Chalmers reinstated it and left it unindexed, ensuring that inflation would steadily pull more earners into it over time.

Australia’s recent experience with tobacco taxation offers an instructive comparison. As excise rates were pushed higher, behaviour changed and the Commonwealth haemorrhaged an estimated $18 billion in revenue over three years. A substantial share of that revenue did not disappear but migrated into organised criminal networks. The lesson is that tax policy that ignores behavioural responses does not maximise revenue; it simply redirects it. The principle is general with income taxation operating by the same logic. When the last dollar of labour income is taxed at nearly half, incentives shift, and the capacity to respond becomes decisive.

The burden of Australia’s marginal tax rates, moreover, does not fall evenly. Those with access to trusts, private companies and sophisticated advice can restructure their income. The salaried professional cannot. The headline rate is borne most heavily by those least able to rearrange their affairs. High marginal tax rates also reinforce Australia’s entrenched bias toward negatively geared property. When labour income is taxed heavily, rational taxpayers look for lawful ways to reduce their taxable income, and capital flows into established housing rather than entrepreneurial risk and productive business formation.

There is a further distortion worth noting. The Government’s annual tax expenditures statement benchmarks so-called concessions against the top marginal income tax rate. The higher that rate, the larger the apparent cost of deductions, the capital gains discount and superannuation concessions. Some of the most eye-catching figures are arithmetic artefacts of the benchmark rather than genuine measures of economic distortion. A high rate inflates the optics of concessions while leaving the rate itself largely unexamined.

Meanwhile, the Treasurer frames the case for high taxes as a matter of intergenerational equity. The argument should be inverted. Commonwealth spending is projected to approach 27 per cent of GDP, compared with roughly 23 per cent in 1990, when unemployment was nearly double today’s rate. That additional spending is not being fully funded. It is being partially deferred, accumulating as debt that younger Australians will eventually service.

High marginal tax rates today and growing debt tomorrow are not alternative fiscal strategies. They are the same intergenerational burden arriving by different routes. A treasurer genuinely concerned with fairness between generations would start with the spending line, not the revenue line.

The problem is not tax rates in isolation. It is the spending trajectory that makes them necessary and the political unwillingness to say so. Australia is not short of voices willing to argue for higher taxes. It is short of a treasurer willing to confront the spending levels that demand them. Until that conversation begins, no amount of tinkering at the margins will resolve a structural problem that sits squarely on the expenditure side of the ledger.

Dimitri Burshtein is a senior director at Eminence Advisory. Peter Swan is professor of finance at the UNSW-Sydney Business School