A Better Tax System: Rethinking Australia’s Future

A tax system is more than just a ledger of government revenue and expenditure. It reflects national priorities, balances fairness with efficiency, and underpins the trust that citizens place in institutions. In August 2025, Grattan Institute CEO Aruna Sathanapally presented A Better Tax System at the Economic Reform Roundtable in Canberra, outlining why Australia’s current tax mix is increasingly ill-suited to the challenges of an ageing population, climate change, technological disruption, and widening intergenerational inequality.

This analysis explores the central arguments of the presentation, places them in a wider economic and social context, and considers what a stronger, fairer, and more future-ready tax system could look like.

Tax as a Policy Lever

Tax is not merely a funding mechanism—it is a tool for shaping the society we want. A well-designed tax system builds human capital, supports stable institutions, and broadens prosperity. Importantly, it also prevents wealth from concentrating too heavily at the top, which sustains social trust and economic resilience.

Australia, like other mature democracies, must constantly adapt its tax framework. Static settings risk locking in inefficiencies and eroding public confidence. Young people already report lower levels of trust in government than older generations, and a tax system perceived as outdated or unfair only worsens this divide.

Adapting to a Changing World

Australia’s tax system faces four structural pressures:

1. An ageing population.
   By 2050, more than 12% of Australians will be over 75, straining health and aged care budgets. Many retirees hold significant housing and superannuation assets, yet still benefit from generous concessions. The imbalance raises questions of intergenerational fairness.

2. Climate change and decarbonisation.
   Extreme weather events impose growing fiscal costs, while decarbonisation presents both risks and opportunities. Tax settings will need to accelerate investment in clean infrastructure while discouraging carbon-intensive activities.

3. Geopolitical and technological disruption.
   From global supply chain shocks to AI-driven shifts in labour markets, Australia’s economy faces volatility. A resilient tax base requires diversification beyond volatile corporate tax revenues.

4. Intergenerational equity.
   If young Australians feel locked out of housing markets and overburdened with tax responsibilities, trust in democracy frays. A more balanced tax system can help restore a sense of fairness across age groups.

Priorities for Reform

Four broad reform priorities stand out:

1. Rebalancing Personal Income Tax

Australia leans heavily on personal income tax, which risks discouraging workforce participation and innovation. Bracket creep (where inflation pushes workers into higher tax brackets) compounds the issue. Adjustments such as indexing thresholds and reviewing concessions could reduce distortions.

2. Business Tax Reform

Corporate tax collections are high by OECD standards, partly due to Australia’s dividend imputation system. Simplifying business tax and incentivising productive investment—particularly in green and digital industries—would align revenue with long-term growth needs.

3. Smarter Use of Pricing Signals

Tools such as congestion charges, road user pricing, and carbon pricing could shift behaviour toward more sustainable and efficient outcomes. These mechanisms not only raise revenue but also encourage better use of scarce resources.

4. Tackling Vertical Fiscal Imbalance

Australia’s federation suffers from a mismatch: the federal government collects most revenue while states bear major spending responsibilities. Reforming this imbalance—possibly through expanding or redesigning the GST—could stabilise revenue flows and better align responsibility with accountability.

Australia in Global Context

Compared to OECD peers, Australia is a relatively low-tax country, with total government revenue at just under 30% of GDP. Yet within this modest framework, the reliance on corporate tax is unusually high, while consumption taxes (like the GST) remain low.

This structure leaves Australia vulnerable to swings in company profits, particularly in resource sectors. Broadening the tax base—through measures such as GST reform or land taxes—would reduce volatility and distribute the burden more evenly.

Balancing Efficiency, Equity, and Simplicity

Tax design always navigates three tensions:

• Efficiency: raising revenue without distorting incentives.

• Equity: ensuring fair contributions across income and wealth levels.

• Simplicity: making compliance straightforward and affordable.

Australia’s current system falls short on each count. Complexity abounds in superannuation concessions and negative gearing rules. Equity concerns rise from generous tax treatment of housing and capital gains, benefiting older and wealthier Australians disproportionately. Efficiency lags in areas where pricing signals could improve resource allocation.

Why Reform Matters Now

Delay only raises the cost of change. An ageing population will soon require higher health and pension outlays, while climate change demands urgent investment. If reforms are left too late, adjustments will become more painful and politically divisive.

The challenge is not just technical but political: building public understanding of why reform is necessary. Australia must “think big and long-term” and craft a tax system that sustains quality of life for future generations.

Towards a Better Tax Future

A truly better tax system would:

• Support intergenerational fairness by taxing wealth and housing more consistently.

• Encourage innovation and sustainability by incentivising green investment.

• Stabilise revenue through a broader, more reliable tax base.

• Maintain trust by aligning contributions with community expectations of fairness.

Reform is not about perfection in one sweep. It is about incremental, well-communicated steps that build momentum and legitimacy.

Conclusion

The Grattan Institute’s call for reform highlights both urgency and opportunity. Australia has room to modernise its tax mix in ways that boost productivity, equity, and resilience. But the window narrows with each passing year. If ignored, today’s cracks will harden into tomorrow’s fractures—straining public trust and economic vitality.

A better tax system is not just about dollars and cents. It is about the kind of society Australia wants to be: fair, future-focused, and confident in facing change.

Reference: Grattan Institute – A Better Tax System