The tax reapers dressed in tax-reform clothing are out again, parading their latest plans to ‘fix’ the system, always, conveniently, by raising more revenue.
The Commonwealth budget is in chronic structural deficit, even with the stealthy help of bracket creep doing its silent work year after year. These deficits stretch as far as the eye can see and will sit atop the already $1-trillion debt pile, yet Canberra’s only idea seems to be to tax more, not spend less.
Of course, no serious conversation about reining in the spending beast is allowed. Instead, we must all accept that government largesse is sacred and must be fed, no matter the cost. But before everyone joins hands in the next national ‘tax conversation’, let’s pause to consider a few inconvenient truths that tend to get lost in the shuffle.
Tax reform has been an endlessly recycled topic in Australian political discourse, but meaningful structural change remains as elusive as ever. The usual suspects are back: policy wonks, think tanks and centralist sympathisers, once again pushing to abolish key state taxes like payroll tax and stamp duty. These ‘reforms’ sound nice in theory, but in practice they would only deepen the structural mess. One wonders if this is less about efficiency and more about helping Canberra inch closer to its long-held dream of a nation run entirely from the middle of the Lake Burley Griffin roundabout.
At the heart of the matter is a grotesque vertical fiscal imbalance. The Commonwealth government now collects well over 80 per cent of Australia’s tax revenue, while delivering comparatively little in the way of actual services. Meanwhile, the states and territories are left holding the bag for expensive front-line services, including in health, education, transport and policing, with increasingly limited means to pay for them.
This mismatch forces states to go cap in hand to the federal government for funding, reducing their fiscal autonomy and turning them into glorified grant applicants. Even worse, it blurs public accountability. When services fail or crumble, voters are never quite sure whether to blame the people they elect or the bureaucrats in Canberra.
And the outcomes? We’re seeing the better-governed states like New South Wales and Western Australia being forced to subsidise the mediocrity and administrative incompetence of Victoria, South Australia and Tasmania. So much for rewarding good fiscal management.
To be clear, this imbalance wasn’t always part of the plan. The original federal arrangement intended that the states be financially independent. But wartime exigency handed the Commonwealth control over income tax, and a series of High Court decisions further knee-capped state taxing powers, including by banning state excise levies. Over time, this centralisation of revenue collection has morphed into dependency by design.
States now rely heavily on Commonwealth grants, both general-purpose and tightly conditioned specific-purpose payments, making them less able to set their own priorities and more likely to become implementers of Canberra’s whims. Long-term planning becomes nearly impossible when you’re on a fiscal drip-feed.
Then there’s the GST, which was sold in 2000 as a neat solution to this imbalance. In theory, it gave the states a reliable and broad-based source of funding. In practice, it’s another example of good intentions gone sideways.
The Commonwealth collects the GST and distributes it via a mind-bendingly complex formula managed by the Commonwealth Grants Commission. This process, designed to ensure every state can deliver ‘comparable’ services, has become a political landmine, especially for resource-rich states like WA, which understandably resent watching the fruits of their economic success redistributed to jurisdictions that can’t seem to keep their own houses in order.
Now we’re told we need to abolish stamp duty and payroll tax because they’re ‘inefficient’. But payroll tax is so pervasive that it is effectively a consumption tax and consumption taxes are relatively efficient. Stamp duty on house transactions is not ideal but should land tax be raised even more? These taxes also happen to be among the few remaining sources of own-source revenue for the states. Payroll tax is the second-largest revenue source in most jurisdictions, and stamp duty brings in billions, especially during property booms.
Eliminating them without offering the states something meaningful in return would just leave them even more financially neutered than they already are. It’s reform without responsibility, dressed up as progress.
As for the idea of replacing stamp duty with a land tax, it may make economic sense on paper. But in the real world, political resistance is formidable, and transitional issues abound. And without a proper rebalancing of fiscal powers, we’re just rearranging the deck chairs on a declining federal ship.
Then there’s the myth that Australia’s company tax is a major source of revenue. In reality, thanks to our dividend imputation system, most Australian companies effectively pay no company tax on profits distributed to Australian shareholders. Instead, it operates more like a withholding mechanism. Residents simply claim franking credits against their personal income tax, usually receiving full refunds.
This is a great deal for local investors, especially retirees and low-rate taxpayers. The only people really paying the tax are foreign investors, who can’t claim credits. So instead of thoughtful reform, we get politically convenient fiddling like lower rates for ‘small businesses’, almost all of which are domestically owned anyway. It’s a sham dressed as strategy. The tax relief here is entirely fake.
At its core, Australia’s tax system isn’t broken – it’s backward. Governments focus on collecting aas much revenue as they can, then scramble to invent new ways to spend it. That’s not strategy; it’s fiscal gluttony. Yet every so-called reform effort seems intent on ignoring this fundamental reality.
Genuine tax reform needs to go beyond the technocratic tinkering. It means resetting the balance of taxing and spending powers across the federation, ensuring accountability and aligning incentives. Without it, all we’re doing is propping up a system that’s perfectly designed to fail, loudly, inefficiently, and expensively.
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Dimitri Burshtein is a principal at Eminence Advisory. Peter Swan AO is professor of finance at the UNSW-Sydney Business School.
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