Dear Barnaby,
The proposed budget changes have caused a great deal of anxiety amongst small business owners and your more typical aspirational Australian – the ones quietly getting on with it, investing in property and shares, or using trusts as a perfectly sensible means to redistribute their own hard-earned income within their own families. These are not the super-wealthy. These are the backbone.
The anxiety is understandable. What is less understandable is why the Coalition, across nearly a decade in government, did nothing meaningful to address the structural rot at the heart of this problem. Bracket creep is not some novel Labor invention. It is baked, thoroughly and deliberately, into an antiquated taxation system that successive governments of both stripes have been too timid, too comfortable, or too compromised to fix.
The current Australian taxation system is not fit for purpose. Its origins lie in the wartime emergency of 1942, when the Commonwealth passed four Acts that effectively compelled the states to relinquish income tax collection to Canberra. What was assembled in crisis has been with us ever since. In 1965-66, the top marginal rate of 66.7 per cent applied to earnings equivalent today to somewhere north of $230,000. Now the 45 per cent rate – 47 per cent with the Medicare levy – kicks in at $190,000, catching professionals, tradespeople, and dual-income families who are, by any honest measure, nowhere near wealthy. Bracket creep was not a bug then; it was a feature. It still is.
The only reason we have the carve-outs we do, trusts, negative gearing, capital gains discounts, superannuation concessions, is because the base system is so broken that people have been forced to route around it. Now a government that refuses to fix the underlying problem wants to close the escape hatches instead, punishing people for surviving a system you failed to change.
Adam Smith told you so. His four maxims of taxation – proportionality, certainty, convenience, and economy of collection – were clear. By every one of them, the current Australian income tax system fails. The compliance cost alone runs to around $40 billion per year. We are burning $40 billion of productive economic output simply to navigate a system that achieves outcomes Smith would have found repugnant.
On the regressivity objection: it is time to put this argument to rest, because it is inconsistent to the point of dishonesty. Nearly every other tax in this country is already regressive, and the progressive establishment has been conspicuously silent about all of them. The excise on beer and tobacco are highly regressive. The luxury car tax – now applying to family SUVs at $80,567 – was introduced to protect a car manufacturing industry that no longer exists. Either argue against every flat and regressive tax in the system, or stop using regressivity as a selective cudgel against the one reform that would actually simplify and democratise the tax burden.
The evidence supports simplification. When Bulgaria moved to a flat rate of 10 per cent, income tax revenues grew by 40 per cent – substantially because grey-market earnings were declared under a simpler system. Estonia and Slovakia saw similar patterns: broader effective bases, lower compliance costs, and growing total revenues. The argument that a flat tax is fiscally irresponsible is not supported by the weight of evidence.
A Practical Proposal
Set income tax at a flat rate of 20 per cent. Broaden the GST to a genuine 100 per cent consumption base including food and essential services, at 10 per cent, with a properly structured one-off compensation payment to Centrelink recipients. Clean. Simple. Honest.
For small business entities; cafes, trades, farms, and service businesses most exposed to volatile annual income, apply a five-year rolling average to tax assessments. A business earning $400,000 one year and $80,000 the next should not be hammered in year one and starved of working capital in year two. This single change would reduce much of the demand for the trust arrangements the government now wants to curtail.
Alongside the rate change, the government should give serious consideration to reintroducing income splitting for families; a mechanism that existed in Australia in the 1970s and which many comparable nations retain today. When a single income supports a family, the full tax burden falls on one earner, compressing the household’s effective choices. Income splitting allows a portion of that income to be assessed in the hands of a lower-earning or non-earning spouse, reducing the household’s overall tax liability. The consequence is not a distortion, it is a restoration of genuine choice. A family in which one partner wishes to stay home with young children should be making that decision freely, not under financial duress manufactured by a tax system that treats every household as two independent taxpayers regardless of circumstance. Under a reformed system with a flat rate and income splitting, that choice becomes available to far more Australian families without a dollar of additional subsidy being required.
There is a related and largely untapped opportunity in aged care and childcare simultaneously. Grandparents and older Australians who provide informal childcare for their working-age children are doing so at no cost to the public and often to the detriment of their own pension or Centrelink entitlements if they receive any recognition for it. The reform required here is targeted and straightforward: allow older Australians to earn the equivalent of a market childcare fee without that income affecting their pension or Centrelink payments, and without bringing them into the income tax system generally. The compliance and administrative burden should be minimal. The effect would be immediate: a meaningful increase in childcare availability, a reduction in pressure on formal childcare centres and their staffing shortages, and a direct financial benefit to families who are already relying on grandparents informally. This is a more elegant solution to the childcare affordability problem than the current apparatus of worker subsidies, fee caps, and activity tests, all of which are symptoms of a system that has failed to recognise and reward what families are already doing.
The entire architecture of government subsidy that has grown up around the broken tax system; childcare subsidies, first home buyer grants, pension supplements, low-income tax offsets, exists largely because we have taxed ordinary Australians so heavily that they cannot afford the basics without government assistance. The subsidy is the government returning a portion of what the tax took in the first place. It is an absurd merry-go-round that enriches bureaucracies and infantilises citizens. Flatten the rate. Broaden the base. Restore income splitting. Recognise informal care. Trust people with their own money and their own choices.
A Note on Superannuation
Compulsory superannuation exists for reasons entirely independent of the tax system: Australians, left to their own devices, will systematically undersave for retirement, and the demographic consequences of that, an unfunded pension liability borne by the general taxpayer are not acceptable. The compulsion is right and should stay.
The concessional tax treatment is a separate matter. It is the carrot attached to the compulsion, made attractive largely because the marginal rate it is being compared to is 47 per cent. Under a 20 per cent flat rate, the differential narrows, and the concession becomes less necessary as a shelter. The structure of compulsory retirement saving remains intact. Its secondary life as a tax planning vehicle becomes considerably less interesting.
Now Is the Hour
I have been engaged in financial services policy and advocacy for the better part of four decades. I have not seen the Australian public as ready for a genuine structural conversation about taxation as they are today.
Australians are not asking for this to be explained to them. They are living it, every pay slip, every tax return, every investment decision distorted by considerations that have nothing to do with the underlying economics. What they have not had is a political voice willing to name it honestly and offer something more than another threshold adjustment or a targeted rebate before an election.
That mood is an opening. It does not stay open indefinitely.
To you both: this is your moment to say clearly that you will fix the tax system, not merely its symptoms. Not a marginal rate trim here and a lifted threshold there, an actual structural reform that any Australian could explain to their children in a single sentence.
Adam Smith managed it in one sentence. Two hundred and fifty years later, it remains the right answer.
Australians are ready to hear it. Are you ready to say it?
Yours sincerely,
Scott Heathwood
President, Institute of Financial Professionals (IFPA)
Former President, NSW Young Liberals (1986–87)
The author writes in a personal capacity. The views expressed constitute an invitation to a policy debate that is long overdue.
