The income tax outlier

Her pay rise was three per cent, and so was inflation. That was the arithmetic the Geelong logistics coordinator had worked out in advance, and she was satisfied with it: her enterprise agreement had delivered a rise that matched the published increase in the cost of living, so she expected to end the year standing exactly where she started. On a salary of $80,000 the rise took her to $82,400. Under the 2024-25 personal tax scale, the tax on $80,000 is $14,788 and the tax on $82,400 is $15,508 (author's calculation on the rate scale published by the Australian Taxation Office for 2024-25). The extra $2,400 attracted $720 of tax, because every dollar of it fell in the 30 per cent bracket. Her take-home pay rose by $1,680 — about 2.6 per cent — against prices that rose three.

Her average tax rate — the share of her whole income that goes to the Commonwealth, not the rate on her last dollar — moved from about 18.5 per cent to about 18.8 per cent. A third of a percentage point. Nobody voted for it, no minister announced it, and her payslip does not report it. She got a rise that matched inflation and finished the year slightly worse off in real terms, because the tax scale did not move when her wage did. Do that for ten years and the third of a point becomes several points, on an income that has not risen a cent in real terms.

That mechanism has a name and a separate audit on this site: bracket creep, examined in detail in Bracket creep and the incredible shrinking tax cut. This article is about something else — the structure that mechanism operates inside. Australia does not simply have an un-indexed income tax. It has an un-indexed income tax doing more of the total revenue-raising work than in almost any comparable country, and correspondingly less work being done by taxes on what people spend. That combination is unusual, it is consequential, and it is the one part of the tax system no Australian government of either persuasion has been willing to reopen since 2000.

What the structure actually is, and how it got here

Every country decides, implicitly or explicitly, which of three broad things it will tax hardest: income, consumption, or wealth and property. Income taxes fall on what people earn — wages, salaries, business profits, interest, dividends, capital gains. Consumption taxes fall on what people spend, usually through a broad-based value-added tax; Australia's is the Goods and Services Tax. Property and wealth taxes fall on assets held — in Australia, mostly at the state level through land tax, council rates and stamp duty on transfers.

Australia's answer, in international terms, is distinctive. Australia leans heavily on the first category and lightly on the second. On the OECD's Revenue Statistics — the standard international dataset that puts every member country's tax collections on a common definitional basis so they can be compared — income taxation as a share of total taxation is highest in Denmark and second highest in Australia (OECD Revenue Statistics). In 2023, income taxes exceeded 40 per cent of the tax mix in eleven OECD member countries, and Australia was one of the eleven (OECD Revenue Statistics 2025). Most member countries sit below that line, some of them well below it.

This is not an accident of drift alone. It is partly the legacy of a deliberate structural choice made and then partly unmade. Until 2000, the Commonwealth had no broad consumption tax at all. It had a wholesale sales tax — a narrow, patchily applied levy on a shrinking category of physical goods, applied at several different rates and not applied to services, which by the 1990s were the fastest-growing part of what Australians actually bought. The Parliamentary Budget Office's history of the Commonwealth tax mix records that the Commonwealth relied on personal income tax for more than 50 per cent of its revenue from the early 1970s all the way through to 2000-01 (Parliamentary Budget Office, analysis of trends in Commonwealth tax receipts).

On 1 July 2000, that changed. The Goods and Services Tax commenced under A New Tax System (Goods and Services Tax) Act 1999 — a broad-based tax of 10 per cent on most goods and services, with significant exclusions carved out during the Senate negotiation that secured its passage, including basic food, and with health, education, childcare, and water and sewerage services GST-free, and financial supplies and residential rent input-taxed. The wholesale sales tax was abolished. A range of state taxes were scheduled for abolition. And, critically for the mix, personal income tax was cut substantially at the same time, and the revenue from the new tax was assigned in full to the states and territories.

The PBO records what that did to the shape of Commonwealth revenue: from 2000-01, personal tax's share of Commonwealth revenue fell below 50 per cent — partly because of the new tax, and partly because personal taxes were cut alongside it (Parliamentary Budget Office). That is the rebalancing the 2000 package achieved. One number, one moment, after three decades above the line.

And then the single most important finding in this entire topic. Since 2000-01, the PBO finds, the share of tax receipts coming from individuals has been trending back toward its pre-GST levels — mostly because of bracket creep (Parliamentary Budget Office). Not because a government legislated it back. Not because the GST was cut. Because the income tax thresholds are fixed in nominal dollars, wages are not, and time passes.

The rebalancing that took a near-death election to legislate is being undone without a single vote, one un-indexed year at a time.

That sentence deserves to be sat with, because most Australians have never encountered it. The 2000 tax package was the most politically expensive domestic reform of the past forty years. It was taken to an election, fought over in the Senate, redesigned to pass, and it reshaped the revenue base of the federation. Its central structural achievement — shifting some of the Commonwealth's revenue-raising weight off income and onto consumption — is being substantially unwound by a mechanism that requires no decision, no announcement, and no defence. The reform was legislated. The reversal is automatic.

The evidence: what the comparison shows, and what it hides

The case above is strong enough that the critique has to be built carefully, from figures that survive scrutiny. Three bodies of evidence matter: the international comparison and its limits, the domestic trend line since 2000, and the economic literature on what the mix actually does.

The superannuation asterisk — why the raw comparison overstates the gap

Before anything is built on the international ranking, a substantial qualification has to be stated, because without it the comparison is misleading and a well-informed reader will spot the omission immediately.

Most OECD countries fund their public retirement income systems, and often their health and unemployment insurance, through social security contributions: a compulsory levy on wages, paid by employees and employers, collected by government, and classified in the OECD's Revenue Statistics as a separate category from income tax. In many European economies these contributions are very large — in some cases comparable to or exceeding the personal income tax take. Because they sit in their own category, a country that raises an enormous amount from a payroll levy on wages appears, on the headline measure, to be far less "income tax reliant" than Australia, even though it is taxing labour at least as heavily and possibly more so.

Australia does it differently. It funds retirement income substantially through compulsory superannuation — the Superannuation Guarantee, under which employers must contribute a legislated percentage of an employee's ordinary time earnings into a private account owned by the employee. Because those contributions go into the worker's own account rather than to government, they are not classified as taxation at all in the OECD framework. Australia therefore records essentially no social security contributions in Revenue Statistics, which mechanically pushes income taxation's share of the Australian total upward relative to countries that run the same function through the public purse.

This is not a small technical footnote. It is a first-order qualification, and it means the honest version of the claim is narrower than the headline. Australia is not necessarily taxing labour harder than the rest of the OECD. What Australia is doing is raising an unusually large share of its government revenue through a single, progressive, un-indexed income tax scale — while the compulsory levy that funds its retirement system sits outside the tax base entirely, in private accounts, and cannot be redirected to fund anything else.

Three things survive that qualification intact, and they are what the rest of this article rests on. First, the consumption side of the comparison is unaffected: superannuation is not a consumption tax, and Australia's GST — at 10 per cent since 2000, with a base narrowed at the point of legislation — remains low-rated and narrow by the standards of comparable value-added taxes, most of which sit well above 10 per cent (OECD Consumption Tax Trends, various editions). Second, the domestic trend line is a comparison of Australia against itself over time, and the superannuation treatment is a constant within it: the PBO's finding that the share of receipts from individuals is trending back toward pre-GST levels does not depend on any international definition. Third, and most importantly, the structural point about indexation is unaffected either way. Social security contributions in most systems are levied as a percentage of wages, so their yield rises with wages and no more; a progressive scale with fixed dollar thresholds raises its yield faster than wages, automatically. That difference is the whole argument, and no measurement convention touches it.

The trend since 2000, and what it means

The domestic record is the stronger evidence because it compares like with like. The PBO's analysis of Commonwealth revenue over five decades produces a clean shape: a long plateau above 50 per cent reliance on personal tax from the early 1970s; a step down at 2000-01 when the GST arrived and personal taxes were cut together; and a slow climb since, trending back toward pre-GST levels, driven mostly by bracket creep (Parliamentary Budget Office, trends in Commonwealth tax receipts and personal income tax).

The important word in that sentence is "mostly". Bracket creep is doing the majority of the work, but it is not doing all of it, and the other contributors matter because they are also structural and also running in the same direction.

One is the composition of what Australians buy. The GST base was narrowed at legislation — basic food removed, health, education and childcare GST-free, residential rent input-taxed. Those excluded categories have generally grown faster than the economy as a whole, because health and education spending rises with income and with an ageing population. A tax base that excludes the fastest-growing part of consumption shrinks as a share of consumption over time without any change to the law. Treasury and PBO analysis of the GST base has consistently found this direction of travel (approx.; Treasury Tax Expenditures and Insights Statement; Parliamentary Budget Office tax-mix analysis). It is the mirror image of bracket creep: one base expands automatically, the other contracts automatically, and both effects push the mix the same way.

A second is the erosion of the other indirect tax bases. Fuel excise yields less per kilometre as vehicles become more efficient and progressively electrify; tobacco excise yields less as smoking rates decline, which is exactly what the health policy was designed to achieve. Both are, from a public health and environmental standpoint, successes. Both leave a revenue hole, and on current settings the hole is filled by the income tax scale doing more work.

A third is company tax, the other half of "income taxation" in the OECD measure. Australia raises a comparatively high share of its revenue from company tax, in part because of the resources sector and in part because of dividend imputation — the system under which Australian company tax paid is credited against the tax on dividends received by Australian shareholders, so that company tax functions for domestic investors partly as a withholding on personal income rather than as a separate impost. Imputation makes Australia's company tax collections look large in international comparison while the effective burden on domestic shareholders is lower than the gross figure implies. That is a genuine complication in the comparison and it is fair to state it.

Why the mix matters, stated as the trade-off it is

The reason economists care about the mix — rather than only about the total — is that different taxes do different amounts of collateral damage per dollar raised. Every tax changes behaviour. The question is how much, and whose behaviour.

Taxes on income fall on the decision to work an extra hour, to take the promotion, to move to the higher-paying job, to save rather than spend, and to invest in a business rather than in an asset with a lighter tax treatment. Taxes on company profits fall on the decision to invest in Australia rather than elsewhere, and in a small open economy that competes for globally mobile capital, a material part of that burden is ultimately borne by workers through lower wages than would otherwise be paid — a mainstream finding in the economic literature, though the size of the effect is genuinely contested. Broad consumption taxes fall on spending regardless of how the money was earned. They do not distinguish between a dollar earned from wages and a dollar earned from capital, and they do not penalise the decision to work more, which is why the general assessment is that a broad consumption tax is less distorting per dollar raised than income and company taxes.

Treasury's own modelling work on the efficiency and incidence of major Australian taxes has produced estimates of the "marginal excess burden" of each tax — the economic cost imposed on the community for each additional dollar of revenue raised. That work has consistently ranked company tax and state stamp duties among the most costly per dollar, and broad-based consumption taxes and land taxes among the least (approx.; Treasury working paper on the economy-wide efficiency and incidence of major Australian taxes, 2015; Australia's Future Tax System Review, 2010). The Henry Review reached a compatible conclusion about the direction, if not every specific number: it argued for concentrating revenue-raising on a smaller number of robust, efficient bases — personal income, business income, private consumption, and economic rents from land and natural resources — and for retiring the long tail of narrow, distorting taxes around them.

But that is only half the ledger, and the half that gets quoted selectively. The other half is that efficiency is not the only criterion, and on the criterion of fairness the comparison runs the other way. A progressive income tax takes proportionally more from higher incomes by design. A flat-rate consumption tax does not; measured against annual income, it takes proportionally more from lower incomes. Measured against lifetime consumption the regressivity is smaller, because high-income households eventually spend what they save, but "eventually" is not much comfort to a household deciding between the grocery bill and the electricity bill this fortnight. This is why a shift toward consumption taxation is inseparable from the compensation package that accompanies it. The tax change and the compensation are a single policy, and judging one without the other is meaningless.

So the trade-off is real and it does not resolve itself. A tax mix weighted toward income raises revenue in a way that is more visibly progressive but imposes a higher economic cost per dollar and falls hardest on people whose income is wages. A mix weighted toward consumption raises revenue at lower economic cost but is regressive in direct incidence and requires a durable, well-designed compensation system to be defensible. Reasonable people land in different places on that trade-off, and this site does not tell readers where to land. What it can say is that the trade-off should be resolved by decision rather than by default — and on current settings, it is being resolved by default.

The critique: reform deferred is reform decided

The critique in this article is not that Australia's tax mix is wrong. It is that the mix is moving, in a consistent direction, without anyone choosing to move it — and that the absence of indexation makes deferring the decision permanently affordable for whoever is in office.

Consider the incentive structure honestly. A government that wants more revenue has two options. It can legislate a visible tax change: raise a rate, broaden a base, argue for it in Parliament, defend it at an election, and wear the cost. Or it can do nothing, and let fixed thresholds meet a growing nominal economy. The second option raises real revenue every year, requires no legislation, generates no headline, attracts no organised opposition, and cannot be pinned on any individual decision-maker. It is not a loophole; it is the default state of the system. And it means the political cost of not reforming the tax mix is close to zero, while the political cost of reforming it is, on the 1998 evidence, close to the maximum available.

Bracket creep is the only tax increase in Australia that no one has to argue for, and the only one no one can be voted out over.

That asymmetry is self-reinforcing. Because the drift funds a meaningful share of spending growth, the fiscal pressure that would normally force a structural conversation never quite arrives. Because the conversation never arrives, the drift continues. Because the drift continues, the mix moves further toward income — which is the very outcome that the reform conversation would be about. The system is stable, and it is stable in a direction nobody has endorsed.

It also means the revenue rises without the accountability that normally accompanies revenue. When Parliament legislates a tax, there is a bill, a second reading speech, a Senate committee, a costing, a distributional analysis, and an opposition. When bracket creep raises the same amount, there is none of that. The money arrives, is appropriated and is spent, and no member of Parliament has ever had to stand up and say why the additional impost on wage earners was warranted. That is a real democratic deficit, and it is separate from any view about whether the total tax take is too high or too low.

The structural consequence compounds the procedural one. Because the drift falls entirely on the income tax base, it concentrates the growth in the tax burden on a single class of taxpayer: people whose income is wages, taxed at source through Pay As You Go withholding, with no scope to defer, restructure or reclassify. It does not fall on consumption. It does not fall on land. It falls on the payslip. The composition of who pays for the growing state therefore shifts every year, in the same direction, without any distributional decision ever having been made about it.

Attribution has to be stated with precision, because this is where commentary usually goes wrong. The current government did not cause the absence of indexation. Automatic indexation of tax brackets existed briefly in Australia in the late 1970s and was abandoned by the Fraser government by the early 1980s; every government since, Labor and Coalition alike, has operated the un-indexed system and has chosen not to restore indexation. The current government did not cause the narrowing of the GST base; that was the price of Senate passage in 1999. It did not cause the erosion of fuel and tobacco excise; those follow from technology and from successful public health policy. What it has presided over is a term in which the drift continued, was relied upon in the published projections, and was not made the subject of a structural reform proposal. That is a fair thing to say about it, and it is also a fair thing to say about every government since 2000. Both statements are true simultaneously, and the second does not excuse the first so much as widen the indictment.

There is one further point that belongs in the critique rather than the caveats, because it goes to how the budget is now being balanced. Where the medium-term projections show the budget improving over the next decade, a substantial part of that improvement comes from personal income tax receipts rising as a share of income — that is, from bracket creep — rather than from spending restraint or from a broader revenue base (Parliamentary Budget Office, medium-term projections and budget insights). A projection built on that foundation assumes governments will decline to legislate income tax relief for years at a stretch. History says they will not. Which means the projected improvement is, to that extent, an artefact: it will either be delivered by an unlegislated tax rise on wage earners, or it will not be delivered at all.

What they got right, and the caveats

Credit is due in several specific places, and the critique above is only credible if the credit is given plainly.

The Stage 3 redesign did deliver relief weighted toward lower and middle incomes. That should be said without qualification, because it is true and because it is directly relevant to this topic. Bracket creep's incidence is heaviest, in proportional terms, on taxpayers crossing thresholds near the bottom of the scale — someone moving from the 16 per cent bracket into the 30 per cent one experiences a much larger proportional change in their average rate than someone already well inside the top bracket. A redesign that shifted a larger share of the relief downward is a coherent policy response to that incidence, on its merits, independent of the question of whether the commitment to leave the cuts unchanged should have been broken. That question is a serious one and it is examined separately on this site in The Stage 3 redesign and the broken promise; it is not relitigated here.

Successive tax cuts have periodically returned bracket creep, and that is a real feature of the system rather than a fiction. The Stage 3 changes that commenced on 1 July 2024 lowered the rate on the second bracket and lifted the thresholds for the two highest rates, and further reductions to the lowest positive rate were announced in the March 2025 Budget to take effect from 1 July 2026 and 1 July 2027 (Australian Taxation Office, individual income tax rates; Australian Government, Budget Paper No. 2, March 2025). A taxpayer measuring their position against the pre-2024 scale is better off. The relief is genuine, it is legislated, and it is not a rounding error. The criticism is not that governments never hand the money back; it is that handing it back periodically is not the same as changing the structure that keeps taking it, and each reset restarts the same climb from a new base.

It is also fair to record that the 2000 reform itself was a Coalition achievement that Labor in office has not attempted to unwind. No government since has moved to abolish or hollow out the GST, and the compensation architecture built alongside it — the higher tax-free threshold, the pension increases — was left in place across changes of government. Whatever the mix looks like now, the 2000 settlement was accepted on a bipartisan basis in practice, which is more than can be said for most contested reforms of that era.

And the honest limits on the critique need stating too. The superannuation measurement point set out above genuinely weakens the simple international comparison, and anyone quoting Australia's OECD ranking without it is overstating the case. Reform is not costless in either direction: full indexation of the income tax scale would reduce revenue growth relative to current projections, and that gap would have to be closed by a broader consumption or land base, by slower spending growth, or by larger deficits. None of the major reviews that examined indexation recommended it in isolation. The choice is not between the current system and a free lunch. It is between one revenue-raising mechanism that requires no act of Parliament, and several others that all require one, each with its own costs and its own losers.

Finally, the states. Any account of Australia's tax mix that stops at the Commonwealth is incomplete. The states raise substantial revenue from payroll tax, land tax, stamp duty on property transfers and gambling taxes, and stamp duty in particular has been identified by every serious review since Henry as among the most economically damaging taxes in the federation — it taxes the act of moving house, discouraging people from relocating for work or downsizing in retirement. The states also receive the entire GST. Any genuine reform of the mix is therefore a federal negotiation, not a Commonwealth decision, and the difficulty of that negotiation is not an excuse invented by any particular government. It is a real constitutional and political fact, and it is the single strongest reason the structure has gone unexamined for twenty-five years.