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With productivity enhancement a major goal of the Albanese Government, now is the time for bold tax reform that is competitive, fair, and fit for purpose, writes Tony Merlo.
Australian tax reform: More carrots, less sticks
10 July 2025
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9 minute read
Decades of minor adjustments to Australia’s tax system, rather than substantial reform, have harmed our international competitiveness. Encouragingly, the Government’s upcoming economic roundtable and the Productivity Commission’s five pillars of inquiry offer a unique opportunity to review and transform our outdated tax system.
Currently, it disincentivises productive effort and capital investment while failing to collect enough revenue for future expenditures. National debt is forecast to grow to $1.2 trillion, with an interest bill of circa $40 billion per annum. That’s equivalent to around half of all our GST collections. This is not just an economic problem. It’s an inter-generational problem – like running up your credit card limit on day-to-day expenses and leaving the debt to the kids to repay.
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Not only are tax collections insufficient to pay for future expenses, but the heavy reliance on personal and corporate income tax collections, which comprise around 70% of the total federal tax take – almost double the OECD average – means that we have serious revenue stream concentration risk.
As our population continues to age and AI reshapes the workforce, the over dependence on income taxes is unsustainable. It also disincentivises work and investment. Our headline 30% corporate tax rate is too high. In fact, it is the third highest in the OECD, well above the OECD average in the low twenties. This drives investment capital – which is increasingly mobile – to more competitive jurisdictions along with the valuable jobs that it creates.
One obvious solution is to reduce our reliance on income taxes by increasing taxes on goods and services. Currently, the GST only raises 14% of total Australian federal tax revenue – well below the OECD average of around 20%.
We could generate around $130 billion of additional revenue annually by increasing the GST rate to the OECD average and eliminating exemptions. After compensating low-income families, significant additional revenue would be available to provide overdue relief from the high effective rates of personal and corporate tax. We could also reduce distortionary taxes and future budget deficits. This would incentivise work, workforce participation, business investment and capital deepening. But the obligation to share GST revenue with the States and Territories creates significant political challenges.
What else can be done? The leading practices of other countries provide a potential tax reform roadmap for Australia. The world’s most competitive tax systems focus on growing tax revenues rather than increasing the tax burden to pay for increased spending – more carrots and fewer sticks. Tax incentives are a necessary part of industrial policy and used extensively by foreign countries competing with Australia to attract value-adding investment in sectors and locations that build long-term national economic resilience. Capital investment is also a key driver of productivity by enabling businesses to scale operations, adopt modern technologies, and improve project delivery.
Many countries offer reduced corporate tax rates to encourage investment in nationally strategic sectors such as technology, energy, advanced manufacturing, financial services, and intellectual property development. Lower corporate tax rates are also available to encourage re-location of important corporate functions that require skilled labour and stimulate investment in regions where housing costs are lowest.
Many countries provide incentives for investment in capital assets, plant, equipment, and technology – these include accelerated depreciation or full expensing or even bonus deductions.
Competitive research and development incentives are critical to promoting innovation and productivity. Highly competitive regimes embrace tax incentives to encourage increased R&D intensity to drive innovation. These include both expenditure-based incentives such as ‘super’ deductions for R&D and innovation spending, as well as reduced rates of tax on income from intellectual property.
Supporting policies are also critical. This would include tax incentives to attract human capital in nationally strategic areas including engineers, scientists, innovative entrepreneurs. These incentives could be designed in various ways to encourage valuable human capital to move to Australia, facilitate local skills development and boost productivity.
Imagine a future Australia. A first-choice investment destination that encourages innovation and growth in cities and regions, across diverse and future focused industries. An Australia, where tax revenue is enough to cover ongoing public needs.
With productivity enhancement a major goal of the Albanese Government, now is the time for bold tax reform that is competitive, fair, and fit for purpose, with more carrots and fewer sticks.
Tony Merlo is a partner and tax policy leader at EY Oceania.
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