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Last week was a busy one for Aussie politics, with the budget handed down followed closely by the confirmation of an election for May 3. In Trumped-up times, Australians will head to the polls in what is to be a hotly contentious campaign that will likely result in a minority government. Yet, amid the rhetoric, politicians on both sides continue to play it safe, choosing policies of little substance that will increase the likelihood of re-election rather than making the hard decisions that the nation really needs. ABSI this week discusses the one issue that remains conspicuously absent from serious debate: Australia’s unsustainable tax system.

Australia’s federal revenue is multifaceted but heavily dependent on personal income tax, which accounts for nearly 50% of total tax receipts in FY23. Meanwhile, the GST of 10% contributes just 15% of government revenue, which is far lower than comparable economies, such as New Zealand and European nations, where consumption taxes play a more substantial role. Furthermore, GST is 100% distributed to the States, with the Federal government reliant on other taxes to fund its approx. $730 billion in spending.

Source: Finance Department

An over-reliance on taxes paid by working Australians is unsustainable, yet successive governments have kicked the can down the road, failing to address this fundamental flaw in our revenue model. With a rapidly ageing population and without reform, Australia risks a fiscal crisis where fewer workers are expected to support a growing number of non-working citizens, making it increasingly difficult to incentivise work and investment. 

The reality is clear: we need a fundamental overhaul of how the government raises revenue. If left unaddressed, the pressure on working Australians will increase while government spending on healthcare and aged pensions expands—leading to either higher deficits or even more burdensome taxation on younger generations.

A Radical Proposal: Removing Income Tax for Most Australians

One bold solution would be to completely remove income tax for individuals earning under $60,000. This would put billions of dollars back into the pockets of working Australians, improving incentives for full-time employment, reducing disincentives for second earners, and encouraging greater workforce participation.

At face value, it may seem crazy, but looking at a breakdown of FY22 income taxes per taxable income range shows that those earning up to $60k contribute 7.16% of total income taxes or $37.1 billion. We would also have to account for the new tax-free threshold for all workers, so in total, this would cost the budget $67 billion.

Source: ATO

So how do we replace that income?

To offset this, we could increase the GST to 20%, which would bring this tax in line with other advanced economies, such as the EU VAT. In FY22, GST raised $80.5 billion; however, doubling it wouldn’t necessarily double revenue as it would result in behavioral changes, but it should raise the $67 billion we need to plug the gap and potentially more to help the budget deficit. 

Looking at the numbers, all workers should be better off with this proposal. For example, looking at somebody earning $60k would be paying $9,967 in income tax based on FY24 brackets. Assuming they spend 100% of their income means they would also pay $5k in GST at 10% for a total current tax burden of approx. $15k. Removing all income tax for this worker and increasing their GST burn to 20% results in a tax burden of approx. $12k making this worker better off by ~$3k per annum. For higher income earners, they would likely still be better off assuming that they don’t consume every after-tax dollar they earn. 

While such a shift would supercharge incentives for people to work and contribute to the economy, there would be some short-term challenges. Retirees, who currently pay little to no income tax, would bear a higher tax burden under a higher GST. However, this could be mitigated with a targeted increase in the aged pension for those with limited assets.

Meanwhile, businesses would benefit from a more dynamic economy with stronger workforce participation and higher disposable income among consumers. Young and middle-income workers—especially those earning under $60,000—would have significantly more take-home pay, while the increased GST would primarily impact discretionary spending.

Despite the economic case for reform, no major party is likely to propose such changes. The reason is simple: short-term electoral incentives dominate policymaking. Most politicians are more concerned with winning elections than implementing long-term reforms that may not pay off until after their time in office. Radical changes to tax policy come with political risks, and no government wants to be the one responsible for breaking from the status quo.

The longer we delay tax reform, the harder it will be to implement. As the population continues to age, there will be even fewer working taxpayers to shoulder the burden of government spending. If we wait another decade, reforms like these will be politically impossible, as an ever-larger share of voters will oppose any shift toward consumption-based taxation.

With the 2025 election approaching, Australians should demand more from their leaders. It’s time for a tax system that encourages work, strengthens economic growth, and sets the country up for long-term fiscal sustainability. We need leaders willing to think beyond the next election cycle and embrace bold, necessary reforms.

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