MNI INTERVIEW: Australia Eyes Productivity-Boosting Tax Reform

The Australian government has a real opportunity to advance tax reform that could boost productivity growth, with some of the country’s most entrenched systems – such as sales tax and negative gearing – now open for debate, a prominent think tank economist told MNI, though he added that any resulting improvement is likely to be modest without complementary reforms in other areas. 

Following Treasurer Jim Chalmers’ announcement of a productivity roundtable and his pledge to overhaul the system, Brendan Coates, director of the Grattan Institute’s housing and economic security program, said the government’s significant parliamentary majority offers a once-in-a-generation opportunity to pursue real reform – one that should focus on reducing the burden of income and company taxes to encourage capital investment.

“There are a range of loopholes in the income tax system, like taxing savings differently depending on the vehicle,” said Coates, citing the highly concessional treatment of superannuation. “Whereas money in a term deposit pays the marginal rate, which is quite punitive.” Closing unnecessary concessions in the superannuation tax system could deliver around AUD10 billion in annual savings, he argued.

Coates also called for halving the 50% capital gains tax discount and reforming negative gearing, arguing the changes could deliver revenue worth up to 1% of GDP, which could be redirected to reduce more distortionary taxes. 

“They could also add GST [goods and services tax] into the mix, if the government’s willing to go there,” he said, though he noted that Chalmers had signalled scepticism toward that option. “They could then seriously reduce income tax and look at different ways of levying company taxes that reduce the economic costs and increase the incentives for capital investment in Australia.”

While Chalmers has not discussed specific reform goals, he has stressed that everything is open for discussion, calling the media's rule-in-rule-out game "cancerous" when questioned on the potential for a GST increase. 

STRUCTURAL REFORM NEEDED

Chalmers has identified lifting productivity while keeping inflation contained as a central post-election policy priority, following Labor’s return to power with an expanded majority.

The Reserve Bank of Australia forecasts productivity growth to reach 0.9% by December and 1% by the end of 2026. However, several former RBA economists have called that projection overly optimistic and warned it could jeopardise the Bank’s broader goal of anchoring inflation within the 2-3% target range over time. (See MNI: Weak Productivity To Cramp RBA's Easing Path - Ex Staff)

Coates argued that reducing corporate taxes would enhance firms’ incentives to invest and expand output. “You increase their incentive to undertake R&D and capital investment, which raises output per worker. If you reduce taxes on income, you increase incentives for people to deploy their human capital,” he said. “We spend a lot on education and training, and if you want people to make full use of those skills, then those things will show up in measured output.”

However, he acknowledged the challenge of pushing through structural tax reform, noting Australia had not undertaken serious adjustment to its tax system since the 1980s. 

"Certain policies like changes in superannuation taxation, negative gearing or the capital gains discount, there's probably a pretty good prospect that would pass the parliament if the government was to enact that policy, because it aligns with the policies of the greens," he argued, noting changes to the GST would likely require bipartisan support.

Beyond tax, Coates said the government should also consider sector-specific changes, such as easing land use regulations to allow more urban housing development. “That’s probably been the shortcoming in Australia’s public debate – you need to understand the sector well enough to identify where the opportunities lie,” he said. “We should look at tax reform – it’s one of the broad systems that influences nearly every economic decision Australians make, but it’s far from the whole story.”