Getting the tax balance right: How Australia can ensure more prosperity for all

An increase in high-income tax brackets here, like Canada and Germany, could provide extra revenue without hurting lower and middle-income earners.

In the global economic landscape, taxation is not just about revenue; it’s about balance – ensuring businesses thrive, individuals prosper, and public services remain robust.

Australia has long prided itself on being a low-tax nation, but how does this model stack up against the world’s leading economies? Are we truly getting the best deal, or is there room for improvement?

Australia’s tax revenue as a percentage of GDP stood at 29 per cent in 2022, ranking 29th out of 38 OECD countries. This is notably lower than the OECD average of 34 per cent and well below countries such as France at 45 per cent and Germany at 38 per cent.

The lower tax burden has been a key attraction for businesses and investors, fostering a pro-business environment with fewer financial constraints. In contrast, nations with higher tax rates tend to have more extensive public services, offering citizens better healthcare, education, and infrastructure, but at the cost of a heavier tax load on individuals and businesses.

The US, another low-tax economy, has a tax-GDP ratio of about 27 per cent indicating that Australia follows a similar path in maintaining a balance between tax collection and economic growth.

However, this approach has a direct impact on public expenditure. Australia’s social spending as a percentage of GDP is lower compared to its European counterparts. According to the OECD, Australia’s total social spending stood at approximately 17.6 per cent of GDP in 2021, compared to France at 31.6 per cent and Sweden at 26.1 per cent.

This directly affects the quality and accessibility of key public services such as healthcare, education, and social security. Australia’s public healthcare system, while robust in structure, faces significant funding gaps that contribute to long hospital wait times and high out-of-pocket expenses for specialised treatments.

An increase in high-income tax brackets here, like Canada and Germany, could provide extra revenue without hurting lower and middle-income earners.

Similarly, education funding per student is lower compared to countries like Canada and Germany, where higher taxation provides for more extensive public education resources.

Despite its lower tax-to-GDP ratio, Australia maintains a strong GDP per capita, indicative of a high standard of living. In 2023, Australia’s GDP per capita was estimated at about $US62,000, placing it among the world’s wealthiest nations.

This economic strength underpins high consumer spending, which fuels domestic demand and business growth. Compared to the UK, which had a GDP per capita of approximately $US47,000, and Canada at about $52,000, Australia remains a highly attractive destination for property and business investments.

A lower tax regime means businesses face fewer financial burdens, which can drive job creation, investment, and economic dynamism. The property sector, in particular, benefits from a stable investment climate where individuals and corporations retain more after-tax income.

This has fuelled Australia’s strong housing market, attracting local and international investors despite concerns over affordability and rising interest rates. Lower taxation also enhances corporate profitability, encouraging foreign investment and making Australia an appealing hub for multinational corporations seeking a stable economic environment.

While low taxes encourage investment, they mean fewer resources for public services, creating a potential gap in infrastructure development and social support. Countries like Denmark and Sweden, which have tax-to-GDP ratios of 47 per cent and 43 per cent respectively, reinvest significantly into public welfare, ensuring world-class healthcare, education, and transport infrastructure. These countries consistently rank high in global quality of life indices, largely due to their well-funded public services.

Australia’s infrastructure spending has struggled in some areas, with congestion in major cities, rising healthcare costs, and increasing pressures on the education system. Public transport projects often face delays due to funding constraints, and rural areas experience significant disparities in service availability compared to metropolitan regions.

Additionally, welfare support for vulnerable populations, including aged care and disability services, remains underfunded compared to OECD peers.

To enhance its economic framework, Australia could consider adopting smarter tax reforms that increase revenue without stifling economic growth. This could involve slight adjustments to corporate taxation, ensuring that multinational corporations contribute fairly while maintaining a business-friendly climate.

A moderate increase in high-income tax brackets, like strategies employed in Canada and Germany, could provide additional government revenue without disproportionately impacting lower and middle-income earners.

Encouraging innovation and productivity will be key in strengthening Australia’s long-term economic trajectory. Nations such as South Korea and Germany have implemented policies to drive research and development, incentivising technological advancements and industry growth.

Australia could adopt similar measures by increasing research grants, fostering university/industry collaborations, and streamlining business regulations.

Supporting automation and AI-driven industries could further boost productivity, helping businesses remain competitive while expanding the overall tax base through economic growth rather than higher tax rates.

Australia’s low-tax model has fostered economic resilience, business confidence, and investment appeal. However, to maintain its competitive edge and ensure long-term prosperity, it may need to rethink its approach to public investment and social welfare.

A carefully calibrated strategy – where taxation supports, rather than hinders, economic growth – could help Australia stand out even further as an economic powerhouse. Striking the right balance will be key.

By leveraging its economic strengths while addressing weaknesses in public service funding, Australia can position itself as a leader in sustainable economic growth. The question is: can Australia fine-tune its fiscal model to ensure its prosperity benefits all?

Hari Hara Priya Kannan is data scientist at The Demographics Group.