Tax

Whatever you think about how government spending is financed, taxes do several distinct economic jobs.

• Making room for public spending without inflation. Tax reduces what households and businesses can spend, which frees up workers and materials for public use. If the government hires 10,000 more nurses, taxes help stop the economy trying to buy more than it can produce.
• Distribution. Progressive income tax takes a larger share of higher incomes. In 2026–27 the rates are 0, 15, 30, 37 and 45 per cent across income brackets, plus a 2 per cent Medicare levy.
• Incentives and discouraging harms. Tobacco excise makes smoking dearer; a price on carbon would do the same for emissions.
• Resource allocation. Tax rules steer money towards some uses. Rental losses can be deducted from wages, and capital gains on assets held over a year are taxed on only half the gain, so property investment is favoured over some alternatives. Both settings change from 1 July 2027 (see the Housing topic).
• The institutional role of revenue. Revenue sits at the centre of the legal and political budget process, covered in the third section below.

Economists of every school accept the first four. They disagree about how to describe the fifth, and about how to judge the right overall level of tax.

OECD figures put Australia's total tax at 29.4 per cent of GDP in 2022, below the OECD average of 34.0 per cent. The mix is unusual. Personal income tax supplies 40 per cent of Australian tax revenue, against an OECD average of 24 per cent, and Australia collects no social security contributions, which in many countries fund pensions. Instead, employers pay compulsory superannuation into private funds, which is not counted as tax. That is one reason people argue about whether Australia is a 'low-tax' country.

You also need the idea of a marginal tax rate: the rate on your next dollar of income. In 2026–27, someone earning $100,000 pays 30 cents on each dollar between $45,000 and $135,000. A $1,000 tax deduction saves them $300 in income tax, or $320 including the Medicare levy. The same deduction saves someone earning over $190,000 $450, or $470 with the levy, so deductions are worth more to higher earners.

Your average rate, total tax divided by income, is lower than your top marginal rate. On $100,000, income tax in 2026–27 is $20,520, an average rate of about 20.5 per cent, not 30.

In Australia, revenue also has legal and political jobs. Section 81 of the Constitution sends all Commonwealth receipts into one Consolidated Revenue Fund, and section 83 says no money can be drawn from it without an appropriation made by law. Parliament, not the government alone, authorises spending.

When spending exceeds tax, the Australian Office of Financial Management issues Commonwealth bonds, and it forecasts daily cash flows so the government can always make its payments.

Revenue also anchors political accountability. After each general election, the Parliamentary Budget Office publishes the budget impact of the major parties' commitments, so voters can compare promises with their cost. Governments set themselves fiscal rules; the Coalition government, for example, capped Commonwealth tax at 23.9 per cent of GDP.

None of these arrangements is a law of economics. They are laws and conventions Parliament chose and could change. But while they stand, revenue shapes what governments can do, what they can promise, and how they are judged.

MMT economists make an operational argument: a government that issues its own currency does not need to collect taxes before it can spend. In Randall Wray's summary, taxes are not needed to 'pay for' spending. Their jobs are to create demand for the currency, hold total spending in check, redistribute, and discourage harms. The real limits on spending are inflation and real resources.

Mainstream economists such as Gregory Mankiw accept that a currency issuer can always pay its bills in its own money. But they argue that financing spending by creating money or issuing bonds still has costs: interest must be paid, and leaning on money creation fuels inflation.

So keep two questions separate. Can the Australian Government run out of Australian dollars? No. Does tax revenue matter in practice? Yes: for inflation, for distribution, and under Australia's laws, budget rules and politics. Both sides agree that taxes matter for inflation. The live disagreement is how to judge the right level of tax, and whether saying taxes do not 'fund' spending clarifies or misleads.

Economists use rent in a special sense: income above what is needed to bring something into use. Land is the classic case. Its supply is fixed, so nothing extra is needed to call it into existence, and its whole return is rent. Classical economists built theories around this, including David Ricardo in his 1817 Principles of Political Economy and Taxation. In 1879 Henry George proposed a 'single tax' on land value to replace all other taxes. The idea extends to monopolies and scarce natural resources.

Because land cannot move or be produced, a tax on its value is hard to avoid and does not reduce the amount of land. Treasury modelling in 2015 found that a hypothetical broad-based land tax would be Australia's most efficient major tax, while stamp duty on property transfers and company tax were the least efficient.

This is a point where mainstream and heterodox economists largely agree. They disagree about how large rent is beyond land, and how quickly the tax base should shift.