Australia’s growing reliance on income tax reflects two decades of slowing productivity more than tax policy alone, according to new research that argues economic growth has increasingly relied on population, housing and credit rather than stronger output per worker.
The study, published by The Balance Sheet, examines OECD tax data, Reserve Bank statistics, Australian Bureau of Statistics figures and international productivity datasets to test the claim that Australia has a tax problem after the Organisation for Economic Co-operation and Development reported that 62.1 per cent of Australia’s tax revenue came from personal income tax and company tax in 2023, well above the OECD average of 36.4 per cent.
The report concludes that the OECD figure is accurate but can be misleading when viewed in isolation.
It argues Australia relies unusually heavily on income tax largely because, unlike most OECD countries, it does not levy social security contributions. Those contributions account for about one quarter of tax revenue across the OECD but are recorded separately from income tax. Australia’s compulsory superannuation system also sits outside the tax system, despite performing a similar retirement funding role.
“When direct taxes on labour are measured on a comparable basis, Australia’s position sits much closer to the OECD average,” the report says.
Rather than focusing on the headline comparison, the research examines why income tax has become a steadily larger source of Commonwealth revenue over time.
It finds personal income tax accounted for 47 per cent of Commonwealth taxation in 2000-01, rising to 56 per cent in 2024-25. Parliamentary Budget Office projections suggest the share will remain above half of total Commonwealth receipts over the coming decade unless tax thresholds are regularly adjusted.
The report attributes much of that increase to bracket creep, where workers move into higher tax brackets as nominal wages rise while productivity and real wage growth remain subdued.
It argues this is closely linked to Australia’s long-running productivity slowdown.
Labour productivity averaged 2.2 per cent annual growth between 1995 and 2005, eased to 1.3 per cent between 2005 and 2015 and slowed to just 0.3 per cent between 2015 and 2025, the weakest decade in at least sixty years of records. The Reserve Bank reduced its estimate of long-run productivity growth last year, while former Treasury secretary Ken Henry has described recent productivity growth as “abysmal”.
During the 1990s, most economic growth came from rising output per person. Over the past decade, it says, population growth has become the larger contributor, with net overseas migration reaching record levels while GDP per capita declined for seven consecutive quarters during 2023 and 2024
The report argues Australia’s growth model has gradually changed alongside that slowdown.
During the 1990s, most economic growth came from rising output per person. Over the past decade, it says, population growth has become the larger contributor, with net overseas migration reaching record levels while GDP per capita declined for seven consecutive quarters during 2023 and 2024.
The report also examines housing and bank lending.
Household credit has risen from 45 per cent of GDP in 1990 to around 114 per cent today, while business credit has declined as a share of GDP over the same period. Housing now accounts for about 62 per cent of total bank lending, roughly double its share in the early 1990s.
It also notes that around 85 per cent of new owner-occupier lending finances existing dwellings rather than new housing, meaning most mortgage credit supports transfers of existing assets rather than expanding Australia’s productive capital stock.
The research draws on work by the Bank for International Settlements and economist Richard Werner, who have argued that credit directed towards existing assets tends to inflate prices rather than productive capacity.
Construction productivity emerges as another area of concern.
According to the report, dwellings completed per hour worked have fallen 53 per cent since the mid-1990s, while construction output per hour has declined even as productivity across the broader economy increased. Manufacturing has also shrunk steadily as a share of GDP over the past three decades.
It concludes these structural changes help explain why income tax has become an increasingly important source of government revenue.
“When productivity delivers real wage growth, nominal incomes rise with output, revenue grows with the economy, and governments can afford to index or cut income tax while services expand,” it says.
“When productivity stalls but nominal wages still creep upward with inflation, workers cross thresholds without becoming better off, and the average tax rate ratchets.”
Despite advancing that argument, the paper devotes an entire section to evidence against its own hypothesis.
It notes that Australia’s tax mix reflects deliberate policy choices over many decades, including funding retirement through compulsory superannuation rather than payroll-based social security taxes. It also acknowledges that productivity has slowed across much of the developed world, making it difficult to attribute Australia’s experience solely to housing or migration.
The report also notes that Australia’s total tax burden remains below the OECD average as a share of GDP, and that household credit has eased from its peak relative to GDP since 2016. Recent federal changes to negative gearing and capital gains tax settings are also identified as policy shifts that may redirect investment towards new housing supply over time.
Its overall assessment stops short of claiming the OECD findings are wrong.
Instead, it concludes the 62 per cent figure is “substantially a classification artefact” when comparing Australia’s tax system with countries that collect large social security contributions, but argues the growing reliance on income tax over time reflects deeper structural changes in the economy.
“The static claim, that the OECD’s 62 per cent proves Australia has a tax policy problem, is not supported,” the report says.
“The dynamic claim is better supported: the income-tax share is rising through bracket creep, bracket creep binds because real per-person income growth has stalled, and the stall coincides with a measurable shift of growth toward population and of credit toward existing property.”
The report argues tax reform cannot be viewed in isolation from productivity, housing, credit allocation and long-term economic growth because each influences the others.
The research also identifies several questions for further study, including whether recent housing tax reforms redirect more lending towards new construction, whether population-led growth can sustain government revenues over the long term, and whether Australia’s productivity slowdown will further increase reliance on personal income tax.
This report is based on publicly available data and analysis. It is not financial advice and should not be relied on for investment decisions. Every effort has been made to ensure accuracy. If you spot any factual error, calculation issue or omission, please email sid@indiansun.com.au so it can be reviewed and corrected if necessary.
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