Treasurer Jim Chalmers’ upcoming economic summit has triggered renewed debate over the links between tax, productivity, growth and equity. And inevitably arguments between the right and the left – can we understand both and find a way through? I hope so.

From the political right, Robert Carling of the Centre for Independent Studies warns that Australia risks drifting into a “European-style welfare state” of higher taxes, slower growth, and dependency. The CIS opposes any tax increases. Instead, it advocates for a simpler personal income tax (PIT) system with lower top rates and bracket indexation, and calls for cuts to government spending – particularly on the NDIS, aged care, health and childcare. Defence, it argues, should remain a priority. Some on the right also support broadening the Goods and Services Tax base and increasing the rate.

On the left, the Australian Council of Social Service contends that Australia is not raising enough revenue to meet its social and environmental obligations. It strongly opposes shifting the tax mix toward the GST, warning that such a change would disproportionately affect low-income households. ACOSS also questions whether transfers alone could adequately offset these effects.

Despite deep disagreements, there is consensus that rising debt is unsustainable. Both sides recognise that structural deficits threaten future generations and fiscal stability.

This raises a key question: which path supports sustainable growth and fairness – raising revenue through progressive PIT and closing concessions (like those on superannuation, capital gains and negative gearing), or shifting the tax mix toward consumption while limiting spending growth?

We typically assess the tax system through five lenses:

1. Revenue adequacy to fund public services and long-term investment;
2. Impact on growth and productivity, particularly through the total tax-to-GDP ratio and tax mix;
3. Impact on inequality, including post-tax income and wealth distribution;
4. Tax base allocation between federal and state governments (not considered here); and
5. Sin and green taxes (such as carbon prices, tobacco, alcohol excises etc) which again I have not considered here.

Former senior public servant Mike Keating AC is blunt: revenue must rise. As he notes, the main spending areas — health, education, welfare, infrastructure and defence — are politically and socially difficult to cut. Past savings efforts focused on tightening eligibility or increasing user charges, but future opportunities are limited. (Pearls and Irritations 2018) Defence spending will rise. An ageing population will push pension, aged care and health costs higher. And the climate transition demands sustained public investment.

Australia remains a low-tax country by OECD standards, with only Mexico, Chile, South Korea, the US and Switzerland collecting less tax relative to GDP. Would increasing the tax take necessarily hinder growth?

According to ACOSS and many economists, the answer is no. Cross-country data reveals no strong link between overall tax levels, top PIT rates and GDP per capita – whether measured at market exchange rates, in PPP terms, or per hour worked. Similarly, there is no statistically strong link between tax levels and Human Development Index outcomes. Public goods like health and education are certainly HDI drivers, but other structural and historical factors often matter more. Australia, for example, performs well on HDI (and better than the US) despite a relatively low tax take – though the Nordic countries consistently do better still.

Empirical evidence also shows that cutting top tax rates increases inequality, without boosting growth or employment. As Hope and Limberg (2022) conclude: “Tax cuts for the rich lead to higher income inequality in both the short- and medium-term. In contrast, such reforms do not have any significant effect on economic growth or unemployment.” Piketty writes persuasively about this and the need to tackle inequality (see particularly “Capital in the Twenty-First Century”).

However, it’s not an open-and-shut case. Longitudinal and panel studies show that higher PIT progressivity, especially targeting the top quintile, can slow productivity and reduce real per capita GDP. Jalles and Karras (2025) find that increases in tax progressivity are linked to lower growth and income levels, consistent with neoclassical models. These effects are statistically significant and persistent.

Corporate tax rates have a dominant influence on PIT settings. High differences between the two rates can encourage avoidance through an emphasis on stock incentives for top executives, with high earners and even middle income tradies restructuring income through corporations — a trend seen in sectors like construction. As corporate tax competition continues globally, pressure on top PIT rates may intensify, despite the 2021 OECD agreement on a 15% minimum corporate rate. Trump is weaponising foreign taxes on US corporations.

In theory, high marginal tax rates might reduce work or investment incentives. In practice, outcomes depend on context – such as labour market structure, public services, human capital and behavioural responses. While macro-level relationships are often weak, micro-level evidence still matters. Sector-specific disincentives don’t always scale up neatly to national trends, but they do point to risks that tax policy must manage carefully.

In sum, tax policy should be designed with nuance, not ideology. Badly designed or regressive taxes can hurt growth and fairness. But a well-structured progressive system — especially when aligned with quality public investment — can support both economic strength and social cohesion.

But we mustn’t forget – at the end of the day, tax reform is about the sort of society we want. Equality matters to me and I, for one, am not horrified at the prospect of becoming a “European-style welfare state” but with uniquely Australian nuances.

The views expressed in this article may or may not reflect those of Pearls and Irritations.