Australia’s economic policy debate has become stuck in a cycle of marginal adjustments. Yet at a time of slowing productivity, fiscal pressure and rising demands on government, incremental tweaks to the tax system are no longer enough. With the upcoming Federal Budget, there is a clear opportunity to move beyond incremental measures and set out a credible pathway for structural tax reform. The challenge is not a lack of ideas; it is a lack of political will to pursue reforms that are both well-understood and economically sound.

The problem is that we continue to rely on taxes that distort behaviour and undermine growth, while underutilising those that least harm economic activity. are four big levers that could shift the system onto a stronger footing – if policymakers are willing to pull them. While expected changes to capital gains tax and personal income tax may adjust incentives at the margin, the reforms outlined here involve more fundamental shifts in the tax base toward less distortionary sources, delivering a productivity dividend that over time flows through to stronger employment, wage growth, higher incomes and GDP.

First, replace stamp duty with broad-based land taxes

Stamp duties on property transactions are among the most inefficient taxes in Australia. They discourage people from moving, lock workers into less productive locations and distort investment decisions. The economic case for replacing them with broad-based land taxes on unimproved value is overwhelming: land is immobile and taxing it does not discourage productive activity.

The obstacle is that transitioning from stamp duty to land tax creates short-term fiscal costs for state governments, which are reluctant to forgo upfront revenue. This is where the Commonwealth could play a constructive role by facilitating the transition through time-limited funding support or incentives. Without addressing this transition problem, a reform that is widely supported in principle will remain stalled in practice.

Second, we must more effectively tax economic rents

Australia under-taxes economic rents – returns that exceed what is needed to keep capital invested. Nowhere is this clearer than in the taxation of natural resources. The Petroleum Resource Rent Tax (PRRT), intended to capture a fair share of profits from Australia’s gas exports, generated on average A$1.6bn in annual tax revenue over three years straddling the commencement of the Ukraine War oil supply shock, far less revenue than expected as global prices surged in 2021/22.

In practice, corporate income tax has done much of the heavy lifting in capturing these rents. When global liquefied natural gas (LNG) prices spiked following the 2021–22 energy shock triggered by Russia’s invasion of Ukraine, company tax receipts rose sharply in Australia (Figure 1). A comparison of LNG spot prices, such as the Japan-Korea Marker (JKM) benchmarks, with corporate income tax (CIT) receipts shows a clear pattern: windfall gains in the resources sector flow through, imperfectly but materially, into higher company tax revenue. The same pattern is likely to re-emerge in 2025–26 as prices rise again.

Figure 1: Australian corporate income tax and petroleum resource rent tax receipts per financial year, versus LNG spot prices at each end-of-financial-year

This highlights a critical point: corporate tax is not simply a distortionary tax on investment; in Australia’s current system, it is also one of the few effective mechanisms for taxing economic rents at scale. Weaknesses in instruments such as the PRRT mean that, absent broader reform, reducing reliance on corporate tax risks eroding one of the few channels through which windfall gains are taxed.

At the same time, this is an inefficient way to achieve that goal. Corporate tax does not distinguish between normal and excess returns, and so it discourages marginal investment. The policy challenge is not simply to cut or raise corporate tax, but to replace its most distortionary features while preserving – and strengthening – its role in taxing rents.

Third, we must tax ‘bads’ more directly and consistently

Taxes can play an important role in pricing negative externalities, particularly carbon emissions. Australia’s current approach – relying heavily on regulatory mechanisms such as the Safeguard Mechanism – achieves emissions reductions, but often at a higher cost than necessary.

A well-designed, broad-based carbon price would provide a clearer, more efficient signal to reduce emissions across the economy. It would also raise revenue that could be used to offset costs for households, support affected industries or fund broader tax reform.

Despite the strong economic case, carbon pricing remains politically contested. Yet the alternative – less transparent, more complex regulation – risks achieving the same objectives at greater economic cost. If Australia is serious about both emissions reduction and productivity growth, more direct pricing of ‘bads’ should be part of the solution.

Fourth, a movement toward a cash-flow approach to taxing business investment

Debates about company tax in Australia have often focused on rate cuts. But past proposals to reduce company tax, such as the Enterprise Tax Plan, have run into a fundamental problem: they involve large upfront transfers to existing capital. Lower rates deliver windfall gains to existing, foreign capital owners. This has made such reforms both costly, in terms of reductions in national income, and thus politically challenging.

A cash-flow approach to business taxation offers a more coherent path forward. By allowing immediate expensing of investment and taxing returns only when they are realised, a cash-flow tax removes the disincentive to undertake marginal projects while continuing to tax above-normal profits. In effect, it preserves the rent-taxing function currently performed – imperfectly – by corporate tax, while eliminating much of the distortion to new investment.

Crucially, this approach avoids the large upfront transfer associated with conventional rate cuts. This makes reform both more efficient and more politically sustainable.

Furthermore, whereas fuzzy intellectual property conventions have for years permitted profit shifting from Australia to low tax havens, the rise of digital services from Facebook, Google, Booking.com, Airbnb, Shein, Temu, Uber, Didi and other digital behemoths, has ramped this up a gear. It is estimated that the five largest tech giants recorded A$15 billion in revenue in Australia last year, but combined they paid only $254 million in tax (1.7%). These companies are platforms that act as intermediaries between producers and buyers. The nature of our origin-based corporate tax system means some companies can profit shift to minimise tax liabilities. Cash-flow taxes present a coherent path forward here, by taxing consumption where it occurs, rather than where the mobile profits land.

Taken together, these reforms reflect a common principle: we must have the courage to shift the tax base toward immobile factors and economic rents and away from productive activity.

Land, natural resources and economic rents cannot relocate or disappear in response to taxation in the same way that labour, investment and transactions can. A system that relies more heavily on these bases will tend to be both more efficient and more robust.

The challenge is political coordination. Many of these reforms – particularly land tax –require cooperation between levels of government. Others involve confronting concentrated interests that benefit from the status quo, and would benefit from political bipartisanship, something that has been absent in Australia for some time. But the longer the reform is delayed, the greater the cost in terms of foregone productivity and fiscal flexibility.

Australia has undertaken major tax reforms in the past, often in response to moments of economic pressure. That pressure is building again. An ageing population, increasing demand for public services and a more competitive global environment all point to the need for a tax system that supports, rather than hinders, growth.

The path forward is not a mystery. The upcoming Budget provides an opportunity to begin signalling this shift, even if full implementation is staged over time. The big levers are already in view. What is needed now is the willingness to move beyond incrementalism – and to pull them.

Associate Professor Jason Nassios serves as Deputy Director of the Centre of Policy Studies at Victoria University.

Professor Beth Webster is Director of the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne.

Image credit: Commonwealth of Australia (Department of the Treasury) and Mlenny/Getty Images