Finance Consumer ‘An investment in society’: Higher taxes drive higher incomes, research shows
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‘An investment in society’: Higher taxes drive higher incomes, research shows

Tax cuts are often touted as a boon for the economy, but research suggests the opposite could be true. Photo: Getty
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Next week’s federal budget is widely expected to bring forward income tax cuts to put more money into Australians’ pockets, but fresh research claims they will drag down the economy.

In a report released on Thursday, The Australia Institute’s Nordic Policy Centre found countries with higher taxes also have higher average incomes, lower rates of inequality, and better levels of economic wellbeing.

Australia Institute senior economist Matthew Grudnoff said the findings put paid to “persistent claims” that taxes were a burden on the economy.

With the federal budget due to be released on October 6, Mr Grudnoff said Australia must have a “serious, fact-based conversation” about tax rates.

The research compared 188 countries, looking for evidence that higher taxes would weigh on economic growth – a suggestion put forward by numerous politicians including Tony Abbott and Scott Morrison.

But the data found that higher taxes are instead correlated with better economic and social outcomes across multiple measures.

Although the report noted the correlation is “not strong”, it suggests countries with higher taxes are “more likely” to enjoy better incomes and economic wellbeing.

It ranked Australia as the 11th happiest country in the world, with the 10 happier countries all boasting higher rates of taxation than Australia.

A positive correlation was also found in every measure of economic wellbeing used in the study.

“Persistent claims that taxation is a ‘burden on the economy’ and a ‘drag on growth’ are simply not backed up by the evidence,” Mr Grundoff said.

Tax is an investment in society.

“In the medium and long term countries with a strong tax base are more likely to invest more in high-quality education, health, public transport, child care and quality infrastructure, investments that deliver considerable benefits to the economy, the community and help to reduce inequality.

Tax cuts tipped for Tuesday

The upcoming federal budget is widely expected to include fast-tracked income tax cuts originally legislated to start in 2022-23 and 2024-25.

The prospect of faster tax cuts was met with fierce backlash from several detractors including former Liberal leader John Hewson.

“The LNP naively hope tax cuts are good politics,” Dr Hewson said.

“But they won’t be, as they increase inequality and fail to ensure job security and increasing wages with our economy still struggling to exit recession.”

Separate modelling by Deloitte Access Economics partner Chris Richardson found the tax cuts will not worsen inequality.

But Mr Richardson said the lower tax rates would do less to stimulate the economy than many other policies, including a permanent increase to the rate of JobSeeker and investment in infrastructure and social housing.

He said the cuts should not come at the expense of other stimulus measures.