The importance of taxation in Australia

In this week’s TaxVine, The Tax Institute’s Tax Policy and Advocacy (TPA) team discuss the importance of taxation in Australia and the role it plays beyond mere revenue raising. Not surprisingly, the purpose for imposing taxation in ancient times and throughout the second millennium is broadly unchanged in our vastly different world today. However, tax systems should be dynamic, not static, and continue to evolve and adapt to the changing landscape and the advancement of our societies. The pursuit of reforming our tax system should never be abandoned. 

Understanding the origins of taxation 

Ever since the early dynasties where ancient Egyptians ruled, taxes were collected for the Pharaoh to fund his operations and maintain a social order. While ancient Egyptians then paid tax by way of grain or cattle, the basic concept today remains the same — the state collects tax to fund public services and redistribute wealth to create a balanced society where basic public needs are met. As was the case then, and remains so today, the grain which the Pharaoh collected from his citizens was stored safely and given back to members of society during times of hardship. 

The levying of taxes on consumption dates back to Ancient Greece and the Roman Empire, which also had duties and property taxes. Forms of taxation spread across Europe, and taxes were particularly relied upon to raise much needed funds in times of war. 

Eighteenth century Scottish economist and philosopher Adam Smith, in An Inquiry into the Nature and Causes of the Wealth of Nations (1776), commonly known as The Wealth of Nations (Book V, Chapter 2, Part 2), premised four maxims with regard to taxes in general: 

1. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities. 
2. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. 
3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. 
4. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. 

These are summarised as proportionality, transparency, convenience and efficiency. 

Until Federation (of Australia) in 1901, each colony administered its own taxes with excise, customs duties and income taxes being its primary source of tax revenue. At Federation, customs duties between the States were abolished, and the Commonwealth Government began to collect customs duties as its sole source of tax revenue. In 1910, the Commonwealth Government began to impose federal land tax in an attempt to break up very large holdings of underutilised arable land.  

In 1915, the Commonwealth Government introduced a personal income tax system to meet the costs of World War I. Personal income tax was imposed at a State and Federal level; however, to mitigate ‘double taxation’, the federal income tax rate was lower and applied only to income above a certain threshold. In 1942, the States relinquished their personal income tax powers to the Commonwealth Government, as the personal income tax rates were raised by the Commonwealth Government in a desperate fundraising effort to fund the war efforts of World War II. By the end of the war, personal and corporate income tax revenue had tripled to around 12% of gross domestic product (GDP).  

Taxation in modern society 

The range of taxes imposed by the Commonwealth Government was, and still is, used to shape the behaviour of Australians, in addition to its primary role of raising revenue. Some taxes can provide price signals to reflect the detriment or benefits that a good or service may cause, which can be reflected by way of incentives or surcharges. In modern society, we see incentives for renewable energy, such as the recently enacted Future Made in Australia (Production Tax Credits and Other Measures) Act 2025 which encourages investment in hydrogen and critical mineral production by the private sector to create renewable energy by offering rebates and refunds on eligible projects. 

We also see taxes imposed to disincentivise consumption, such as high excise duty rates for tobacco and alcohol, and the added GST which further increases the cost of tobacco, cigarettes and alcohol in Australia. In such ways, taxation is used as a mechanism to encourage better living standards and improved health by deterring taxpayers from purchasing or engaging in certain detrimental activities through the imposition of further taxes or surcharges. Similar taxes are imposed by State and Territory governments for this reason on gambling activities. 

In 2010, the Henry Review (the Review) looked at the future of the Australian tax system. The Review identified that, at the time of the Review: 

• the Commonwealth Government levied a total of 125 different taxes; 
• of those 125 different taxes, just three taxes — personal income tax, company tax and GST — accounted for approximately three-quarters of revenue raised; 
• 90% of Australia’s revenue was raised by only 10 of those 125 taxes; and 
• personal income tax alone amounts to more than one-third of Australia’s revenue. 

Last financial year, Australia’s total taxation revenue across all levels of government was  
$755.8 billion, and 29.5% of GDP according to the Australian Bureau of Statistics. This revenue funds our democratic institutions, public services and programs, including the judicial system, defence, education, infrastructure, health, policing, and many more. 

However, as evident from the Review, more taxes do not necessarily mean more revenue. To be effective revenue raisers, taxes need to operate efficiently so that they do not cost the government (via the administrator of the tax system, the Australian Taxation Office) more to collect a tax than it raises in revenue. The long-defunct superannuation surcharge (abolished from 1 July 2005) is an example of a tax that, as the surcharge rates (and the resulting revenue raised) reduced, the administration costs as a proportion increased. Further, there was considerable complexity in administering and complying with a superannuation surcharge. 

As discussed in The Tax Institute’s 2021 report, Case for Change, a good tax system not only raises the right amount of revenue, but is also sensitive to the impact that taxes have on economic activity and the interaction with the transfer system. Central to this is the importance of getting the tax mix right. For many years, The Tax Institute has held the view that the three features of a good tax system are simplicity, efficiency and equity. These are not dissimilar to the four maxims identified by Adam Smith nearly 250 years ago — proportionality, transparency, convenience and efficiency — which remain as relevant today as they were then. 

Why paying tax is essential to fund community services  

Members of society who opt to not pay their taxes, or keep cash payments off the books, cause serious detriment to other businesses and the community. The Black Economic Taskforce Final Report (later renamed, the Shadow Economy) explains how people who do not correctly report or pay their tax put a greater burden on honest taxpayers, and deprive the community of essential services such as health and education, as well as basic infrastructure and disaster response funding, among other things. Such non-compliance is often compounded by uninformed sentiments justifying the behaviour by reference to that of others in similar or even completely different circumstances. 

Over the years, there have been a range of cases demonstrating the reasons why people may not pay tax or consider they should not be liable to tax. These vary from ignorance of their liabilities to the most extreme outliers where a few taxpayers have attempted to circumnavigate their taxation obligations by claiming that that tax laws simply do not apply to them.  

In one such unusual case, a devout family living in Tasmania argued that paying tax was ‘against God’s will’, and that transferring their allegiance from God to the Commonwealth would mean ‘rebelling against God’. The siblings were ordered to pay more than $2 million in taxes and other fees by the Tasmanian Supreme Court.  

In another bizarre case, a man claimed that the taxation laws did not apply to him because he did ‘not accept recognition as a person’. After citing the Universal Declaration of Human Rights, he said, ‘as I waive my right to recognition as a person, I am not a resident for tax purposes’. Again, unsurprisingly, the court decided in favour of the ATO and described his arguments as a ‘mockery of the law’.  

While these extraordinary claims against paying tax can be somewhat comedic to the educated reader and futile in a court of law, they indicate the need for greater public education on the importance of paying tax. Greater awareness of the importance of paying tax and how we all benefit from it is necessary so more people in our communities understand that they are not only contributing to society, but they are also receiving its benefits.  

The need for holistic tax reform 

The tax system in Australia paves the road for the future, quite literally. However, our tax system is riddled with potholes that mere patching will not fix. Tax reform is not just important — it is vital — to maintain a robust and sustainable tax system that can continue to support, and improve, the communities in which we live and work every day.  

Australia needs holistic and sustainable reform, which steers away from tinkering and minor tweaks that do not address the broader challenges. We need to have a serious and mature conversation about tax. This means a conversation informed by data, sensible design and stakeholder consensus, not political agendas. While the role of government in demonstrating political will and taking courageous steps to improve our tax system is important, there is also a key role to be played by the profession to educate the broader community and advocate for the improvement of the system as a whole. Taking steps to improve Australia’s tax system, and ensuring that taxpayers are meeting their obligations, is essential so that future generations can enjoy at least the same prosperous quality of life as the generations that preceded them. 

Closing comments 

Taxation plays a vital role in our society, and all stakeholders in the system need to be confident that tax is being paid appropriately by the right contributors. While Australia has a high rate of voluntary compliance, there are opportunities to improve the system to make such compliance less onerous. And while there may always be some who try to undermine the system, changes to strengthen compliance, improve our laws, and educate the community will go a long way in reducing such cases. 

As always, we welcome your views and any suggestions on how Australia’s taxation laws can remain dynamic and continue to be relevant to the everchanging landscape. You can provide your feedback here. 

Kind regards, 

The TPA team
The Tax Institute