Centre Stage: Tax Reform for Middle Australia
The Hon Andrew Leigh MP
Assistant Minister for Competition, Charities and Treasury
Assistant Minister for Employment
Conference on ‘Justice and the Tax Base in the 21st Century’
University of Melbourne
3 April 2025
I begin by acknowledging the Wurundjeri people of the Kulin Nation, the Traditional Owners of the land on which we meet. I pay my respects to their Elders – past and present – and to all Aboriginal and Torres Strait Islander people joining us today.
For tens of thousands of years, this was a place of exchange – of ideas, culture, ceremony, and resources. It’s fair to say systems of contribution and redistribution existed here long before we gave them names like ‘horizontal fiscal equalisation.’
Thank you to Miranda Stewart and Daniel Halliday, chief investigators on the Australian Research Council grant that supports this conference. I echo the organisers in acknowledging the late Geoffrey Brennan, whose big brain and baritone voice are missed by many of us.
It is a pleasure to be at a gathering where talk of tax doesn’t clear the room, but fills it.
Most Australians don’t lie awake thinking about the tax base. And if they do, they probably work at the ATO. But for those of us who care about fairness, prosperity and the mechanics of modern government, it’s hard to think of a more important topic. It’s where money meets values.
But it wasn’t always this way. In fact, income tax came late to the Australian story.
In colonial times, governments funded themselves mainly through customs duties, licence fees and fines. The first income tax was introduced in South Australia in 1884, followed by New South Wales and Victoria in the 1890s – not out of philosophical conviction, but out of economic necessity. The wool boom had ended, revenues had slumped, and taxing incomes was seen as the least-worst option.
At the Commonwealth level, income tax didn’t arrive until 1915, when the First World War forced the federal government to find new sources of revenue. Even then, it was modest in scope. Through the interwar period, state and federal governments both levied income taxes, often in overlapping and inconsistent ways.
Then came the Second World War. In 1942, the Commonwealth assumed exclusive control over income tax collection, arguing that national defence required a unified and efficient tax system. That wartime shift became a permanent arrangement. The states were compensated through grants, and while they’ve occasionally asked for the income tax keys back, the basic structure has held for more than 80 years – a rare case of fiscal federalism finding its equilibrium.
Over time, income tax has become not just the largest source of public revenue, but one of the most progressive. It’s the only major tax that scales with capacity to pay. If you earn more, you contribute more. That principle has held through changes in governments, tax rates, thresholds and thresholds. Australians might not enjoy doing their tax return – but they generally accept that the system should ask more from those who have more.
And because of that central role, income tax is always in the spotlight. Adjustments – up, down, or sideways – attract scrutiny. Not because people are resistant to change, but because they know tax shapes the choices we make as a society. It influences work, investment, savings, family decisions – and the ability of governments to act.
By the way, if you’re keen to dive deeper into tax history, check out Miranda Stewart’s excellent book Tax and Government in the 21st Century for the global story, and Paul Tilley’s terrific book Mixed Fortunes for the Australian story. I had the pleasure of launching both books – and can highly recommend them. They’re the kind of page-turners where the suspense lies in the marginal rate schedule, and the plot twists involve deductions.
Over the past two years, the Albanese government has introduced three rounds of income tax cuts. Each has been guided by the belief that a just tax system should reward effort, support those doing it tough, and help grow the economy without eroding the social contract. Reform, in our view, doesn’t have to mean retreat. At a time when people are under pressure, income tax cuts – alongside measures such as cheaper medicines, cheaper child care and energy bill relief – have helped support household living standards.
But before we dive into the details, it’s worth stepping back to consider what income tax really is. Compared to most taxes, it’s unusually personal. It knows your salary. It sees your deductions. It’s not always loved – but it’s widely experienced. It’s one of the most direct connections between citizens and the state. And when it works well, it makes the country stronger, fairer, and more cohesive.
So let’s take a closer look at how our government has sought to improve the income tax system – what we changed, and why it matters.
The Three Tax Cuts – Supporting Jobs and Growth
Let’s begin with jobs, growth and incentives – the efficiency story.
Across this term of government, we’ve delivered three rounds of personal income tax cuts. Each has been designed with a steady hand and a clear aim: to return bracket creep, ease cost-of-living pressures, and support labour market participation – particularly where the economy gains most from it.
The first round came into effect on 1 July 2024, providing immediate relief to more than 14 million taxpayers – including around 3 million Australians on incomes of $45,000 or less, who under the former Coalition Government’s tax plan previously saw no benefit.
These changes reduced the bottom tax rate from 19 per cent to 16 per cent for incomes between $18,201 and $45,000. They also lowered the 32.5 per cent rate to 30 per cent and the income threshold above which the 37 per cent tax rate applies increased from $120,000 to $135,000. At the top end, the 45 per cent rate now applies to incomes above $190,000.
The second and third rounds go further by lowering the first marginal rate – currently 16 per cent for income between $18,201 and $45,000. From 1 July 2026, it drops to 15 per cent. From 1 July 2027, it drops again to 14 per cent – the lowest this rate has been in more than 50 years. For context, the last time it was this low, the original Mad Max was in cinemas and ABBA was still touring.
These tax cuts are steady, deliberate, and designed to reinforce progressivity while boosting after-tax incomes in a fiscally responsible way.
Consider someone on average earnings – around $79,000. In 2026–27, they’ll receive a new tax cut of $268, increasing to $536 from 2027–28.
That benefit gets bigger still when you compare it with the Stage 3 tax cuts that were put in place by the former government, and were due to take effect on 1 July 2024. Those tax cuts, as you know, managed to offer precision support to the highest income earners. Parliamentary Budget Office analysis found that people in the bottom two income quintiles received virtually nothing, while three-quarters of the tax cut went to people in the top income quintile. Just one third of the benefit of the Coalition’s planned 2024 tax cut went to women.
Calling the Coalition tax plan ‘Stage 3’ is going to soon get confusing, given that Labor has just delivered three tax cuts. So we need a new name. For the purpose of this speech, I’m going to call them ‘Morrison’s Missing Middle Model’. The acronym is MMMM – fitting for a policy that gave most of the middle class not much more than a murmur.
When you combine our government’s latest tax cuts with the first round, someone on average earnings is $2,190 better off per year, receiving a tax cut worth $1,340 more than what they would have received under Morrison’s Missing Middle Model. Across the whole taxpaying population, the average annual tax cut from 2027–28 is expected to be $2,548 – or about $50 a week, which for many households makes a noticeable difference. Between now and 2035-36, they will pay $30,000 less in tax under Labor.
But this isn’t just about tax returns and pay packets. These reforms are expected to lift labour supply in measurable ways. Treasury estimates the combined effect of the three tax cuts will increase hours worked by around 1.3 million per week – the equivalent of more than 30,000 full-time jobs. This is more than double the labour supply boost that would have been achieved under Morrison’s Missing Middle Model.
That’s not an abstract number. It’s a real shift in economic capacity – achieved without needing to redraw the tax system or rewrite the constitution.
Strikingly, most of the additional hours come from women – around 900,000 extra hours per week. That speaks to how the structure of the tax system interacts with second earners, part-time work, and the real-world choices families make every day.
The effects extend beyond the labour market. By 2027–28, household disposable income is projected to be 1.9 per cent higher than under 2023-24 settings. That’s not just good for households – it helps underpin the recovery in private consumption and the broader economy.
This is tax reform doing what it should do: improving incentives, boosting incomes, and supporting growth, without compromising fairness or fiscal discipline.
Fairness First: The Equity Impact of the Tax Cuts
So much for growth and participation. Let’s now turn to the other half of the story: fairness.
Tax reform is never just about GDP or participation. It’s also about the social contract – the implicit deal that says we all contribute, and we all deserve a shot at opportunity and security.
That’s why, when the Australian Government designed these three rounds of tax cuts, we didn’t start with a number and work backwards. We started with a principle that bracket creep should be unwound from the bottom up. And that our tax system should remain progressive – not just in structure, but in impact.
First, we found a way to provide more relief for middle Australia, and every single Australian taxpayer, without adding to inflation pressures. And now, we’re providing further cost of living relief up and down the income scale, to increase the financial rewards from work and boost labour supply. We know cost of living pressures are being felt up and down the income scale, but we also know those pressures disproportionately affect the low and middle incomes. Our tax plan delivers relief to all taxpayers, but it will have the greatest impact for those who are most vulnerable to cost of living pressures.
So how does that principle show up in practice?
Let’s start with who benefits.
In 2027–28, all 14 million taxpayers will receive a tax cut. Of those, 12.4 million – or 83 per cent – will receive a larger cut than they would have under Morrison’s Missing Middle Model. Every income taxpayer gets a tax cut, and everyone earning under $154,143 gets a bigger tax cut than under Morrison’s Missing Middle Model. That’s not just a different distribution. It’s a different philosophy.
Take someone earning $45,000 – a full-time café or retail worker, or a sparkie just getting their start. Under the revised plan, they’re getting a tax cut of $804 this financial year and they are receiving tax cuts now that will build to a tax cut of $1,340 in 2027–28. Under Morrison’s Missing Middle Model? Just $0. That’s not a rounding error. That’s the difference between being seen and being skipped over.
Or take someone on the national minimum wage, currently around $47,600. Under the new plan, they’ll receive a cut of $1,406. Under the old model? $66.
At the other end of the scale, someone on $200,000 will still receive a tax cut – just a smaller one. Under the revised package, their tax cut in 2027–28 will be around $5,065. That’s still real money. But it’s a rebalancing of priorities.
So yes, this is a progressive reform. But more than that, it’s a deliberate reshaping of who the tax system puts first.
Young Australians, for example, do well. People aged 18 to 24 are often in their first jobs, studying part-time, working casually, or cobbling together multiple gigs. These are not high-income earners – but they’re exactly the kind of people who are sensitive to work incentives and the cost of living. Under the revised plan, 98 per cent of 18–24 year-olds are better off compared to Morrison’s Missing Middle Model. In 2027–28, they’ll receive an average tax cut of $1,546 – compared to an average of $453 under the old settings. And that matters. It means more freedom to take a course, fix a car, or move out of home – without needing a second job to do it.
The biggest age group of beneficiaries, in both dollar terms and numbers, are people aged 30 to 49. These are the years when many Australians are raising children, paying mortgages, juggling careers and care responsibilities. For those aged 35 to 44, the average tax cut in 2027–28 is around $2,900 – roughly equivalent to a couple of months of childcare fees or a month’s rent in some parts of Australia.
But the benefits don’t stop there. Every age group sees gains. More than 85 per cent of taxpayers aged over 65 are better off under the combined package than they would have been under Morrison’s Missing Middle Model. That includes many older Australians working part-time or casually to supplement their retirement income – people who often sit just above the pension threshold, and for whom a few hundred extra dollars can be the difference between treading water and getting ahead.
Women, too, benefit significantly. The majority of low- and middle-income earners in Australia are women. They’re also more likely to be in part-time or casual work, and more affected by the interplay between tax, family payments, and childcare costs.
Under these changes, around 90 per cent of women taxpayers – 6.3 million women – will receive a larger tax cut than under Morrison’s Missing Middle Model. For those women getting a larger tax cut, the average increase in their tax benefit is $1,181. That’s not just a spreadsheet improvement. That’s more money for rent, groceries, bills and maybe a bit left over at the end of the fortnight.
We’ve also looked at how these changes affect participation. When the financial return to work rises, especially at the margin, it makes a difference in the real world – particularly for second earners in a household.
Treasury estimates that the combined effect of the tax cuts will increase total hours worked by about 1.3 million per week. 900,000 of those hours are expected to come from women. That’s the equivalent of unlocking more than 20,000 full-time roles – empowering people to work more if they choose to. In the budget papers, Chart 1.2 shows the expected change in weekly hours is strongest for those with a taxable income between $30,000 and $70,000 a year.
And the gains are even more striking when the tax cuts are paired with our broader family care and workforce reforms. Treasury modelling shows that when you combine the new income tax cuts with our Cheaper Child Care package, the financial return to work improves significantly for families.
Take a secondary earner – typically a woman – moving from two to three days of work each week. Under the previous settings, the increase in disposable income from doing that extra day was modest. Under our reforms, it rises by $5,720 – that’s $1,515 more than without our policies. The policy impact is visualised clearly in Chart 1.3 in the budget papers, which shows the steeper and fairer gains in disposable income across extra days worked. A secondary earner who works a third day does especially well from our reforms.
This isn’t just about short-term dollars. It’s about long-term agency. When we make it easier for families to balance care and work – when the numbers start to work with people instead of against them – we help support both gender equity and economic growth.
The structure of the reform also narrows the gender gap in benefit share. Under the revised package, 43 per cent of the total tax cut benefit goes to women – compared to just 36 per cent under Morrison’s Missing Middle Model. That’s a meaningful shift in who the system rewards.
I can’t help noting that a government whose party room is 53 per cent women has overseen the lowest gender pay gap in Australian history, 11.9 per cent. Last year, the female labour force participation rate in Australia hit a record high of 63.2 per cent.
Let me close this section with a broader point.
A tax system is a mirror. It reflects our choices – what we reward, what we value, and who we prioritise. For too long, income tax debates in Australia have been framed in either/or terms: growth or equity, simplicity or fairness, aspiration or redistribution. But that’s a false binary.
This reform is an attempt to prove that we can do both. That we can design a tax cut that supports participation and lifts disposable incomes, and distributes its benefits more fairly than what came before.
And if we get it right – if we pair this with targeted cost-of-living relief, investment in child care, and support for low-paid workers – then we do more than just adjust the brackets. We make the system fairer, more inclusive, and more reflective of the society we aspire to be.
Conclusion: A Tax System That Works for More Australians
Taken together, the three rounds of tax cuts are more than a fiscal package. They are a statement of intent: that tax reform in Australia can support growth and participation and deliver greater fairness. That we can lift disposable incomes without compromising progressivity. And that the people who carry the biggest load shouldn't be the ones who are always asked to wait.
We’ve seen the numbers. Fourteen million Australians receive a tax cut. Eighty-three per cent are better off than they would have been under Morrison’s Missing Middle Model – which offered abundant relief to the top and polite encouragement to everyone else. Women, young people, middle-income earners and working families are the greatest beneficiaries. Labour supply increases. Disposable income rises. The economy gets a quiet push in the right direction – no fanfare, no gimmicks, just better design.
But all of these gains are now at risk. Peter Dutton has pledged to repeal Labor’s tax cuts – the very ones that deliver for the middle of the income distribution. If that happens, every Australian taxpayer will face a higher tax bill. These aren’t theoretical risks. They are practical, immediate consequences – and they fall hardest on the people who deserve relief the most.
It would be, quite literally, the first time in living memory that a federal opposition promised to raise taxes on everyone.
Throughout history, tax systems have been a mirror of their times – shaped by the values, priorities, and politics of each era. From Adam Smith’s emphasis on fairness and certainty, to the post-war consensus that linked taxation with nation-building, to modern debates about equity and growth, tax has never been just about revenue. It’s always been about purpose. And in that tradition, Australia’s income tax system remains one of the most powerful instruments we have – not only for funding services, but for shaping opportunity, supporting participation, and building a fairer society.
Other countries are grappling with rising inequality, ageing populations, stagnant wages, and the temptation to shift the tax burden from income to consumption, no matter the consequences. The Australian Government has chosen a different path – one that maintains a progressive tax base, rewards effort, and respects the lives people actually live.
And that’s something worth protecting.
The reforms we’ve introduced aren’t ideological. They’re practical. Measured. Grounded in evidence. And, perhaps most importantly, designed not just for the world we model, but for the one Australians wake up in each day.
Fair tax policy isn’t just about getting the incentives right. It’s about getting the priorities right. And this reform puts the middle of the income distribution back at the centre of the conversation.
That’s where it belongs. And that’s exactly where we’re keeping it.