Writing recently in the Australian Financial Review, Associate Professor Steven Hamilton argued that, “There is one clear solution that public finance experts agree on, and that is the ‘dual income tax’ as implemented in the Nordic countries, which taxes all investment income and expenses (including trusts) independently of earned income at a flat rate and without a tax-free threshold.”
Achieving policy consensus among public finance experts, economists by another name, is no small feat. After all, if you ask three economists for their views, you’ll likely receive five different opinions. Nonetheless, after decades of studying, practicing, and observing public finance, this is the first time we have encountered such a claim of consensus.
It is true that investment income and capital gains are generally taxed at flat rates in Nordic countries: 30% in Sweden, 35% in Norway, and 42% in Denmark. However, it’s important to note that personal income taxes in these countries are so high and broad-based that there is little effective progressivity.
For example, in Denmark, the top marginal tax rate is 55.9%, and it applies to all individuals earning just slightly above the average income. In an Australian context, this would be akin to the top marginal tax rate of 47% kicking in at an annual income level of $100,000, rather than the current $190,000 threshold. In Sweden, all taxpayers pay a municipal income tax of 32% with no tax-free threshold, and a further national tax of 20% applies to incomes over SEK625,000 (approximately $100,000).
Hamilton is correct that Nordic countries tax trust income at a flat rate, but this is because trusts, as they are known in common law jurisdictions like Australia, do not exist in Nordic legal systems.
Most economists would accept that investment income should be taxed in proportion to the consumption it funds. Since income comprises savings as well as consumption, the tax on investment income either needs to be lower than that on labour income to more approximate consumption, or the tax shifted to cashflow (that is, consumption itself).
The appropriate lesson to be drawn from the experience of the tax regimes in Nordic countries, Australia, and the USA, is that to provide an adequate level of investment, the tax rate on investment income needs to discounted relative to labour income. One would hope that this is the duality that Hamilton had in mind.
Seemingly missed however is that Australia already has a dual income tax within the superannuation system, with most income taxed at 15% and capital gains on assets held over a year at 10%. By inference then, Hamilton’s dual tax proposal would need to extend beyond the superannuation system. This would likely impact dividend imputation, negative gearing, and accounting for inflation in capital gains (the so called ‘discount’).
Unclear is how a dual income system sits alongside the government's proposed 30% tax on higher super balances, including on unrealised capital gains. Particularly given the risk that once established, this model could leech beyond superannuation and become a broad-based wealth tax, including on the primary home. Such a ‘wealth’ tax would compromise the simplicity and efficiency of the current superannuation tax regime and significantly weaken Australia’s capital and investment markets.
These issues reflect the complexity of reforming Australia’s tax system. Thus, in contrast, we believe the Government's top reform priority should instead be tackling Australia’s persistently weak productivity growth.
Australia’s high tax rates and complex tax system undoubtedly contribute to its productivity challenges. However, an even greater barrier is the size, scope, and overactivity of the country’s bureaucratic and regulatory apparatus. This vast system, greatly expanded over the past 25 years, offers substantial opportunities for reform.
Scaling back Government would not only ease the fiscal burden but also create the political space needed to advance meaningful tax reform. Fundamentally, reversing the rapid growth in Government spending must be a top priority.
Major reformers of the past understood this sequence well. Hawke, Keating, and Walsh addressed Government spending before turning to tax reform, just as Howard, Costello, and Fahey did in their time.
Based on the 2025 budget and before election commitments are accounted for, approximately $300 billion or 40% of Commonwealth government spending will be on welfare and housing. The NDIS will cost 50% more than Medicare. Interest payments, which were essentially nil some 18 years ago, will be $30 billion. And by the end of the forward estimates, interest payments will be the Commonwealth’s 5th largest spending program; more than that budgeted for Medicare, defence, or aged care.
Real economic reform starts not with improving the efficiency of revenue raising, but rather with restoring discipline in how revenue is spent. Until the government reins in its own appetite, any attempt at tax reform, is simply rearranging deck chairs on the Titanic.
Peter Swan AO is emeritus professor of finance at the UNSW Sydney Business School. Dimitri Burshtein is a principal at Eminence Advisory.