Recent data showed that the federal government's tax take has hit a 20-year high.

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Tax as a share of gross domestic product (GDP) was 24.1 per cent in 2025-26. The last time it was that high was back in 2005-06 when John Howard was prime minister.

Many commentators have lamented how high taxes are and have called for them to be cut. There's just one problem: high taxes are exactly what the economy needs right now.

Go back to basics on inflation. Inflation is when prices go up. It's what happens when there is too much money (demand) chasing after too few goods and services (supply).

This means there are two ways to get inflation down: reduce demand or increase supply.

When it comes to reducing demand, we can cut government spending, increase interest rates, or (you guessed it) increase taxes.

People are right to point out that government spending is too high. The problem is that, in the same breath, they are also lamenting that taxes are too high and are calling for them to be cut.

Cutting taxes in an inflationary environment is just as silly as increasing government spending in an inflationary environment.

Both have the same result: pushing even more demand into an economy that already has too much.

But what if we continue the thought-experiment: does this mean that taxes should be even higher to get stubbornly high inflation back down?

Let's pause and properly diagnose the problem here.

Analysis of Australia's inflation dynamics reckons that about one-third of our inflation problem is coming from demand (people and governments buying too much stuff) and two-thirds is coming from supply (not producing enough stuff).

This gives us a reasonable rule of thumb on where governments (federal,........

© Canberra Times