The income tax reforms in the 2026 budget do deliver greater equity, despite the protests from those who think they will lose out.

Immediately after the 2026-27 Budget was presented on 12 May, I described the tax reforms which were its centrepiece as “the most adventurous set of tax reforms seen so far this century”, albeit they were nowhere near as comprehensive as those introduced by Bob Hawke and Paul Keating in the mid-1980s, or by John Howard and Peter Costello in 2000.

I think that characterisation still stands, despite the evident difficulties the Government has encountered in ‘selling’ the Budget to the Australian public, in the face of trenchant opposition from those who perceive themselves as being adversely affected by it.

The fundamental question the tax changes proposed in the 2026-27 Budget seeks to address is, why should people earning the same income in different ways be treated differently by the income tax system?

Or, since how a question is framed can have a big impact on how it is answered, why should someone who earns, say, $100,000 in the form of wages and salaries – or, for that matter, interest – be expected to contribute more to the cost of providing teachers, doctors and nurses, police officers, and the broad range of services governments are expected to provide, than someone who earns $100,000 from capital gains, operating a business, trust distributions or other types of investment income?

I’m not arguing there should never be any differences between the way in which the tax system treats similar incomes earned through different channels. There are valid reasons why the tax system should, in some circumstances, treat similar incomes earned through different channels differently.

One of those reasons is that we are a capital-importing nation – one which, in all but six of the past 66 years hasn’t saved enough to fund all the investment we’ve wanted to undertake. So, we can’t completely ignore how the tax systems of other nations from which we seek to import capital treat different forms of income. And the fact is that the tax systems of most other ‘advanced’ nations do treat many forms of investment income differently (although not always more concessionally) than labour income.

That doesn’t mean we have to slavishly follow what other countries do. To take one example, New Zealand has a top marginal income tax rate of 39 per cent, and doesn’t levy tax on capital gains on assets held for more than two years. Yet that hasn’t resulted in a tidal wave of Australians moving to New Zealand. Indeed, there have been a lot of New Zealanders moving to Australia in recent years, despite our higher taxes on both high incomes and on capital gains.

Another plausible reason for taxing similar incomes earned in different ways differently may be to encourage some kinds of economic behaviour and discourage others – just as we use indirect taxes to discourage tobacco and excessive alcohol consumption. It may be appropriate to use the tax system to encourage additional saving (as we do with superannuation, for example) or particular types of investment or innovation.

Since the capital gains tax was first introduced in 1985, successive Australian governments of both political persuasions have wanted to prevent investors from being taxed on that........

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