1950 to 1980: Increasing demands on government

With war funding no longer needed, the total tax take was reduced the years immediately following the end of the Second World War. The real value of the large accumulated debt quickly declined with high inflation. Wool prices soared, resulting in a spike in revenue around 1951.

The tax mix evolved over the next 30 years in response to rapidly changing expectations on government, particularly in providing social assistance benefits.

Social assistance was not new to the post-war period. The Australian Government had introduced a national old age and invalid pension scheme in 1908. Due to long residency requirements and lower average life expectancies, the financial burden of the scheme on government was relatively low.[5] The Depression brought high demands for social assistance leading to special levies being imposed, but these were intended to be temporary.

Expectations of governments rose as the Australian economy underwent a rapid post war expansion. The general social safety net expanded, including through the introduction of the medical and pharmaceutical benefits schemes and increases to aged and disability pensions (Figure 1-2).[6] Some of these long-term changes were driven by demographic factors, including increased spending on the aged due to longer life expectancy. The 1960s and 1970s brought large social changes, such as increased participation of women in the labour market. 

In the 1970s persistent unemployment brought a significant increase in unemployment benefits. Payments to families with children, the largest being ‘child endowment’, increased more modestly until the 1990s.

Figure 1-2: Australian Government spending on social security and welfare 

Source: PBO historical fiscal data, Australian Bureau of Statistics Year Books. 
 

Most of the increasing revenue requirements during this period were met through bracket creep. High wage inflation meant that the lack of indexation of personal income tax thresholds pushed individuals into higher tax brackets.[7]

The average personal income tax rate doubled over 20 years from 1964 (Figure 1-3). Total personal income tax revenue also doubled over the same period, from around 6% to 12% of GDP. Except for 2 modest increases to statutory tax rates in the late 1960s, none of the increase in personal income tax was generated through actual policy changes.

Periodic increases in income tax thresholds, or reductions in rates, were usually insufficient to offset the impact of growing incomes for any significant time. In fact, the top marginal tax rate was heavily reduced over the period. For the 1950-51 year, income above £10,000, the highest tax threshold, was taxed at a rate of 75% compared to a top rate of 49% for the 1987-88 year for income above $35,000, the top tax threshold in that year. Importantly, in 1987-88 around 11% of taxpayers were subject to the highest tax rate. In 1950-51, only 0.3% of taxpayers were subject to the top rate, and only around 2.5% of were subject to a marginal rate of at least 49%.

Cumulatively, the increase in personal income tax between 1964 and 1985 is the largest change to Australia’s tax mix since Federation (see Figure 1-10 in Section 1.6).

Figure 1-3: Aggregate average personal income tax rate, 1954-55 to 2034-35

Source: ATO Taxation Statistics, 2024-25 Budget, ASSA, ABS and PBO analysis.
Note: For consistency across time, net tax before 2000-01 is calculated before allowance for franking credits. Data for non-taxable individuals is unavailable prior to 1978-79. The net tax rate prior to 1978-79 assumes that taxable income for non-taxable individuals has the impact of reducing the average tax rate by around 0.7 percentage points, the median amount from 1978-79 to 1987-88.

After the states handed their income tax collection powers to the Australian Government, their own taxes remained mostly narrow-based or transactional in nature, and they relied heavily on the Australian Government’s financial distributions. 

This ‘vertical fiscal imbalance’ (Figure 1-4) was partly addressed through the handover of payroll taxes to the states in 1971, who uniformly doubled the rate to 5%. In addition, the states increased stamp duties and taxes on gambling and introduced taxes on insurance policies. 

Following further changes in 2000 (see the following section), the states’ total tax take and mix has remained relatively stable as a share of GDP.

Figure 1-4: Total tax revenue, Australian Government and State and local

Source: ASSA, ABS and PBO analysis.