The dangers of a new ‘productivity tax’

The federal government’s 2026 budget has sparked renewed debate over tax reform, with proposed changes targeting capital gains, trusts and property investment.

What was initially presented as a strategy to improve fairness and increase productivity has undoubtedly divided opinion.

UNSW Professor Richard Holden said the tax changes in the 2026 federal budget have created Australia’s first intentionally designed 'productivity tax', which he described as the interaction of different taxes results in high-productivity businesses paying a higher effective tax rate than lower-productivity businesses

High-productivity businesses grow quickly, outpacing inflation and can support the distribution of higher wages.

Low productivity businesses do the opposite, often shedding jobs over time. As previously reported by Accounting Times' sister brand, Accountants Daily, Australia has a serious problem with low investment and productivity, translating into slower wage growth and decreased business competitiveness.

As highlighted by Accounting Times’ budget reporting, the government’s productivity package will reduce regulatory costs by $10.2 billion a year and boost long‑run GDP by around $13 billion a year through work underway with states and territories.

Holden said the high feasibility of an unideal scenario in which two identical businesses, delivering the exact same service, one highly productive, the other unproductive, will now face vastly different effective CGT rates.

Holden gave an example of two identical industrial cleaning businesses with the same initial investment, revenue, and early profit. Over time, one business grows at a slower rate with low productivity, meanwhile the other expands at a more drastic pace, becoming more efficient, and hires more staff.

Even though both are successful and sold at the same profit multiple, the higher-productivity business will end up facing a much larger capital gains tax bill due to its greater increase in value.

Holden’s scenario shows that with the proposed tax settings, more productive businesses could face a greater tax burden than slower-growing firms, which may discourage businesses most likely to propel job creation and economic growth.

“This is the worst possible plan for a country in need of more jobs, and more economic growth. It’s a productivity tax in the middle of a productivity crisis,” Holden said.

“Unfortunately, that is the perverse logic of a productivity tax, they punish high productivity businesses for doing well, growing fast, and creating more jobs.”