Laffer Curve Australia: Does Cutting Taxes Boost Revenue in 2025?

The Laffer Curve has been a touchstone in debates about taxation and government revenue for decades. But as Australia faces new fiscal pressures in 2025—ranging from an ageing population to energy transition costs—the question resurfaces: Could cutting taxes actually increase government revenue, or is the Laffer Curve more economic myth than magic?

What is the Laffer Curve—and Why Does It Matter in 2025?

Economist Arthur Laffer first sketched the now-famous curve on a napkin in the 1970s. The core idea is simple: there’s a point where raising tax rates actually reduces government revenue because it discourages work, investment, and compliance. Conversely, lowering rates from that point could, in theory, boost economic activity and tax receipts.

In 2025, Australia is at a fiscal crossroads. The federal budget faces persistent deficits, and the Albanese government’s Stage 3 tax cuts—now taking effect—have reignited debate about the trade-off between tax rates and revenue. Could the Laffer Curve justify these cuts, or does Australia risk shrinking its revenue base?

• Stage 3 Tax Cuts: Flattening income tax brackets to reduce marginal rates, primarily benefiting middle and high-income earners.

• Revenue Pressure: Health and aged care spending continue to rise, placing more strain on the federal budget.

• Tax Compliance: The ATO is investing in digital enforcement, but tax minimisation remains a challenge.

Where Are We on the Laffer Curve? The Australian Evidence

The Laffer Curve predicts a sweet spot where tax rates are high enough to fund government but not so high as to stifle economic activity. But where is that spot for Australia?

Recent Treasury modelling and independent think tank analyses suggest Australia’s overall tax-to-GDP ratio (around 27.9% in 2024) is well below the OECD average. Most evidence indicates Australia is not on the ‘wrong side’ of the Laffer Curve—meaning further tax cuts are unlikely to pay for themselves through higher growth alone.

• 2025 Federal Budget Papers: Forecasts show Stage 3 tax cuts will reduce revenue by $20 billion annually, with only modest offsetting growth effects expected.

• Work Incentives: While lower marginal rates can modestly increase workforce participation (especially for secondary earners), the gains are not large enough to fully offset the lost revenue at current tax levels.

• Historical Experience: Australia’s tax cuts in the early 2000s did not lead to a surge in government revenue—growth was instead driven by the mining boom.

Globally, only a handful of countries with exceptionally high tax rates (over 60%) have seen Laffer-style effects where tax cuts increase revenue. Australia’s rates are far lower.

The Laffer Curve in Political Debate: Myth, Reality, or Policy Guide?

The Laffer Curve remains a popular talking point in politics. Supporters of lower taxes often cite it as evidence that cuts will ‘pay for themselves.’ Critics, meanwhile, argue that the curve is real but rarely relevant at Australia’s current tax rates.

In the 2025 policy landscape, the real value of the Laffer Curve may be as a reminder: tax policy is a balancing act. Excessive rates can suppress economic activity, but so can chronic underfunding of essential services. The challenge is to find a rate structure that supports both growth and revenue needs.

• Stage 3 Debate: Proponents argue the cuts will boost incentives, while opponents warn of deepening deficits and inequality.

• Productivity Push: Some experts suggest focusing on broadening the tax base—such as closing loopholes or tackling multinational tax avoidance—rather than relying on rate cuts to deliver growth.

• GST Reform: With income tax cuts locked in, attention may shift to indirect taxes like GST to shore up future revenue.

Conclusion: The Laffer Curve’s Lesson for Australia

The Laffer Curve remains a compelling illustration of the link between tax rates and revenue, but in 2025, there’s little evidence that Australia’s tax cuts will ‘pay for themselves.’ As the government juggles fiscal repair, economic growth, and fairness, the real question isn’t whether to cut or raise taxes—but how to design a tax system that delivers sustainable prosperity for all Australians.