Why we pay tax

Nobody loves seeing money leave their pay. But tax is not money thrown into a hole. It is one side of a deal that every Australian is part of, and understanding the deal makes the deduction on your payslip a lot less mysterious.

What the money buys

• Health: Medicare, public hospitals, the scheme that makes many medicines affordable.
• Education: public schools, a large share of university funding, and student loans like HELP.
• Support payments: the aged pension, disability support, unemployment payments and family payments.
• Infrastructure: roads, rail, ports, the electricity grid and the systems behind clean water.
• Safety: police, courts, emergency services and defence.

Health, welfare and education take the biggest slices of government spending. When you visit a doctor and pay little or nothing, or sit in a public school classroom, you are on the receiving end of the deal.

The deal runs across your whole life

Most people receive more than they pay in some parts of life and pay more than they receive in others. As a child you used schools and hospitals while paying almost nothing. During your working years you will likely pay more in than you take out. In retirement the flow often reverses again. Tax spreads the costs of a whole life across the years when you can most afford them.

Fairness and the ability to pay

Australia's income tax is progressive, which means people who earn more pay a higher percentage. Someone earning $200,000 does not just pay more dollars than someone earning $40,000, they pay a bigger share of each extra dollar. The idea is ability to pay: the deal asks the most from the people it costs the least. You can debate the exact settings, and Australians constantly do, but the principle is what makes the system feel fair enough for everyone to keep participating.

Why the market cannot build all of this

It is reasonable to wonder why so much of this runs through government at all, when private businesses build most of the things we use. The answer is that some goods only work when everyone has them, and nobody can be sensibly charged at the point of use. A private company could not run the street lighting on your road and switch it off for the one household that refused to pay, and it could not sell national defence to some suburbs and not others. Economists call these public goods, and because there is no clean way to charge each user, no business will build them for profit. So the government builds them instead and funds them from tax, which is the only way a whole country can pay for something all of it uses at once.

A common misunderstanding about your own tax

Many people quietly assume their tax pays for their own services, as though there were a personal account somewhere with their name on it. That is not how it works. The money you pay this year funds services this year for whoever needs them, and the tax paid by workers today funds the pensions of people who retired long ago. Your turn to receive comes at a different stage of life from your turn to pay. This is why the deal only holds together across a whole population and a whole lifetime, rather than person by person, and it is also why a healthy tax system depends on enough people earning and contributing at any given moment.