The growing disparity between inequality of incomes and inequality of wealth is increasing the rich-poor divide in Australian society. This paper argues that rather than reducing this inequality, the tax system has become part of the problem and that tax reform is urgently needed if we are to address it. 

Inequality in Australia is growing, driven by the rapid accumulation of wealth by the very wealthy. Ranked by incomes, the top fifth of households have incomes five times higher than the bottom fifth. Ranked according to wealth, however, the top fifth of households are 146 times better off than the bottom fifth. 

This paper shows that capital gains arising from accumulated wealth have produced large increases in passive, unearned income that have added further to inequality in Australia and that current cost-of-living stresses in Australia are directly related to these economic inequalities. 

If wealth inequality is to be reduced, the tax system will need to shift from taxing wages and other earned incomes towards taxing unearned income, wealth and capital gains. 

The authors propose three types of tax reform that could restrain the growth of wealth inequality in Australia:

• more comprehensive taxation of capital gains
• the introduction of an annual tax on wealth above a specified threshold, and
• the introduction of a wealth transfer tax.