It seems just about everyone has an idea on what a proper tax structure should be.

The Government, Parliamentary backbenchers, The Labor Party, welfare organisations, economists and even a number of State premiers have had a go.

There is no doubt that the tax system needs a major overhaul – even preparing a relatively simple income tax return is now a nightmare. But governments have tried reform in the past and while things have changed the system remains as complicated as ever.

Nevertheless change is needed – and not just for the reason of making the system simpler. Assuming we survive climate change and terrorist attacks, the ageing of the population, as we all know by now, will mean big changes in the future. More and more people will be retiring, placing greater stress on government resources and the productive capability of the Australian economy. More will have to be produced by relatively fewer workers.

In other words, if we are to maintain our standard of living then productivity, or output per worker per hour, will have to increase. If we do not get this increase in productivity then all that will happen is that prices will go up and those carefully accumulated retirement nest eggs will become worthless.

To make these productivity increases happen there will have to be changes in a number of areas. Tax is one of them but others include education, industrial relations, eliminating discrimination against older workers and providing incentives for innovation and investment.

Economists know that increases in productivity come mainly through increased investment and innovation. This is primarily the responsibility of employers although Governments can have some influence through the tax system by encouraging research and investment.

Industrial relations reform can help if it reduces inefficient work practices that prevent workers from operating at maximum efficiency. But it is worth noting that cuts in wages as a result of changes in industrial relations laws will not necessarily improve productivity.

For example cuts to penalty rates, overtime payments and so on may simply lead to lower wages costs for employers and higher profits. It doesn’t mean that each worker will produce more in a given amount of time - which is what it is all about. In fact it might have the opposite effect. If wages fall then there is less incentive for employers to introduce labour saving innovations.

Higher education too is an area that needs attention. Education currently provides us with a comparative advantage and allows us to export services and other products that require a high level of skill. Making it more difficult for Australian students to get an education by increasing fees is looking at education as a cost rather than an investment.

And how long will we have this advantage? China and India are cranking up their education systems and producing university graduates by the hundreds of thousands every year. For example China is now producing 600,000 engineering graduates a year, India 350,000 and the United States only 70,000.

But back to tax reform. Malcolm Turnbull, an aspiring Government backbencher, reckons we need a major overhaul of the tax system including big cuts to the top marginal income tax rate and changes to the welfare system to encourage more people on welfare to go to work. He also believes that demographic trends make the changes imperative.

He advocates reducing the top marginal rate to 30 per cent – the same as the corporate tax rate. This he says will encourage those on high incomes to work harder, stop the brain drain of bright Australians to other countries and reduce tax avoidance by broadening the tax base.

Some of these claims are doubtful but some do have merit. Many wealthy Australians use companies, trusts and income splitting arrangements to reduce tax.

With a lower top rate and the elimination of many of the structures, the incentive and ability to cut tax in this way will be reduced.

Whether a tax cut will get high-income earners to work harder is debatable. Not all high income earners are motivated entirely by the size of their after tax pay packet.

Cuts to the top rate could also have an unexpected effect. Workers could earn the same amount of net pay by working less, not more as expected.

Broadening the tax base has merit, as it would mean eliminating many of the deductions now available to some taxpayers and not to others. Any tax reform aimed at increasing productivity would also have to look at negative gearing, depreciation allowances and the capital gains tax.

In the view of many economists Australia suffers from an over-investment in property. The tax system encourages this. As one put it: if you were designing a tax system to encourage speculative investment in property then you would adopt the Australian model.

Buying and selling houses does not increase our productive capacity but our capital gains tax and negative gearing encourage this form of investment. Australia probably has the most generous tax treatment of this investment of any developed country in the world.

The welfare system also needs reform. Effective marginal tax rates (EMTR) imposed on those on welfare seeking jobs are far too high. The imposition of tax and the cuts to welfare payments from even lowly paid part time jobs mean that up to 70 cents for each dollar earned goes back to the Government.

Dealing with this problem is tricky. A means-tested welfare system means that EMTR will be high. However they can be tapered so that there is greater incentive for those on welfare to go back to work if they can.

We need all the workers we can get. And we need them to be productive.