The government is warning that Australia's "heavy reliance" on business and personal income taxes may become unsustainable in coming decades and says the country needs to quickly reform its tax regime to adapt to changes in the global economy.

Its tax discussion paper, which draws considerably on the Henry tax review, has questioned whether Australia's dividend imputation system ought to be reformed, saying the benefits of imputation have been declining as Australia becomes more integrated with the rest of the world.

It says the dividend imputation system was designed to prevent distributed company profits from being taxed more than once while giving Australian shareholders an incentive to invest more of their savings in Australian companies, rather than foreign ones.

However, the benefits of dividend imputation have been declining as the Australian economy has become more integrated into the global economy, it says.

"In particular, benefits in relation to financial neutrality between debt and equity financing have fallen, while the bias for households to over-invest in certain domestic shares has increased," it says.

"It reduces the cost of investing in Australian companies for Australian residents, [but] it provides little benefit for non-resident shareholders in Australian companies . . . because Australian imputation credits do not reduce their tax liability in their home country."

The Abbott government is using the discussion paper to kick-start debate about Australia's tax system, saying the current system was designed before the 1950s and is ill-suited to the 2050s.

The paper warns that Australia relies more heavily on corporate tax than other countries, and its 30 per cent rate is higher than most of the countries it competes with.

It suggests foreign companies would find Australia more appealing if its company tax rate was lower because it would reduce the incentive for profit shifting out of Australia while increasing the chance of making higher profits in Australia.

However, the paper also acknowledges there would be short and medium-term consequences for Australia's economy if the company tax rate was cut.

"A reduction in the corporate tax rate in isolation would exacerbate the existing disparity between the corporate rate and the highest marginal tax rate in the individuals income tax system," the report says.

"[It] would also have a significant impact on tax revenues in the short term, [but] this effect would be partially offset in the medium to long term, as increased economic activity from new investment generates additional tax revenue."

It says the rise of the digital economy and globalisation presents "significant challenges" for the effectiveness of the tax system because capital is much more mobile.

It says about 70 per cent of Commonwealth tax revenue is collected from personal and company taxes, and "a dozen companies pay around one-third of Australia's company tax".

"We need a competitive corporate tax regime to encourage investment."

The government says it will listen to the public's response to the discussion paper and those responses will inform its tax options green paper, which is due to be released in the second half of 2015.

After receiving feedback on those options, the government says it will develop policy proposals for consideration by Australian voters "in 2016".