Chris Bowen (Prospect, Australian Labor Party, Shadow Assistant Treasurer) Share this | Hansard source

We have been calling on the government to reduce the punishing, very high effective marginal tax rates at the lower end of the scale. The minister at the table scoffs, but Labor has been calling for this for years. The evidence shows that we have been calling for these sorts of tax cuts for years and they conveniently ignore the facts.

I had a look at the relevant bill from last year, which introduced last year’s tax cuts, and I see that the shadow treasurer, who led the debate, moved a second reading amendment which the government voted down. It said, in part, that the House notes the government:

... failed to systematically address the punishing effective marginal tax rates faced by:

(a)

second earners, most particularly women;

(b)

individuals moving from welfare into work; and

(c)

middle and low income families with dependent children.

The Labor Party laid this out at last year’s budget, that this is where our priorities would be. And the government comes in with the budget—an election budget—and has miraculously come up with tax cuts for low- and middle-income earners!

The shadow treasurer laid out some tests earlier this year as to whether the opposition would support the tax cuts in this year’s budget. There were two tests: do the tax cuts tackle disincentives for workforce participation and skill formation? That is test No. 1. Test No. 2: are they appropriately staged to minimise inflationary risks? I am glad to say that these tax cuts pass both of those tests.

Labor has been calling for tax cuts such as this for years for two reasons: firstly because it is good economic policy and secondly because low- and middle-income earners need relief. They are struggling with eight interest rate increases in a row and four since the last election, when the Prime Minister promised to keep interest rates at record lows, and they are struggling with spiralling petrol prices and cost of living increases.

Let me deal firstly with the economic management arguments in favour of these tax cuts. Australia has some of the most punishing effective marginal tax rates in the world. The OECD has shown that average workers in Australia face the highest EMTR in the world—63c in the dollar—compared with an average EMTR for all workers across the OECD of 31c in the dollar. It is particularly punishing for second income earners and sole parents—the types of people we need to be attracting back into the workforce. We see the effects of these punishing effective marginal tax rates in our participation rates. Australia’s labour force participation rate is 73.6 per cent. Let us look at comparable countries. In New Zealand it is 76.6 per cent, in the United States it is 75.4 per cent and in the United Kingdom it is 76.2 per cent. The government’s own budget papers show that Australia has lower labour force participation than Canada, Denmark, Norway, Switzerland, Sweden and the United States.

An increase in labour force participation of just one per cent can make a huge difference to the economic performance of the nation. Our participation amongst workforce aged males is 25th out of the 30 OECD countries. We do a little better with females, who come in at 23rd out of 30. As the population ages, we face the urgent task of increasing participation rates. It is one of the most important medium- to long-term economic challenges facing this nation. The ratio of dependants, mainly aged dependants, to workers is set to double in Australia by 2040. That is what makes it vital to improve our labour force participation rate. Of course it is also important for social reasons—to give young people a role model of work and to break what is in some places and in some cases an intergenerational cycle of poverty and despair as generation after generation is out of the workforce. Yet the government have presided over a regime of punishing effective marginal tax rates at the low and middle income of the spectrum. They have had 11 years to act on this, and in an election year they start to act.

We have seen the Welfare to Work reforms—the Welfare to Work changes, perhaps more accurately. What did the Welfare to Work changes do? In some cases, they managed to increase the effective marginal tax rate of people seeking to move from welfare to work. This is the party of incentives. This is meant to be the party of building incentives into the economy. I seem to recall the Prime Minister, in a previous incarnation, calling it the ‘party of incentivation’. Yet for 11 years we have had punishing effective marginal tax rates, locking people out of the labour market.

Labor agrees with the OECD and others. Back in 2004 the OECD said this:

An additional important issue is that of effective marginal tax rates which, despite recent reforms remain high for many low income earners, deterring labour force participation, including by secondary earners and older workers. The priority for tax reform should be the simultaneous continuation of policies which contribute to lowering these high effective marginal tax rates and the raising of the threshold at which the maximum marginal income tax rate cuts in, consistent with budgetary objectives.

The OECD also said:

The pace of reform has recently not been as strong as it could have been.

In fairness, the government have dealt with the low rate of cut-in for the top marginal tax rate, and we support the measures in the budget to increase that rate of cut-in even further. It is an appropriate thing to do. But the government have been very tardy indeed in dealing with the high effective marginal tax rates at the low and middle income of the spectrum.

We also agree with Professor Brian Andrew of the University of New South Wales. I was drawn to some comments of his recently. His contribution is worth quoting at some length. He said:

The economic impact of the EMTR problem is very serious because it hits a large number of middle income families where the second spouse could make a contribution to the workforce if the EMTR was reduced. At a time when the Australian population is ageing it is essential that we encourage the second spouse in each family to participate in the workforce and we should not underestimate the disincentive to workforce participation provided by an EMTR of 65% coupled with the cost of childcare and transport. Tax reform which moved the EMTR problem to a different income level and reduced its impact upon middle income families could make a significant contribution to the economy.

He went on to say:

The EMTR problem is well known and has existed for a long time and it is hard to understand why there has not been a serious effort to address the problem in a concerted way. Now is the time to attack the problem, as there is relatively full employment and a skills shortage which can only be addressed by encouraging more people into the workforce.

I agree with Professor Andrew: it is hard to understand why there has been no concerted effort. It is hard to understand why low- and middle-income earners, who have been ignored in successive budgets, are having their tax rates cut in this election budget at five minutes to midnight. I think low- and middle-income earners understand why that is the case and view the budget, appropriately, cynically. I do not want to leave the impression that this budget and the tax cuts contained in it for low- and middle-income earners have dealt with the punishing EMTRs. Far from it; there is much left to do. The budget papers indicate that it is predicted that workforce participation will increase as a result of these tax cuts, and that is welcomed, but we still have a huge EMTR problem. That problem will fall to the Rudd Labor government to fix should we be elected later this year.

Real reform can only come from a complete package examining tax rates and the taper rates of welfare payments. As I say, we have seen a Welfare to Work package from the government which in some instances increased effective marginal tax rates for people moving from welfare to work. Well done: a Welfare to Work package which actually punishes people for moving from welfare to work. They must believe, after being in office for 11 years, that punishing effective marginal tax rates at the low and middle income of the spectrum is good policy. They either believe in it or they are too lazy to fix it. That is the approach we have seen from the government.

There is an economic argument for increasing participation rates by reducing the effective marginal tax rates on low- and middle-income earners, and there is also an equity argument. Low- and middle-income earners are doing it tough, despite the Prime Minister saying in this House that they have never had it so good. Firstly, there is the impact of eight consecutive interest rate increases. Since the last election, the last four interest rate increases have seen average mortgage payers in Australia’s capital cities paying $65 a week extra—and even more for many in Sydney, Melbourne, Canberra and Perth—in mortgage repayments. The percentage of household income going towards mortgage repayments is the highest it has been in Australia’s history—higher than in 1990 and 1991, higher than the high interest rates under Treasurer Howard in 1980 and 1981. They are the highest in this nation’s history. Low- and middle-income earners are doing it tough. So the $14 a week or the $21 a week tax cuts are welcome, but they will go in some part to subsidise the increases in interest rates that the Prime Minister told the Australian people they would not have to worry about. They will go to subsidise the increase in interest rates brought about by this government’s failure to deal with the skills crisis and the infrastructure crisis facing the nation, which are the reasons highlighted by the Reserve Bank for the increases in interest rates over recent years.

Then of course there are petrol prices. For a lot of families, when petrol prices rise this acts just like a tax increase. It reduces discretionary spending and puts pressure on the family budget. Caltex recently confirmed that petrol prices in Australia have increased substantially since the start of the year. Australian families needed no reminding. Caltex said:

Petrol prices in Australia have increased 21 cents per litre on average since January due to sharp increases in international prices for petrol.

The price of unleaded petrol now stands at an average of $1.30 across Australia’s capital cities and, of course, it is more in many rural and regional areas, as the shadow minister for regional affairs at the table well understands.

Some economists, particularly those at CommSec, have predicted that petrol could hit $1.50 in the near future. This bill provides a tax cut of $21 or $14 a week, depending on where you are in the income scale. Let us have a look at what the impact of an increase in petrol to $1.50 would mean for some people. If petrol prices go from where they are now to $1.50, a person who drives a 2006 Commodore will find that they are paying $15 a week more for petrol; a Falcon, $13.60 more a week; a Toyota Corolla, $11 a week; a Ford Focus, $11 a week. Again, the $14 a week tax cut is very welcome. It goes to subsidise the increase in petrol. The government wonder why the Australian people have not been overcome by joy at the budget and by gratitude to them since they presented it. Perhaps it is because the tax cuts are helping people cope with (1) the increase in interest rates, (2) the increase in petrol prices and (3) the general increase in the cost of living.

Labor has always maintained, and I have always said, that the biggest impact on the increase in petrol prices is world oil prices—no-one would pretend otherwise. But in this environment where Australian motorists and families are facing the highest petrol prices on record, we need to be assured that the federal government are doing everything in their power to ensure that Australian motorists are not paying one cent more than they need to. The Prime Minister, the Treasurer and the Assistant Treasurer can give no such assurance. The Prime Minister and the Treasurer have been on radio assuring people that they are taking this issue very seriously. The Prime Minister said:

We will again ask the ACCC to look at these prices.

No, they will not. And they have not. A simple way they can do it is: the Treasurer signs a letter to the Chairman of the ACCC which says, ‘I direct you to formally monitor petrol prices.’ It is easy to do. It is a one-page letter. It is not hard to do. It is only necessary because, very early in their term, the government changed the act governing the ACCC and took away its power to do that of its own volition. Now the Treasurer has to write a letter, not go on radio or to the Telegraph and say, ‘I’m asking Graeme Samuel to look at petrol prices.’ That is not how you do it. You write him a letter. No letter has been sent, and no letter has been received. The government have to be honest about this. They cannot go on radio and say: ‘We’re going to be really tough. We’re going to ask the ACCC to have a good look.’ The ACCC is doing the best it can with the powers it has, but what it is doing is a Google search. It does a very good job at monitoring petrol prices through the internet—and I do not mean that facetiously. It does a good job. It does the best job it can with the powers that it has. But let us give the ACCC the powers it needs to do its job as the Australian people’s watchdog.

Mr Howard says that he will ask the ACCC to have a look at petrol prices, but he gives it no power to do so. The Treasurer could write to the ACCC and notify it to formally monitor petrol prices under part VIIA of the Trade Practices Act, but he refuses to do so. As I recall, my predecessor, the member for Hunter, even wrote the letter for the Treasurer, handed it to him across the dispatch box and said, ‘Here, sign this.’ It cannot get easier than that. But, no, the government refused to act. As I said, I do not suggest for one second that giving the ACCC the power to do that would bring petrol prices down overnight. I do not suggest for one second that we have a magic bullet or an easy solution to the problem of petrol prices. Anyone who suggested that would not be being honest with the Australian people. But what I do suggest very strongly is that there is an obligation on the government to do absolutely everything in their power to ensure that there is no uncompetitive behaviour, that there is no price gouging and that Australian motorists are not paying one cent more than they need to—and they refuse to do so. The Treasurer comes in here with a great deal of hoopla and announces his tax cuts, and then he wonders why the Australian people are not overwhelmed with gratitude for his generosity in the budget. Perhaps he will realise that it is because his tax cuts are going some way to help low- and middle-income earners deal with the increase in the cost of living that they are facing.

These tax cuts are welcome, not just because the Labor Party called for them this year but because we called for them last year, the year before and the year before that. The tax cuts are welcome because, finally, we have seen some decent tax relief for low- and middle-income earners. Although we do not see real reform of effective marginal tax rates, we see a step in that direction. On that basis, we support that step in that direction. Labor do support these tax cuts, but there is more to be done. The Treasurer said, ‘The Labor Party doesn’t have a tax policy.’ He very conveniently misquoted the shadow Treasurer, although we have already laid out that dealing with effective marginal tax rates will be one of our priorities should we be given a mandate later this year to form government.

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