Ursula Stephens (NSW, Australian Labor Party, Shadow Parliamentary Secretary for Science and Water) Share this | Link to this | Hansard source

I rise this evening to speak on the Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006. This bill gives effect to tax changes announced in the 2006-07 budget by amending the tax laws and the Medicare Levy Act 1986 to change personal income tax rates and thresholds, the low-income tax offset, the Medicare levy phase-in rate and the fringe benefits tax rate. This bill also increases deductions for the decline in value of depreciating assets under the diminishing value method and project pools.

Whilst not indicating opposition to these measures, I wish to highlight the problems in the government’s approach to taxation. Prior to the budget the case for wholesale reform of Australia’s taxation system was absolutely compelling. Our system lacks both vertical and horizontal equity, is excessively complex and no doubt is a brake on economic growth. Individual taxpayers were paying too much, ridiculous compliance burdens were killing small business, and poor interaction between individual, company and capital gains tax systems posed a serious threat to our future prosperity.

At the coalface, serious questions were being raised about the way the Australian Taxation Office deals with individual taxpayers and some small business entities. People were calling for regulations to be simplified and radically reduced, not just pruned at the edges. There is no doubt that our tax system is a cumbersome giant tripping over its own heels. Were any of those issues dealt with in this budget tax cut measure? Unfortunately not.

The first priority for the repair and redesign of the personal tax area is critical. The way that rates and thresholds are structured results in the tax burden on the average employee being unjustifiably high. The economy-wide effects of a high tax burden on labour are very significant. The first effect is the disincentive for labour market participation. The second effect is that the incentive for labour productivity growth is curtailed. Labour productivity ultimately flows through into higher wages, but if they are too highly taxed then the rewards for innovation and better workplace outcomes are weakened. The third effect is a reduction in our competitiveness. High rates tend to reduce Australia’s capacity to compete for skilled labour. This will ultimately reduce productivity and, of course, has also led to the regime this government now has in place to import labour from other countries rather than giving Australians an opportunity.

One aspect of the tax debate which is misguided is the assumption that the majority of these economic benefits will necessarily flow from tax reform at the top end of the income scale. Indeed, the combination of tax cuts and family payment systems has become a potpourri of disincentives. The burden of these disincentive traps falls most unfairly on low-income earners, especially sole parents, who are lucky to retain $1 in every $4 from a wage increase. This is the prime reason why Australia’s labour market participation rates lag behind those of our international competitors, especially the United States.

The personal tax system remains too complex. Growth in deductions is rapidly outpacing growth in revenue. How is this explained? This is further evidence that the review of aspects of the personal work related deduction system is long overdue. Tax returns are far too onerous. The government should consider a tick-the-box type of approach so that taxpayers can be freed from the complexity of the current system. Major problems also exist outside the personal tax area. The small business sector continues to face crippling compliance burdens, which eat into its capacity to innovate. Differential rates in company, personal and capital gains tax distort economic incentives. Treatment of tax losses discourages investment in exploration and venture capital.

Tax legislation and administrative practice have been poor in recent years. At least 13 flawed tax measures were introduced into the parliament during 2005 alone. Treasury’s record in providing regulatory impact statements is notoriously bad, as the Productivity Commission has pointed out. Where explanations of new law are provided, they are not in plain English and are often inaccurately costed.

Simplification is a major challenge and cannot be properly tackled with half-baked measures. The lesson of history is that such attempts to simplify tax law tend to have the perverse effect of increasing complexity. Now that the legislation has exploded to 9,000 pages, the plan to cut 2,000 redundant pages looks a little bit less than ambitious. The government must begin a serious program of simplifying and consolidating operative provisions. Perhaps they should look to the UK system of targeted reductions in business regulation.

The ATO is performing below par. For example, the overly aggressive approach to the handling of small business tax debts is a real worry. This approach led to more than 2,000 small business bankruptcies last year alone. The tax inspector’s call for a more case-by-case approach is well justified and I support it. It may be time to look at a US-style loans guarantee program for small business.

The tax system is the primary driver of incentives in our economy. When it does not fit together neatly, harmoniously and simply, consumers and investors face increased uncertainty and high transaction costs. This is a brake on economic growth. Genuine tax reform is needed to lift workforce participation and productivity to the levels of our competitors. This will lead to increases in growth and per capita GDP. We need to realise that Australia will not bridge the gap between Australia and US GDP per capita with the current tax system.

Did the budget address these concerns? The overwhelming answer has to be no. The Treasurer does not seem to understand that there is a difference between tax cuts and tax reform. The Treasurer consistently says in public that there is no difference. Tax reform improves the efficiency of the tax system. It restores vertical and horizontal equity to the tax system. It reduces the compliance impact of the tax system. But we saw none of that in this budget, and there is none of that in the bill before the Senate this evening.

I turn to the second point I want to make—that is, how this package is funded. This takes me to the issue of forecasting. Senators may have been reading the Australian Financial Review with some interest recently because, in the Senate estimates process, Labor senators tried some teasing-out of their own to try to determine what is going on in this area of revenue forecasting. Something very strange is happening. While there was no increase in the company tax rate, for example, in the budget, the effective tax rate on companies is actually increasing. Mr Chris Richardson from Access Economics made the point that something strange is happening when company revenue is growing at 18 per cent and company profits are growing at 12 per cent.

We challenge the minister when summing up this debate to tell us the basis on which his projections of company tax revenue are made. It is pretty simple. These increases in company tax receipts are critical to funding the tax cuts, and I think it is appropriate for the Treasurer, given the uncertainty that was raised in the budget estimates period, to tell us exactly what is happening. He should tell us specifically why it is that the budget is getting an 18 per cent increase in company tax receipts while company profits are growing by only 12 per cent. He might come in here and say: ‘This is very easy to explain. Companies, particularly mining companies, over the last year or so have been investing heavily in additional capacity to try to catch up with demand, particularly in China.’ That would explain why there would be a disparity in the figures.

But nowhere in the budget papers are we given any such explanation, so the minister, in closing the debate, should perhaps explain why it is that we have company receipts growing at 18 per cent and company profits growing at 12 per cent. As I said, if it is the result of heavier deductions which flow from the additional investment in productive capacity, we would be satisfied with that answer, but if the minister says, ‘No, that’s not what it’s all about,’ can he tell us what it is about? It is a new phenomenon, one we have not been familiar with in the past, and I think the Australian people deserve an explanation.

These revenue forecasts are so important, and of course we all know that revenue forecasting can be manipulated for political gain. Senator Watson in the Senate estimates hearings made the point that it is possible that real and meaningful wholesale tax reform might have been overlooked because of conservative revenue forecasts. Maybe it is time to learn from international practice, perhaps by taking a US-style approach and having an independent agency to do the forecasting on behalf of the government or by looking at the UK model of having, in parallel, an institute funded by the government also measuring the forecasts to keep the government of the day honest.

I wish to conclude by highlighting a little hypocrisy of the Treasurer. He was bragging to the G8 meeting that Australia leads the world in transparency of budget processes. I do not think so. The hopeless performance of Treasury in revenue forecasting is surely proof against this. Moreover, the Treasurer will not open up his forecasting assumptions and explain the enormous upgrading in estimates by over $40 billion since MYEFO in December last year. Where is the transparency in this? Poor forecasting records hamper tax reform, as it makes it impossible to construct good policy. Perhaps this explains why all we get from the Treasurer is tax breaks and not real tax reform.

Andrew Murray (WA, Australian Democrats) Share this | Link to this | Hansard source

Schedules 1 to 4 of the Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006 amend the tax laws and the Medicare Levy Act 1986 to provide changes to personal income tax rates and thresholds, the low-income tax offset, the Medicare levy phase-in rate and the fringe benefits tax rate. Schedules 1 to 4 will cost $10.6 billion over four years.

Schedule 1 increases the 30 per cent tax threshold from $21,601 to $25,001. It reduces the second highest marginal tax rate from 42 per cent to 40 per cent and increases the threshold for that rate to $75,001. It reduces the highest marginal tax rate from 47 per cent to 45 per cent and increases the highest tax threshold to $150,001. Schedule 1 also makes a range of consequential amendments resulting from the reduction in the top marginal tax rate.

Schedule 2 reduces the fringe benefits tax rate from 48½ per cent to 46½ per cent from 1 April 2006. Schedule 3 amends the Income Tax Assessment Act 1936 to increase the low-income tax offset from $235 to $600 and increases the income threshold from which the tax offset begins to phase out from $21,600 to $25,000. Schedule 4 amends the Medicare Levy Act 1986 to increase the income threshold that applies to taxpayers who are eligible for the senior Australians tax offset and reduces the Medicare levy phase-in rate from 20 per cent to 10 per cent.

Schedule 5 amends the Income Tax Assessment Act 1997 to increase deductions for the decline in value of depreciating assets under the diminishing value method and project pools. This schedule costs an astonishing $1.2 billion over four years.

The government changes to the personal income tax scales will take effect from 1 July 2006. These changes come on top of changes already due to take effect from 1 July passed following the announcement by the government in last year’s budget. The changes to personal income tax scales already passed in 2005 were to lift the top threshold for the 30 per cent band from $63,000 to $70,000, but that will now be $75,000. The changes to personal income tax scales already passed in 2005 were to lift the top threshold for the 42 per cent band from $95,000 to $125,000, but that will now be $150,000. And, of course, the changes to personal income tax scales now drop the top rate of 47 per cent, presently applying above $95,000, to 45 per cent applying above $150,000.

In addition, the government announced a large increase in the low-income tax offset from its present level of $235 to $600 from 1 July, and the threshold at which the offset begins to phase out will also rise, from $21,600 to $25,000.

The impacts at different income levels of the cumulative changes and tax arrangements vary. The Democrats have long advocated a tax-free threshold of $10,000, and this tax cuts package does deliver an effective $10,000 tax-free threshold. The budget papers indicate that, once the proposed low-income rebate has been taken into account, a person whose income is below $25,000 per annum has an effective tax-free amount of $10,000 per year excluding Medicare. Under the proposed Medicare levy rates, no Medicare levy is payable until a person’s income exceeds $16,772 per annum in 2006-07. A reduced rate of levy is paid until a person’s income reaches $19,332. This bill before us raises the disposable income of persons earning $10,000 by 3.8 per cent and persons earning $25,000 by 4.6 per cent.

The budget also delivers additional family tax benefits, and for that you must see other legislation that increases the real income of low- and middle-income Australians. None of this justifies an estimated 5.4 per cent increase in disposable income for those earning $125,000 and 6.5 per cent for those earning $150,000 when lower and middle-income Australians still suffer such high effective marginal tax rates.

Debate interrupted.