Wayne Swan (Lilley, Australian Labor Party, Shadow Treasurer) Share this | Hansard source

The Tax Laws Amendment (2006 Measures No. 1) Bill 2006 deals with a number of measures and appears in the context of the Treasurer’s comparative tax inquiry announced on the weekend and subsequently repudiated by the Prime Minister in his remarks when he said that we do not need substantial tax reform. I do not believe that Australians need a Clayton’s inquiry to tell them this country urgently needs tax reform. The elements of that reform, I think, are relatively simple. They are needed to put some incentive in the tax system and to make it simpler, fairer and more competitive.

It seems the Treasurer needs to have an inquiry to tell him what everyone else knows. He set up a task force of Treasury officials headed by Dick Warburton and Peter Hendy, but what is their remit? It is not to offer suggestions for reform, but simply to rank Australia’s tax system against other tax systems. As I pointed out this week, he could have downloaded the relevant tables for free from the OECD website.

The Treasurer complained on the weekend that the tax debate does not take into account overseas state or city taxes when comparing them with Australian taxes. Tables 1.1 and 1.2 of the OECD tax database tell us ‘Central, subcentral and combined personal income tax rates’—that is, just the city and state-level taxes that the Treasurer was talking about. He has also complained that international comparisons do not take account of European social security contributions. Table 1.3 of the OECD tax database reports ‘All-in average personal income tax rates’—that is, income tax, plus employee social security contributions.

Even if we took the Treasurer seriously and thought there was not enough international benchmarking of Australia’s tax system, he would be ignoring the tax policy documents from Peter Hendy’s own organisation, the Australian Chamber of Commerce and Industry. ACCI’s taxation reform blueprint has pages of international comparisons of Australia’s tax system dealing with R&D tax, corporate tax, CGT and personal tax against international benchmarks. ACCI, among many others, has already done the work, and I could cite many other pieces of work. On top of that, we have a closed, private inquiry which leaves ordinary taxpayers unrepresented. So this is a tax inquiry which disenfranchises average taxpayers. It is an inquiry into a tax system that is in serious need of reform but an inquiry which is not allowed to make any recommendations about that reform.

This is all very puzzling. I think it is really only explained in terms of the Treasurer’s even more bizarre behaviour that we saw over the weekend—his foray into social policy, his claim that he had been deeply scarred by the introduction of the GST and his ‘Look at me!’ performance at the Press Club yesterday where he claimed that, after 10 years in office, suddenly he might decide to change some of the settings to make them more friendly to women. He runs a tax system that absolutely punishes second-income earners in households that face some of the highest tax grabs anywhere in the Western world. This has been very well documented by the OECD, but if you look at the terms of reference for the Warburton inquiry you will see that there does not appear to be any real mention of intersections between the tax system and the transfer payments system, which is where most women are suffering horribly in the tax system.

We know that when the Treasurer appeared at the Australian conference last year, he said that he did not consider effective marginal tax rates were a problem at all. I think he repeated that lewd line yesterday at the Press Club. Marginal tax rates are a big problem when second-income earners want to work more hours and suddenly find they are going to lose 60c in every additional dollar they earn after the withdrawal of transfer payments. They know all about how unfair this tax system is and why it urgently needs reform. It urgently needs reform because it is an impediment to participation and a huge handbrake on productivity in this economy.

This matter does not even appear to get a mention in the terms of reference for the inquiry. Why did we get the inquiry? It has enabled the Treasurer to cartwheel across the political stage in the space of a weekend—to go from being anti reform to some position which might be almost pro reform to get himself out of the jam that he got himself into in the second half of last year on tax.

I certainly hope we do see some substantial reform, because there are many people out there in the Australian economy who deserve that reform, and the economy needs it if we are going to get the improvements in productivity that are required to make us a much more competitive nation and to deal with some of the structural problems that the Treasurer is in denial over. Those structural problems were demonstrated yesterday in the national accounts, where our very poor export performance was there for everybody to see. Unless we improve that export performance, our foreign debt is going to continue to escalate and net foreign liabilities will continue to go through the roof. There is a very strong argument for tax reform as part of a wider suite of measures required to lift productivity and competitiveness, because sooner or later those levels of debt—our appalling trade performance—will catch up with this country.

It is crucial that governments regularly assess the competitiveness of their tax arrangements and make policy judgments accordingly. The design of our tax system has the potential to influence both capital and labour markets. With highly mobile capital and increasingly mobile labour, countries with uncompetitive tax regimes will suffer. A top-notch tax system is crucial to our success in the global economy.

By international standards, Australia’s personal tax system is too complex and marginal rates are too high. While other countries have been getting on with the task of simplifying their income tax systems, we have been adding to the complexity of ours. According to the OECD personal income tax database, the comparative complexity of Australia’s tax system has been increasing relative to other countries—another achievement of Treasurer Costello in the last 10 years! Five years ago nine other OECD countries had more complex marginal tax rate structures, but in the latest tables only four can claim to be more complex. That is on the public record already. I suppose this will be presented as a revelation in the findings of the inquiry.

Our race towards claiming the title of the world’s most complex tax system is borne out by the Treasurer’s slashing of the tax act from 3,500 pages, when he was elected, to 9,500 pages! That is not a bad record in 10 years, Treasurer—3,500 pages to 9,500 pages! No wonder we had this cartwheel—this 180-degree turn—over the weekend, with Dick Warburton and Peter Hendy as the spokes. This Treasurer has a dreadful record. The nature of that record was being exposed by his constant refusal to admit that there were any problems in the system. That is why we had the inquiry appointed last Sunday.

The OECD also reveals the high marginal tax rates faced by personal taxpayers in Australia and the trend overseas to embrace lower marginal rates. In 2004 Australia had the ninth-highest top statutory marginal tax rate compared to the 10th-highest five years ago. Last year our top statutory marginal tax rate, at 48.5 per cent, was considerably higher than the average of 44 per cent and the median of 42.8 per cent, both of which are down around three per cent compared to five years ago. That is on the record.

Furthermore, as I was saying earlier, the marginal tax rates faced by many of those on lower incomes are even higher—much higher—once the withdrawal of our complex array of transfer payments and tax offsets is taken into account. That is a huge brake on participation in the workforce. Precisely at a time when labour shortages are emerging in key areas we have an intersection between our tax system and our transfer payments system that stops a lot of women from working longer, even though they want to. This matter is barely even mentioned in the terms of reference of the inquiry. A single-income family on average earnings has an effective marginal rate of 51.5 per cent, the second highest in the OECD. That is up from 35.5 per cent 1996, when we had the 15th-highest rate. That is on the record. Presumably it will be published in the report. The same family type on the minimum wage currently has an effective marginal rate of 104.5 per cent. That is a shocking thing to do if you are interested in moving people from welfare to work and increasing participation.

Easing the burden on low-  and middle-income earners, many of whom pay the highest effective marginal tax rates, must be our first priority when we are talking about reform. High EMTRs are important because they reduce incentives to participate in the labour market, increase skills and save. That was the motivation behind Labor’s response in the 2004 budget—a response that produced twice the reform that this lazy Treasurer produced in his budget.

Labor is convinced of the need for a simpler system. A powerful case is emerging for a personal income tax system with fewer and lower marginal rates and a streamlined system of tax offsets and personal income tax deductions. Adopting a tax system with fewer and lower marginal rates does not mean that we abandon the important principle of a progressive tax system. On the contrary, we are a strong believer in a progressive tax system. A progressive system is important because it recognises that those on higher incomes have an increased capacity to contribute more tax because their non-discretionary spending takes up a smaller proportion of their income. I believe we can design a flatter marginal tax rate structure with as few as three marginal rates. It can be designed in a very progressive way.

Advocates of flat taxes do not seem to understand that this factor is the reason that we have a progressive system in the first place. You will see all the arguments come out in this debate from those who really want to redistribute the tax burden further down to low- and middle-income earners. I want to make it very clear that Labor is absolutely committed to a progressive tax system, unlike certain sections of those opposite.

Simplified personal income tax systems, with fewer and lower marginal rates, are common overseas and ought to be considered in the Australian context if they are affordable and fair. Such systems typically operate with a generous personal tax-free allowance that could be considerably more generous than our existing general tax-free threshold. It would potentially remove the need for many low-income earners to pay any tax and massively improve the rewards to move into the labour market. Overseas, the personal tax-free allowance is typically withdrawn at higher incomes with the trade-off of lower marginal tax rates.

At the very least, the experience of reform overseas shows it is possible to adopt a simpler and flatter tax structure that can reduce the tax burden for everyone, reduce the highest effective marginal tax rates and remain progressive. The extent to which marginal tax rates could be reduced depends on a range of factors including the desired distributional outcomes and the ability to finance the overall tax reductions. And there is a strong case for paying special attention to single and couple taxpayers without children who are on average wages or less. The OECD makes it clear that such taxpayers have faced an increased tax burden under the Howard government, transfer payments included or not.

From an international perspective—as the Treasurer should know—comparisons of Australia’s tax system to what is going on elsewhere are well documented. But there are a few facts that ought to be put on the record here today. Wage earners on around average earnings or less are losing a greater share of their gross earnings in tax today than in 1996. Typical Australian families face the second highest effective marginal tax rates in the OECD. OECD studies have shown that Australia has a heavy reliance on income taxes which are used in part to churn money back to households as transfer payments.

If the Treasurer asked ordinary taxpayers, the Treasurer would find what we already know, and that is that the Australian tax system needs reform. It needs reform up and down the scale, but particularly to reward the hard work of middle-income earners. It needs reform to encourage participation, particularly for those who should be in the workforce but who face the sting of losing too much of their social security payments. It needs reform to be fairer and simpler. The thousands of pages of the tax acts have simply grown out of control and need serious pruning.

That brings me to a number of the measures in the bill before the House. This bill introduces a range of measures to assist temporary residents. Specifically, it creates an exemption from Australian income tax on income derived from outside Australia for individuals who are considered to be temporary residents for tax purposes. As I have said before, we need to make sure that the tax treatment of highly skilled foreign executives is not disadvantaging the international competitiveness of Australia’s businesses in the hunt for top global talent.

Considering the dire skills shortage that is constraining Australia’s economic growth and putting pressure on prices and wages, there is a lot to be said for measures that allow Australia’s businesses to meet their demand for skilled employees. There is a lot more to be said for this government and the private sector getting stuck into investing in our own people first and foremost. They should not be using the immigration system as a substitute for training Australians here at home. But the fact is that there are some significant skills shortages. They are a consequence of the Howard government’s chronic underinvestment in Australia’s education and training system.

The bill also allows certain business expenditures to be tax deductible. One of the effects of the bill is to make James Hardie’s compensation expenses tax deductible. This is something that the Treasurer said he would never do. I am pleased to stand here and say that he has done it. The only problem is that we have not heard the Treasurer say it. But he did do it, and, even though he will not say it publicly, I will give him the credit for doing it. I will not give him the credit for being so mum about it. This is a necessary part of the arrangement to make sure that James Hardie bears the burden for the long-term consequences of its shameful practices that have ruined so many people’s lives.

If this arrangement had not gone through—and for a while it looked like it would not, because the Treasurer was going to block it—Australian taxpayers would have had to have borne the burden of health care, disability support payments and pensions for the default of James Hardie, so I am pleased this bill is before the House. It is beneficial not only for those directly involved but for the nation as a whole.

The bill also includes measures to deter the promotion of schemes to avoid or evade tax. These measures are welcome, though I note that the problem of promoting tax avoidance has been around for a long time and has done a lot of damage to the integrity of the tax system, and it has taken the government years to do anything about it. There is also a minor amendment to the tax treatment of prepaid phone vouchers.

I now want to turn to Labor’s proposals and Labor’s amendment. The amendment we are moving to this bill addresses concerns about taxpayers subsidising the payment of kickbacks in developing countries under the guise of legitimate business expenses deductible under tax law. These so-called facilitation payments are not illegal under criminal law—if they are minor, if they do not involve paying for decisions about how contracts are awarded and if careful records are kept. But the standard for tax law is different. Under the tax law, a facilitation payment can be deducted even if it is not minor and there are no records kept.

The OECD reported on 4 January that the gap between the tax law and the criminal law ‘may provide scope for abuse’. That is why Labor is moving an amendment that will bring our laws relating to facilitation payments into line with OECD standards. We will try to make sure that only minor payments can be claimed as tax deductions and that such payments are recorded. I commend Labor’s amendment to the House.

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