Joel Fitzgibbon (Hunter, Australian Labor Party, Shadow Assistant Treasurer and Revenue) Share this | Hansard source

He says, ‘Very satisfied.’ That interests me because I recall very well the contributions made by the member for Moncrieff prior to the budget. I am not so sure they now align with what is being delivered in these tax cuts. Let us not have any gilding of the lily, Member for Moncrieff. You should maintain your independence. You have done so in the past. You should maintain your independence and share with the House and the Australian people your real view about this tax package and the extent to which it conforms to your pre-budget contributions and where you would have the Treasurer change his tax package to better align it with the views you expressed earlier.

I am delighted to have the opportunity to contribute to this debate. Given that the government is absolutely awash with money—not as a result of anything it has done in economic terms but because of the resources boom this country is currently enjoying—we should not have been surprised in that context to see the government come up with a $37 billion tax cut plan over the coming four years. I suspect most Australians will be happy with those tax cuts. Why would they not be? They are long overdue. But I suspect some will be happier than others. For example, if a family’s private income is $70,000, the tax cut, combined with family benefits, will be about $25 a week. Much happier will be those on private incomes of around $150,000 where the combined effect of family tax benefit changes and income tax cuts will be around $119 a week. The extent of happiness will of course vary from household to household. I suspect that is why the government has not received the boost it was hoping for in public polling in response to the budget. Of course, happiness will also be measured by one’s situation in life. If you are approaching 60, or are just past 60, you will be very happy with the proposed super changes. If you are a small business person around the age of 56 and you were hoping to inject some capital into your super fund as a means of saving for your future, I suspect that, because of the cap proposed to be introduced, you will be somewhat happy.

As I make my contribution, I want to reflect on the tax cuts, I want to reflect on how they were designed and how they were funded and I want to reflect on the government’s forecast—the basis on which the government is reassuring, if you like, the Australian people that these tax cuts were affordable. 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 regulation to be simplified—radically reduced, not just pruned at the edges. There is no doubt our tax system is a cumbersome giant tripping over its own heels.

The question today for the House is: were any of those issues dealt with in this budget tax cut measure? The first priority for 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 fall most unfairly on lower 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—and I think the member for Moncrieff agrees with me on that point. Tax returns are far too onerous. The government should consider a tick-the-box type of approach so that taxpayers can be set free 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 has 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 now looks a little bit less than ambitious. The government must begin a serious program of simplifying and consolidating operative provisions. Maybe 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. Some people say that this produces a new lender of last resort. At the moment the tax office is the lender of last resort, and with it comes painfully high general interest charges on debt. Why not shift the lender of last resort option to a semi-government agency, for example, which would charge a risk premium but which, rather than make taxpayers guilty of breaches of the act, would allow small business taxpayers a better option?

In the United States this is a revenue positive initiative. A small business person goes to the bank looking for a short-term loan to deal with a short-term cash flow issue and the bank looks at the numbers, decides it is just outside its risk guidelines and passes it on to the Office of Small Business Administration. The Office of Small Business Administration looks at it and says, ‘Yes, we will back this loan to the tune of 75 per cent.’ On that basis the bank lends the small business the money. The premiums raised by the Office of Small Business Administration are in excess of the cost of the very few defaults it suffers as a result of the program. It would be better to have some government agency assisting small business through cash flow difficulties than having the tax office fill the role of lender of last resort, with punitive penalties for loans. The banks are very good at knocking back small business for short-term loans to deal with cash flow issues—$20,000 to $30,000—but the same banks are very good at sending the same small business person an offer in the mail the next day to extend their credit card limit to some $20,000 or $30,000. This is an inconsistency on the part of the banking sector.

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 Australian and US GDP per capita with the current tax system.

That was the pre-budget situation. These were the things that business peak representative bodies and economists around the country were asking for. The question again is: were those voices heard in terms of this tax package and were those goals achieved? If you acknowledge for a moment that there were some reductions in personal tax cuts, 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. It is not a very difficult concept to comprehend. The Treasurer consistently says in public that there is no difference. I know the member for Moncrieff will agree with me on this point when he rises to his feet, because he has said so publicly himself. Tax cuts obviously reduce the individual’s tax burden by raising thresholds or reducing rates. That is simple. Anyone can surely understand that concept. 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 parliament today.

I turn to the second point I want to make, and that is how this package is funded. I have already talked about the windfall from the resources boom. That is how these tax cuts are being funded. But, as any first-year economics student knows, we are taking a short-term windfall, a temporary windfall, to pay for an ongoing commitment. These tax cuts do not just have effect this year, next year and in three years time. They have an effect ad infinitum, until the law is changed again. But the windfall is temporary.

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