Simon Crean (Hotham, Australian Labor Party, Shadow Minister for Regional Development) Share this | Hansard source

Whilst Labor supports the tax cuts contained in the Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006, we believe that the budget presents a huge wasted opportunity for tax reform. We also have particular concerns about the bill itself, and these are reflected in the second reading amendment moved by the member for Lilley. In particular, the failure to pay the low income tax offset fortnightly will greatly diminish the significance of the benefit. People need the money in their pockets on a regular basis, not just in a lump sum at the end of the year. Similarly, we have concerns that high effective marginal tax rates will continue to disadvantage second earners and people moving from welfare to work, as well as middle-income families.

As the Leader of the Opposition indicated in his budget reply speech, middle Australia have had to experience five budgets without a decent tax break and then, at the end of it, all they got was $10—$10 which has already gone on the triple whammy of rising interest rates, rising petrol prices and the additional worry of whether they will still have a job under the new workplace relations act. It is no wonder that the public’s response to the budget has been far less positive than Peter Costello’s hype and the media endorsement of it.

This bill essentially implements budget decisions which reduce personal income tax rates; increase the LITO—the low income tax offset; decrease the Medicare levy on low-income senior Australians; and increase depreciation rates for business assets. Taking the last point first: for business, the depreciation allowance for business assets will be increased from the 150 per cent diminishing value rate to 200 per cent. This provision is useful. It should encourage greater investment in business assets—if you like, in physical capital. It is a pity that this budget and this initiative are not matched by greater incentives to invest in our people, our human capital. Not only has the Howard government failed to make the investment in our people but its other policies add to the insecurity of those very same people. The Work Choices legislation is adding to the insecurity that workers face. It is putting workers and their families under pressure. It could lead to a reduction in real wages.

On tax, personal income tax will be reduced and income tax thresholds increased so that a marginal tax rate of 15c will apply up to $25,000, the 30c rate up to $75,000, the 40c rate up to $150,000 and the 45c rate above $150,000. They have also increased the low-income tax offset. Combined, these measures and this form of tax relief go to most wage earners, although it is also true that the biggest increases go to the top end.

The point I want to make today, though, is that there is a dimension beyond the amount of the tax cuts and their distribution, and it is a policy dimension. For the economy, it is how tax policy and tax reform can drive greater participation in the workforce. How can we better add to our labour supply? For families, it is how we provide the incentives for people to move from welfare to work, restoring their dignity and giving them better income security. Yes, this budget gives tax cuts, but it does not give tax reform—reform which could have both given tax cuts and encouraged greater workforce participation. Participation, I would point out, is one of the three Ps, together with productivity and population, which we hear so much about in the context of the intergenerational challenge to the nation. Yet the Treasurer, given the funds that were available to him, failed the reform test in the budget. With the same fiscal envelope, we could have been more reformist. We should have better targeted the tax cuts to low- and middle-income earners by concentrating more on cutting rates than simply adjusting the thresholds.

I am encouraged in this argument by a very recent report by CEDA, the Committee for Economic Development of Australia, entitled Tax cuts for growth: the effect of marginal tax rates on Australia’s labour supply, dated 25 May this year. This report has a number of important conclusions. First, it says that tax cuts are likely to do more to boost economic growth if they target middle and low earners. It is these groups that are more likely to respond to the incentive provided by tax cuts than people on higher incomes, in part because they face higher effective marginal tax rates. The second conclusion is that, to encourage more work, tax cutting should focus on lowering the bottom rate—that is, the 15c income tax rate—and raising the tax-free threshold and/or introducing a tax device called the earned income tax credit for low-income households.

The third conclusion is that, where tax cuts are focused on those on higher incomes, very large savings can be made by lifting thresholds rather than simply cutting the rates. Fourth, cutting low marginal tax rates or targeting tax credits on relatively low income workers appears to be the most effective use of revenue forgone in tax reduction. The fifth conclusion is that cuts to marginal tax rates for high-income earners are unlikely to have as substantial an effect on labour supply. It is better to raise the thresholds at the top end—in other words, cutting tax for low- and middle-income earners and raising the thresholds for high-income earners. So I urge honourable members to read this report, to note that the budget does none of the things recommended in it but to ponder the possibilities for important pointers to future reform.

In coming to its conclusions, the report relies heavily on the Melbourne Institute Tax and Transfer Simulator, called MITTS. It is a microsimulation model of the Australian economy with detailed information about Australia’s tax and transfer system. I was particularly interested in their reliance on this model, because Labor used the Melbourne institute and the same model to evaluate the tax package it took to the last election. In 2004 our package had four key elements. First, there was consolidation of family tax benefit parts A and B, with some changes to rates and tapers. Second, we added the single-income tax offset. This is a tax rebate for single-earner families. Third, we added the low- and middle-income tax offset, essentially providing $8 a week then—this was back in 2004—to taxpayers with an income of between $7,300 and $56,000. Essentially, no-one with an income below $8,400 would pay tax. We also incorporated the existing low-income tax offset. The fourth leg of our policy was to increase the top income tax threshold.

The Melbourne Institute of Applied Economic and Social Research found, through its model, that the net effect of all of those measures would be to increase labour force participation by 71,000 people. In other words, our policy was not just about fairness in the distribution of tax cuts; it was also good for the economy. The Melbourne institute found that this would in turn produce a dynamic dividend to the budget in excess of $800 million over four years. In other words, again, there would be a fiscal return to the nation for being clever with taxation in reforming the system, not just in paying the tax cuts.

This package was all affordable two years ago, before the recent budget surpluses. It was costed, it was funded and it stood the test of the Treasury analysis. Imagine how, if it had been implemented, we could have continued the path of tax reform with the surpluses available in this budget. In this regard, it is also interesting to note what CEDA suggests. It argues for better targeting of low- and middle-income earners by lowering the bottom rate from 15 per cent to 11 per cent. Other options are raising the tax-free threshold and/or introducing the earned income tax credit. As you will recall, Labor proposed a targeted earned income tax credit back in 1998.

In the debate on the Appropriation Bill (No. 1) 2006-2007 last week, I argued that the government should have considered funding the cut to the top rate—that is, 47c down to 45c—by closing tax loopholes and base broadening measures which affect high-income earners. It could then have funded a further cut in the 42c rate below the 40c rate which this bill contains. If the $2.3 billion cost of reducing the top marginal tax rate had been applied to the 42c rate, it could have come down to 36c. That could have been a down payment on cutting the rate further, subject to fiscal ability, to essentially eliminate it altogether.

At the top rate end, CEDA suggested raising the threshold for the 47c rate as opposed to cutting the rate. It argues that the behavioural effect for high-income earners relates to average tax rates, not to marginal tax rates. For these taxpayers, the most important question is: ‘How much tax will I pay out of my total income?’ CEDA argues that lifting thresholds at the top end rather than cutting top marginal tax rates better improves our tax competitiveness. And there can be significant revenue savings. For example: if the threshold were raised to $200,000—currently $125,000 going to $150,000—as a mechanism for relief at the top end, that would save $1.7 billion. As an extension, it is even possible to index the $200,000 threshold. Essentially, you could then argue that 99 per cent of taxpayers will never pay the top rate. The $1.7 billion saved could have been used to take the 42c rate down to 37c. That would have been real reform.

The reason for my going through this is that it demonstrates that there is plenty of scope for better targeted tax cuts, as well as tax reform to enhance labour market participation—reform which produces a fairer distribution of tax cuts and a better dynamic for the economy. Labor is greatly encouraged by the endorsement of its tax reform initiatives to date. I remind the House that in 2004 we funded an $8 tax cut by increasing the low income tax offset within the then fiscal parameters.

The changed fiscal parameters post the election saw that $8 proposal rise to $12 as the affordable tax cut through increasing the low income tax offset, as outlined in the Leader of the Opposition’s budget speech in reply. In other words, low- and middle-income earners could have had $12 last year as well as the $9.80 that is being paid this year. It was affordable then. We had costed it and funded it. But, as is always the case under this government, it was just another wasted opportunity—a wasted opportunity for greater fairness, a wasted opportunity to get greater workforce participation, a wasted opportunity to get people off welfare and into work and a wasted opportunity to address our capacity constraints and skills shortages.

Our proposal also offered a choice of fortnightly payments. That is what our second reading amendment does. I tell you this: people, particularly in regional and rural Australia, need the money in their pockets on a fortnightly basis, not at the end of the year. That is why I urge members to support the second reading amendment that we have moved. A lump sum payment after July 2007, more than 12 months away, will not help with the weekly bills.

I have said before that Labor was and is the party of true tax reform. We gave seven tax cuts in 13 years, including cutting the top rate from 60 per cent to 47 per cent and in every case reducing rates, not just thresholds. We returned more than bracket creep. We used tax policy not only as a redistributive mechanism but also as an anti-inflationary tool. Together with wages policy, we used it to break the back of inflation and reduce interest rates. In opposition, we have continued to argue the case for tax reform, but the reality is that tax reform will only happen if Labor is returned to office.

Whilst on the question of tax reform, I want to talk about another missed opportunity in the budget, and that is the government’s superannuation plan. ‘Plan’ is their word, but the reality is that there is very little detail contained in the budget as to what is involved. Again, I remind the House that Labor is the party of true reform in this area. It was Labor that introduced compulsory superannuation, and it was fought every inch of the way by the Howard government and when they were in opposition. Despite embracing our scheme now, they have done nothing to continue the reform agenda. Super contributions, still at nine per cent, are insufficient to meet the intergenerational challenge of our ageing population and the associated costs.

The fact is that the abolition of the exit tax on superannuation will benefit very few people. Most people do not have enough in their superannuation accounts to pass the existing tax free-threshold of $130,000. The big cost is the tax-free status of lump sums and annuities taken by people turning 60, with the reasonable benefit limit abolished. But there are some key questions that the government must answer if we are to advance this debate in a way that is good for the economy as well as for individuals. Will the proposals disproportionately benefit the very wealthy? Will the plan lead to a situation of different tax status for retirees over 60 continuing to work than for those below 60? Does it mean that those over 60 who can so arrange their affairs will not pay any tax at all? How sustainable is that with an ageing population? Will it lead to increases in consumption and therefore add to inflationary pressures? Could it result in people blowing their lump sum payments and coming back to claim the age pension? If it does, it is hardly a strategy to reduce the cost to the budget of an ageing population.

Australia deserves open and honest answers to these questions to properly assess the impact and to consider alternatives. We need to have the proposals that the government is talking about run through the intergenerational model to determine both the income distribution and the cost implications over 40 years. We have the model; let us put the proposals through it. The government claims that it will cause long-term falls in pension and health costs, but where is the evidence for this? Let us see it. The basic issue for superannuation is that we have to lift the contributions above nine per cent. A better way to do this, I would suggest, would be to reduce or abolish the contributions tax. We have advocated it in recent years. Clearly, abolition of the contributions tax will cost more than the government’s announced policy, but, again, it is worth considering it as a significant down payment. Senator Minchin talked about this. Has that work been modelled? If so, produce it. If not, let us do it. Let us run it through the 40-year model and see which one of them stacks up. This is a debate we have to have and, certainly, cutting the contribution tax would be the equivalent of lifting the compulsory contribution above nine per cent, with no cost to either the employee or the employer. It also represents real tax reform in relation to future, not present, earnings. It is a tax cut that goes to savings and is not inflationary. I would urge the government to produce that information so that we can have a serious debate about the best way to spend the tax cuts and reforms to superannuation as well. (Time expired).

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