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

in reply—I would like to thank the previous speaker for his contribution. He is very knowledgeable about the area of tax and understands how important this bill is. The measures contained in the Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008 do honour the government’s election commitment to cut personal income tax for all Australian taxpayers from 1 July 2008. Importantly, it implements important taxation reform which has long been put forward by this government to position the economy for continued growth and also to modernise our economy. As uncomfortable as it is for those opposite, the key elements of these tax reforms—the increases in the threshold for the 30c rate and significantly enhanced low-income tax offsets—date back to Labor’s tax response in the 2005 budget. They were good policies then and they are good policies now. They allow Australians to keep more of their earnings and reduce effective marginal tax rates that may distort behaviour. That is a very important point, and one well made by the member for Lindsay.

The economic benefits of these important tax reforms appear to have been overlooked by many commentators who have engaged in public debate about the merits of these tax reforms in recent weeks. In my summing up, I wish to respond to some of these public comments and provide some up-to-date analysis on the impact of these tax reforms on individuals and on the economy. It is only proper that I acknowledge the vigorous public debate that has occurred in recent times.

A number of commentators have made the charge that these tax reforms will heighten inflationary pressures in the economy and will make the job of the Reserve Bank harder in tackling inflation. With respect, I completely disagree with that assessment. The argument overlooks a number of important factors that are relevant when assessing the likely macroeconomic impacts of these tax reforms, coupled with other reforms which the government is implementing.

First and foremost, the argument overlooks the fact that these tax reforms are specifically designed to increase labour force participation. That is very important. As we know, the inflationary pressures that are currently evident in the economy are a product of skills shortages and labour shortages more generally, although if you listened to the opposition you would never know that there was something like a labour shortage or skills crisis in this economy. Well, in fact, there is. Chronic labour and skills shortages are reported regularly by business as the most significant constraint on their expansion. These in turn do put pressure on wages and inflation. Effectively dealing with this problem requires strategies that both tackle the skills shortages and lift workforce participation.

The government has already announced 450,000 new skilled training places, including 25,000 which are being rolled out between now and July. Indirectly, the tax reforms in themselves increase financial incentives for skills formation because they increase the marginal gains associated with higher wages that typically flow from higher skills attainment. Added to this, the tax reforms will enhance incentives for those currently out of the labour market to re-enter the labour market. They will also result in those already in the labour market increasing the hours that they work. Analysis has been undertaken by the Treasury which examined the labour supply aspects of personal income tax reforms. It is anticipated that the tax cuts will, over time, result in an additional 2.5 million hours of work being added to the economy each week. The result of this will be approximately 65,000 additional people in the workforce.

It is worth noting that the largest effects result from the increase in the threshold for the 30c rate as well as the increase in the low income tax offset. This is very important. According to the Treasury modelling, 35,000 of the labour supply response will result from increases in the 30c rate. Twenty four thousand of the increase will result from an increase in the low-income tax offset. The reason for this is that labour supply elasticity is generally much higher for those on lower incomes, particularly for second-income earners. It is with good reason, then, that the vast bulk of the tax cuts introduced in 2008-09 are targeted specifically at this group. Almost 90 per cent of the tax cuts to be delivered in 2008-09 relate to the increase in the 30c threshold and the increase in the low-income tax offset. It is worth noting that these labour supply estimates exclude the impact of the increase in the childcare tax rebate to 50 per cent from 1 July 2008.

The impacts of these changes should not be underestimated. Cameo analysis by the Treasury suggests that, compared to the current tax and childcare settings, a second-income earner with a partner on average earnings and two young children will have their take-home pay from part-time work of two days a week boosted by 45 per cent as a result of the tax and childcare measures taking effect from 1 July 2008. That is a very substantial increase and a massive boost to the incentives for many second-income earners, many of whom are already highly skilled. ABS surveys indicate there are around 100,000 parents who would re-enter the workforce if affordable quality child care were available. These reforms aim to unlock some of these numbers.

The government’s tax reforms will of course increase disposable incomes, and we make no apologies for that. The government does not, however, accept the argument that these gains in disposable income will flow entirely through to consumption, thereby adding to inflationary pressures. By increasing the disposable income of households, these tax cuts will provide much-needed relief for working families. In particular, they will assist households to retire debt and repair their household balance sheets. In the current climate it would indeed be a rational thing for many households to do, and I certainly would encourage them to do that. This government trusts Australian families to know how best to use the tax cuts. They are in the best position to decide how to balance their household budget prudently and they will be in a better position to do so as a result of these tax cuts.

In saying that, I am mindful of the latest household savings ratio, which has remained positive for the seventh consecutive quarter. I would also like to note that gains in disposable income that flow from these tax cuts should also assist in moderating wage pressures. Workers will keep more in their hand from their existing wages and will keep more of any future wage increase than would be the case if there were no tax cuts. This effect is further reinforced by the government’s decision to incorporate half of the low-income tax offset into the PAYG withholdings. The final point that I would like to note is that the tax cuts will be progressively phased in, taking effect in three stages—from 1 July 2008, 1 July 2009 and 1 July 2010—to better match the supply capacity of our economy.

I would like to talk a little about the government’s reform goals. The tax reforms contained in this bill represent a down payment on the Rudd government’s aspirational tax reform goals. During the last election campaign we outlined our ambitious long-term reforms. Australia needs a clear destination point for the future of its tax system, not just the incremental adjustment to thresholds which the former Liberal government specialised in either at budget time or at election time.

Subject to sound growth outcomes and budget surpluses, the Rudd government has set itself a goal over six years to deliver by 2013-14 a simpler, more competitive tax system with three marginal rates of 15c, 30c and 40c. In addition, we plan to lift the effective tax-free threshold to $20,000 for low-income earners through the low-income tax offset. This will further reduce effective marginal tax rates for low-income earners, who get punished when they work additional hours. As the member for Lindsay was saying, families do not work additional hours because they lose so much of their additional income in very high effective marginal tax rates. This will further reduce effective marginal tax rates for low-income earners, including those moving from welfare to work and second-income earners. It will also improve the tax system and make it more progressive.

These tax reforms when fully implemented will bring important structural benefits. Not only will they further boost incentives for workforce participation and skill formation but they will better align our personal income tax system with the business tax system, reducing incentives for individuals to engage in unproductive arbitrage between the two systems due to differing tax rates.

Labor has a proud record of personal income tax reform. When we were last in government, Labor slashed the top marginal rate from 60c in the dollar to 47c—in 1993; cut the bottom marginal rate from 30c in the dollar to 20c—by 1993; cut the corporate tax rate from 46c in the dollar to 36c; and introduced dividend imputation to prevent the double taxation of company income. These were significant reforms.

Nothing done by the Liberals in the subsequent 11 years has come close to the quantum of tax cuts achieved by the previous Hawke and Keating governments. Instead, Australian taxpayers had to wait six years for their next personal income tax cuts, which were delivered in 2000-01. Even then, the tax cuts were, substantially, compensation for the GST, with the balance reflecting the partial return of bracket creep over the previous six years. Since then, we have seen ad hoc tax cuts which were devised without a destination point. Indeed, the OECD last night highlighted the evolution of the tax burden under the former government, and it was not a pretty picture.

The OECD report Taxing wages confirms the need for the Rudd government’s personal income tax cuts, which are fairly and squarely targeted to low- and middle-income earners. The report released provides a detailed picture of the evolution of the tax burden on the wage earners of Australia over the past seven years. In five out of eight household types, the tax burden increased over the period from 2001 to 2007. It is worth noting that the results are sensitive to the starting point chosen. As I noted earlier, the year 2000 is not an appropriate starting point because the tax cuts provided in that year were to compensate for the GST and they followed six consecutive years of no personal income tax cuts. The OECD singled out Australia as one of the few countries in the OECD which, over the past seven years, have provided greater tax cuts to high-income earners than low-income earners. This is what the OECD noted:

Across OECD countries, tax changes have tended to favour low-wage earners. But in a few countries—Australia, Canada, Germany, Iceland, Korea … tax reforms have mainly benefited higher-income groups. 

That was the conclusion of the OECD. This may have been the case in the past under the Liberals but, looking forward, the Rudd government’s personal income tax reforms will deliver proportionate benefits to lower and middle-income earners. Preliminary estimates from the Treasury suggest a so-called tax wedge on low-income earners will fall from 23 per cent, as published in the OECD report for 2007, to 20.1 per cent from 1 July this year. To this end, I table the summary results from this report, including the Treasury estimates of the tax burden from 1 July 2008 for eight household types examined in the report.

I would like to respond to the claims of those opposite that the Rudd government will hoard the taxes of Australia. This is an extraordinary claim from members of the previous government, which ran the highest taxing government in Australian history. To make it perfectly clear: the Rudd government are committed to keeping taxes as low as possible, consistent with the provision of quality public services. The government have committed to significant personal income tax cuts in the forward estimates and have outlined our aspirational tax goals for the future. We also recognise that, in the current economic circumstances, there does need to be a disciplined fiscal policy. To this end, we have committed to achieving a surplus of at least 1.5 per cent of GDP in 2008-09. This will allow the budget to move with the economic cycle and help take pressure off inflation by making the Reserve Bank’s job easier. Pretending there is no inflation problem, like those opposite, would do a great disservice to families and the economy.

The tax reforms in this bill are fiscally responsible and are designed to enhance individual incentive, workforce participation and productivity, particularly for part-time workers and secondary income earners. This will lift the supply capacity of the economy and, ultimately, help to fight inflation and prepare Australia for its future economic challenges. These tax reforms will reward the hard work of Australians whose efforts are so critical to keeping our economy strong. Importantly, the tax changes are built on the foundations of a more internationally competitive tax system that will further enhance the productive capacity of the Australian economy. I thank all those who have participated in this debate, and I commend the bill to the House.

Question agreed to, Mr Windsor dissenting.

Bill read a second time.

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