Peter Hendy (Eden-Monaro, Liberal Party) Share this | Hansard source

I rise to support the Taxation Laws Amendment (Temporary Budget Repair Levy) Bill and related bills and to condemn the Labor Party for forcing this type of necessary budget repair on the Australian people. This is a package of fifteen bills that will introduce a temporary budget repair levy from 1 July 2014 until 30 June 2017. The temporary budget repair levy will apply at a marginal rate of two per cent on individuals' annual taxable income in excess of $180,000. In addition to the levy itself, the package of supporting bills contains important consequential amendments that will maintain the integrity and fairness of the tax system.

The government has an economic action strategy that will fix Labor's debt and deficit disaster. We cannot keep on borrowing $1 billion a month to pay the interest on debt. This is a budget of both saving and building. That is why we are moving spending from short-term consumption to long-term investment, including by building the infrastructure of the 21st century.

In 2017-18 there would have been a deficit of at least $30 billion under Labor, but we are drawing that back to less than $3 billion by winding back unsustainable spending. But we are doing it in ways that are responsible. Everyone is making a contribution so that we can build for the future. These tax bills are a vital part of the repair job. The underlying cash deficit is projected to be $60 billion over the four years to 2018—a vast improvement compared to the $123 billion over the four years that Labor left us. Instead of the $667 billion of debt by 2024 that Labor put into the pipeline, we will now have debt of $389 billion. This substantial improvement is built off a significant reduction in payments growth. At the time of the 2013 Mid-Year Economic and Fiscal Outlook, average real growth in payments over the four years to 2017 was to be 2.6 per cent. The average over the four years to 2018 is now 0.8 per cent.

The recent budget has stimulated a lively debate on taxation reform. These bills on taxation give me an opportunity of speaking more widely on the issue of income and corporate taxes. The tax measures in the budget have many opponents on one side and on the other side a distinctly smaller number of supporters. It was 'ever thus' with taxation. Part of the problem has been the dearth of any meaningful and substantial reform for over a decade—indeed, since 2000. And, clearly, while many of the recent tax measures can be argued for in the case of repairing the budget's bottom line or fulfilling promises like abolishing the carbon tax, I will not insult the listener by claiming that they are the be-all and end-all of tax reform. Some will argue that certain measures are actually anti-reform.

There was not any sustained attempt at tax reform in the latter half of the Howard government—not surprisingly due to the near political death experience of that government when it courageously took massive tax reform, including the introduction of a GST, to the electorate in 1998. Since then, the former Treasurer and continuing member for Lilley was one of the most quixotic treasurers in Australia's history when it came to taxation. His claim that the carbon tax was 'economic reform' defied logic and the treatment of the review chaired by then Treasury Secretary Ken Henry in 2009 was flaky to say the least. I actually did not agree with quite a few of that review's recommendations, so I am not unhappy it was largely ditched. And, while the member for Lilley would argue that one of the three recommendations that was attempted, the mining super profits tax, was a 'reform', my view is that it was both bad in theory and in practice. It obviously also precipitated the demise of Kevin Rudd in his first incarnation as Prime Minister. Clearly, whatever the merits of any particular proposal, significant tax change is fraught.

One area of the economy that is crying out for taxation reform is small business. The Australian Chamber of Commerce and Industry pre-election survey for 2013 found that more than three-quarters of businesses expressed major and moderate concerns with company tax, the compulsory superannuation levy and personal income tax. Further, small- and medium-sized firms rated the superannuation levy as one of their top five concerns, while large firms placed it well down in their list of concerns. As the ACCI commented, 'The concern of SMEs is understandable as the superannuation levy is one of the major on-costs for hiring workers, and this on-cost will increase further following the increase of the levy from the current nine per cent to 12 per cent over the corning years.'

ACCI asked businesses which taxation areas needed further reform. It found that while small business ranked company tax reductions and personal income tax reductions as their first and second tax reform priorities respectively, medium and large businesses rated payroll tax reductions and company tax reductions as their first and second reform priorities.

The recent budget delivered on two key coalition election promises: to delay the increase in the super levy and to cut company tax by 1.5 per cent to 28.5 percent. They are very welcome. In my view we should be looking to go further. Firstly, on super I think there is a strong case for an even longer suspension in any increase. I also think we should be reviewing international experience and looking at having a differential and lower company tax rate for small business. Over the years this has been implemented in a number of countries including the UK, the USA, France, Japan and South Korea.

I also think that the Rudd-Gillard-Rudd government's abolition of the small business entrepreneurs' tax offset should be reversed. Small business taxpayers with a turnover of $50,000 or less were allowed a tax offset of 25 percent on their taxable income. That benefit was introduced in the 2005 Costello budget and had little time to be tested. For those who do not like the tax measures in the recent budget, can I urge them to take part in the community consultation on taxation reform. At the election the coalition promised that we would review the taxation system within two years of coming to government and prepare a comprehensive white paper. My view is that the review should start immediately, maximising the opportunity for selling any tax reform proposals. And small business should be a key focus of the review.

However, with respect to tax reform I have more to say. I have a warning for my Liberal and National Party colleagues: speculating on increasing the revenue take from the GST is playing with fire. They are in serious danger of being dragged into a debate that does not stand up to economic justification despite all the so-called expert commentary on why it would be such a marvellous idea to increase the GST rate or alternatively expand the tax base by removing exemptions for fresh food, education or health services. I am here talking about the economic case. The political case is even potentially more horrendous. First to the economic case.

When you boil it down, most of the commentators arguing for changes to the GST are focused on increasing the tax take so that they can spend more money on their pet projects. They are not really talking about tax 'reform' at all. It is simply about extracting more money from the taxpayer. The premiers are calling for more tax revenue to fund massive increases in education and health expenditure that were promised by prime ministers Gillard and Rudd. They were always undeliverable promises, and many people said so at the time of their announcements. The premiers are being completely disingenuous on this issue. They want the Commonwealth government to wear the opprobrium of raising higher taxes so that they get the applause for spending more money. It is one of the great dysfunctional aspects of Australia's federal system.

There were two principal economic reasons for introducing the GST. First was the fact that the pre-existing indirect taxes like the wholesale sales tax were very inefficient because they taxed business inputs such that there was a cumulative cascading of taxes that added massively to business costs. This was particularly damaging to exporters and import-competing industries that were battling with businesses from overseas that were not suffering from the same handicap.

The GST or value added tax, which is its more economically accurate name, removed that double taxation burden. This was the principal economic reform and it meant billions of dollars to Australian businesses. However, it is a reform that is completed. It was long overdue but it is now done. The efficiencies and productivity benefits have already been booked many years ago—no thanks to the Labor Party, which cravenly opposed its introduction although they knew it was a necessary economic reform.

The second big economic reason for introducing the GST was that it allowed for what became known as a 'tax mix switch'. That principally meant a reduction of the revenue burden on direct, income taxes to be replaced by indirect taxes. It is argued that this is important as high marginal tax rates on personal income have a largely negative impact on economic activity, discouraging work and productivity improvements. This is well known to be the case from decades of research, like that of the OECD. The Treasury Secretary, Martin Parkinson, was making similar observations in a speech last week.

A tax mix switch was attempted in the 2000 Howard-Costello tax changes. It was also the centrepiece of the Option C proposal of Paul Keating in 1985 when he was Labor Treasurer and of the Fightback package of Iohn Hewson and Peter Reith. However, the bottom line is that it did not really work for the Howard government. At the time there were some substantial income tax cuts, but we seem to still have a heavy reliance on direct rather than indirect taxes in Australia. The reason for that is bracket creep on the income tax schedules and a heavy call on corporate income tax. Also, there was to be significant replacement of inefficient state taxes. However, a large segment of that was reneged on by state premiers. Ask Peter Costello about broken promises by state premiers—he has a fine old story to tell. That is why I would be highly reluctant about doing any future deals with state premiers on GST, given that their predecessors displayed high levels of bad faith on delivering on tax reform over the last 14 years.

The other point to make is that many of the same people who are arguing for increases in the GST to fund increased government services would immediately become the noisiest advocates for compensation through tax and welfare cuts, which would soak up most of the new GST revenues, thus defeating much of the stated purpose for a change, namely to pay for other things. I say again that most of the advocates are simply arguing for bigger government, not a more efficient tax system. I think that business organisations like the Business Council of Australia and the Australian Industry Group should shake off their naivety and be very careful about supporting such calls.

Another issue is the simplistic call for the removal of the GST exemptions for fresh food, education, health, sewerage and water, and financial supplies. Some people are claiming that these were all politically expedient decisions. Admittedly, the fresh food exemption was the price of getting the support of the Australian Democrats in the Senate to pass the GST legislation. However, it would be entertaining to see someone try and sustain an argument for taxing fresh food more heavily when one of Australia's current problems is an obesity epidemic. As for the other exemptions, they were not so much political decisions as tax administration decisions based on the difficulties of taxing these areas, especially given the heavy involvement of government in many of these sectors and the cross-jurisdictional issues in our Federation which could cause significant tax churning. They were not design flaws of the system but in fact design features deliberately taken for good, on-balance reasons. I say again: considering changes to the GST is playing with fire without significant economic benefits.

In conclusion, I support these bills, not because they are taxation reforms but because they are economically responsible and show the resolve of the government in meeting its fundamental election promise of getting the budget under control.

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