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

I welcome this opportunity to speak on the Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006 and I move:

That all words after “That” be omitted with a view to substituting the following words: “whilst not declining to give the bill a second reading, the House is of the view that:

(1)

the Government’s failure to incorporate the enhanced Low Income Tax Offset into PAYG withholding schedules will significantly diminish its potential impact on workforce participation rates; and

(2)

in view of the declining rate of workforce participation associated with the ageing of the population the Government has, despite the improvements contained in the Bill,  failed to systematically address the punishing effective marginal tax rates faced by:

(a)

second earners, most particularly women;

(b)

individuals moving from welfare into work; and

(c)

middle and low income families with dependent children”.

This bill seeks to enact the key elements of the government’s budget related tax measures, including personal income tax reductions, fringe benefits tax reduction and adjustments to the capital depreciation arrangements for business. I wish to indicate at the outset that Labor will be supporting this bill. The measures contained in the bill will provide long-overdue relief to taxpayers and represent modest taxation reform. While these proposals are no doubt beneficial, it would be fair to say that the public have found these proposals underwhelming. Taxpayers recognise that every cent of their tax cuts have already been eaten up by rises in petrol prices and increases in interest rates. Then there is the deep level of unease about this government’s extreme industrial relations proposals that threaten their wages, conditions and penalty rates and even their jobs. No amount of tax cuts could possibly make up for what they could lose from these extreme industrial relations changes, a topic I intend to return to shortly.

There is also another reason for the relatively poor reaction to the budget and the tax reductions we are debating today. Put simply, the measures contained in the budget failed to invest adequately in future prosperity. The budget failed to use the once-in-a-generation opportunity provided by the commodity boom to invest in future drivers of growth. It was a budget that was more about spending the proceeds of prosperity rather than building on it. If we are to meet the economic challenges that are ahead—the reordering of global trade led by China and India, and the ageing of our population—we need visionary policies which go to the heart of lifting our flagging productivity and below standard levels of workforce participation. The way we invest in the skills and education of our people is central, along with our way of addressing the infrastructure bottlenecks that are holding the economy back and increasing the cost of doing business.

Taxation policy is an important component of all this. The operation of our tax and transfer payments system impacts heavily on levels of workforce participation. It also impacts on savings and investment decisions. Capital accumulation and skills acquisition are both affected by our taxation system. When it comes to these factors, there is no doubt that the measures in this bill represent an improvement, albeit an incremental improvement, of the situation. But before discussing the detailed impact of these measures, I believe it is worth while to see where we have been and to apply some scrutiny to the tax record of this government.

The coalition claim they are a party of lower taxes and enterprise. Nothing could be further from the truth. They are the highest taxing government in our history and the government’s record on effective marginal tax rates is completely at odds with their claim to be a party of enterprise. This is not a party of choice nor a party of enterprise; this is a party that runs a taxation system that discourages choice and enterprise. Before this budget this government held the mantle of the highest taxing government in our history. The origins of this government’s record tax take can be traced back to their first four years in office. For four years the government refused to cut taxes. For four long years, as nominal incomes rose, this government did not give a dollar of personal income tax relief. Taxes were ratcheted up on individuals prior to the introduction of the goods and services tax. Personal income taxes as a share of GDP increased from 11.9 to 12.9 per cent of GDP between 1995-96 and 1999-2000. For a single taxpayer on average earnings their average tax rate—that is, the share of their wages lost in tax—jumped from around 24 per cent to 26 per cent. Finally, when the government introduced the GST in 2000-01, it was accompanied by significant income tax cuts. However, they were eroded by the impact of the goods and services tax.

After taking into account the impact of the GST and the bracket creep netted between 1996 and 2000, you see this government has been continuing to chase its tail on the personal income tax burden. From 2000-01 to this financial year we have seen four rounds of tax cuts introduced—most incremental. The budget papers show that this year, 2005-06, personal income tax receipts will amount to 11.8 per cent of GDP. Remember that in 1995-96 the equivalent figure was 11.9 per cent of GDP. I would ask members to reflect on these two figures—10 years and virtually no change in the burden on personal taxpayers.

This is indeed a startling fact because in this period we had the GST introduced, so we had virtually no change in the personal tax burden plus a 10 per cent GST, which was supposed to have been accompanied by a sustained reduction in personal income taxation. We were told that the introduction of a broad based goods and services tax would reduce our reliance on direct taxation. It did not. So, despite the introduction of the GST, personal income tax in 2005-06 will be as large a share of GDP as it was when the Howard government entered office in 1995-96.

The Treasurer has recently accused the states of double taxation when it comes to the GST, yet these figures make it clear that he stands condemned on his own charge—a common feature of this Treasurer. Personal taxpayers are paying as much tax as they did in 1996 and they now face the additional burden of a GST. Indeed, we know some taxpayers have been paying higher income taxes as well as higher indirect taxes from the GST. That is the double taxation from Treasurer Costello. Higher personal income taxation and a GST—that is his record.

An analysis of the government’s tax cuts to date shows reductions in average tax rates only for those earning somewhat more than average weekly earnings. If we take someone on the average wage, we know that in 1996 their average tax rate was 24 per cent. This year, 2005-06, their average tax rate will be 24.8 per cent, including the Medicare levy. The difference adds up to about $470 a year. So this is not a government that stands up for the battlers when it comes to personal income taxation. When it comes to personal income taxation, they do not defend them; they create them, and that is what these figures show. Is it little wonder then that average wage earners in Australia are underwhelmed by their $9.80 weekly tax cuts announced in this year’s budget? They are not fools.

In contrast to the coalition’s approach to personal income tax, Labor can claim credit for significant, real personal income tax reductions. When in office Labor delivered seven rounds of tax cuts: on 1 November 1984, 1 December 1986, 1 July 1987, 1 July 1989, 1 January 1990, 1 January 1991, and 15 November 1993. Having inherited a top marginal rate of 60c in the dollar from Treasurer Howard, Labor reduced that to 47c, along with broadening the tax base through the introduction of the fringe benefits tax. A key failing of the Howard government has been its failure to properly integrate personal income tax reform and transfer payment reform. The failure to do this has resulted in the persistence of high effective marginal tax rates and in some cases the worsening of effective marginal tax rates.

The OECD has been talking about this for a long time, condemning on many occasions the government’s record. According to the OECD annual report Taxing wages, a single-income family with children, on average earnings, faced an effective marginal tax rate of 35.7 per cent in 1995. This year the same family will face an effective marginal tax rate of 51.5 per cent. That is far higher than the top marginal tax rate experienced by higher income earners. Such a family keeps less than half of their additional earnings, whether it comes from overtime, investment earnings or promotion. So much for the Treasurer’s free enterprise! These families do not give up their weekends or their family time to have Peter Costello’s hand so deeply in their pockets that they are losing in excess of half of their additional earnings. That is this Treasurer’s record.

So how do the budget tax cuts stack up? Given the background that I have outlined, we are now in a very good position to assess the context and merits of the measures we are debating today. Labor’s considered view is that they are a welcome improvement but they fall far short of addressing many of the problems created by our complex and unfair tax system. There is no doubt that the tax cuts we are debating today will deliver some long overdue relief to taxpayers. However, for the most part, taxes on middle-income earners are too high. An analysis of the tax cuts reveals particular improvements for those earning between $25,000 and $35,000 per annum. However, significant relief generally does not flow until an annual income of over $75,000.

That said, the distribution of the tax cuts in this budget is fairer than those announced last year. This year, half of the value of the tax cuts are delivered to taxpayers who earn below $50,000 and half to taxpayers who earn above $50,000. In last year’s budget, only one-third of the tax cuts went to those earning under $50,000; two-thirds went to those earning over $50,000. This time, taxpayers who earn up to $80,000 a year will gain two-thirds of the tax cuts on offer. A taxpayer on $30,000 gained $17.50 per week from this budget compared with $6 per week in last year’s budget. So at least we shamed the government into introducing some greater fairness into the system, although it still has a way to go.

Most taxpayers will certainly need every cent that they have received in these tax cuts, if not more, to pay for the recent increases in petrol prices and interest rates, and that is before they get to the government’s obscene and extreme industrial relations laws. Increases in petrol prices and interest rates could have added more than $20 a week to the expenses of typical households in recent months, and on top of that is the impact of the government’s extreme industrial relations changes. I will table our analysis of the tax cuts, which provides all the detail required.

That brings us to industrial relations. What is more worrying to households are the government’s extreme workplace laws. It is of course impossible to divorce the changes in personal taxation from its recent changes to wage-setting arrangements. The government’s intention with its so-called Work Choices policy is to drive down wages and conditions. We have seen that amply demonstrated in this House during question time in recent times. For an example of this, we need only look at the Spotlight situation highlighted yesterday. This parliament has heard that the AWAs offered to workers have stripped them of just about every award condition and offered them just 2c per hour extra for the loss of a large number of conditions.

Under the award, an employee working 38 hours a week could earn up to $33,000 a year with penalties. Yet, under the AWA, the same work would result in an annual wage of $28,256. That is a loss of up to $91 a week, an amount that dwarfs the tax cut of just under $20 a week for someone on that income. So average taxpayers out there, and punters working at places such as Spotlight, still have a very high tax burden compared with when this government was first elected. They are facing rising interest rates, they are facing rising petrol prices and now they have this threat to their take-home pay. And this is not an isolated case.

Evidence given at the Senate estimates hearings by the Office of the Employment Advocate suggests that what has occurred with Spotlight is widespread. Something like 6,263 AWAs have been lodged with the OEA since Work Choices commenced on 27 March. Of those AWAs sampled, these are the outcomes: 100 per cent excluded at least one protected award condition; 64 per cent removed leave loadings; 63 per cent removed penalty rates; 52 per cent removed shiftwork loadings; 40 per cent lost gazetted public holidays; and 16 per cent excluded all award conditions and replaced them with the government’s legislated minimum standards. With outcomes such as these under the government’s new workplace laws it is little wonder that middle- and low-income earners are—

Phillip Barresi (Deakin, Liberal Party) Share this | Link to this | Hansard source

Order! Member for Lilley, I have read the amendments that you have moved and I would ask you to tie your comments into those amendments.

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

I certainly am, Mr Deputy Speaker. I am talking about the take-home pay of hardworking Australians who pay tax and go to work to earn an income that they can live on, and their living standard is a function of what they earn in the workplace and how much tax they pay to the Howard government. At the moment, the miserly tax cuts that many of these lower paid workers were given have been gobbled up by the attack on their wages and working conditions. Nothing could be more pertinent to this bill than those two features of the Howard government’s attack on their living conditions. Nothing could be more pertinent to this bill than the impact of tax and its interaction with the government’s extreme industrial relations legislation.

The tax cuts in this bill for high-income earners are significant—principally, the measure to reduce the top marginal rate from 47c in the dollar to 45c in the dollar above $150,000 per annum. As a consequence of these changes, our top marginal rate is now much closer to the OECD medium. That is a positive outcome from the perspective of having an internationally competitive taxation system, but what is worrying is that the tax cuts for most workers can be swallowed up many times over by the savage assault on their wages and working conditions. That is the point. What is left in the hand after they pay tax on earnings, which are diminishing for the many workers who are subject to vicious AWAs such as we have seen at Spotlight?

That brings me to work incentives. Labor believes it is not just the high-income earners who deserve incentive. The tax measures we are debating today fail to systematically address the high effective marginal tax rates that plague our tax transfer payments system. It must be said that most of the elements adopted by the government to ameliorate the worst work disincentives mirror those proposed by Labor over a year ago when there was far less room in the budget for substantive reform. For taxpayers on low incomes—that is, those moving from welfare to work and the many second-income earners—the main change is a new effective tax-free threshold of $10,000, delivered through a new $600 tax offset. This is a big improvement—indeed, we put it forward last year—but it is worth while putting it into perspective with the problem it is trying to address. For taxpayers earning less than $10,000 per annum, effective marginal tax rates fall by up to 15c in the dollar by removing the overlap of tax and withdrawal of cash benefits. However, the taper range for social security allowances and family tax benefit part B extends further, up to roughly $20,000 per annum. Over this income range, an EMTR of around 70c in the dollar can still apply. So, while work incentives are improved for those earning less than $10,000 a year, they remain poor for those earning between $10,000 and $20,000 per annum. That is not a good outcome—nor is it a substantial income.

Also blunting the budget’s impact on workforce participation is the government’s decision not to incorporate the new $600 tax offset in fortnightly PAYG withholdings. Instead, it will only be paid when tax returns are lodged at the end of 2006-07. A lot of people on low incomes are in for a rude shock. They are going to be expecting a fortnightly tax cut, but it is not going to be there. These people face the rising costs of petrol and groceries and the difficulty of getting to work. The cost of all these things keeps going up. The government says, ‘While prices go up on a fortnightly basis, we’ll give the offset to you in a lump sum at the end of the year’—as if people want to suspend eating for a year or suspend all other costs for a year. Costs happen regularly. This government has decided in a very mean and narrow way to deliver this tax relief to low-income earners as a lump sum at the end of the financial year, when they need it on a fortnightly basis, during the year, to meet the rising expenses of life.

Of course, the government’s failure to provide this tax relief on a fortnightly basis will almost certainly reduce any expected behavioural response, as those who stand to benefit will not notice any improvement in their take-home pay each fortnight—precisely when they are making judgments about whether a return to work is worth it. It will be felt especially by mums returning to work who use child care. Out-of-pocket child-care costs often make the biggest dent in their take-home pay, yet the tax relief contained in the budget will not be available each fortnight to help offset it. This is a repeat of the debacle of the government’s 30 per cent rebate for out-of-pocket child-care costs promised 18 months ago. Not one cent of that rebate will be delivered until after 1 July this year. I do not know whether this government understands how people live—if it provides support solely in one-off payments at the end of the year.

Before the budget, Peter Costello’s tax system punished mums who work, and that remains the case after the budget. Yesterday at estimates we had confirmation from Treasury officials that the decision not to incorporate the enhanced low-income tax offset into fortnightly tax withholdings will reduce the behavioural impact of the measure. The Treasury itself has admitted that the government’s decision to do this on a yearly basis will not enhance workforce participation, which the Treasurer has previously claimed in this House remains the government’s No. 1 priority. As usual, the government says one thing and its policy heads entirely in the other direction. This is one example of where the tax measures announced last week fall short of systematically addressing high effective marginal tax rates.

Middle-income families will still face a tax grab on extra earnings of 51.5c in the dollar, well above the new top rate of 45c, because the increase in the family tax benefit part A threshold shifts taper zones but does not reduce them. Also, despite the changes in the budget, single-income families with children will still face a staggering EMTR of between 82 and 98.9 per cent on annual incomes between $25,000 and $35,000. For a family—and this is a stunning figure which shows the narrowness and meanness of the Howard government—on $25,000 a year, these absurd disincentives mean they will keep less than $800 of a $10,000 per year increase in earnings. If that were happening to high-income earners in this community, there would be a riot. This government is very strong in taxing people on low incomes and handing out punishing disincentives but very weak in delivering the reforms that are required to enhance participation and deliver sustained financial security to families who are struggling to balance work and family life.

That brings me to capital depreciation measures, a positive measure in the bill we are debating today. Most assets are now depreciated on the basis of their effective life. This means that the Commissioner of Taxation describes the effective life of an asset to be over when the asset can be written off. Two methods are generally available: the prime cost method, which divides the cost equally over each year of an asset’s life; and the diminishing value method, which allows a taxpayer to claim a deduction of 150 per cent of the written-down value of the asset. Under the pre-budget rules, the deduction in the first year is 150 per cent of the prime cost value and in the second year it is 150 per cent of the residual value—that is, the purchase price less the write-off in the first year. Although the asset is depreciated more rapidly in the earlier years, the same net reduction applies over the effective life of the asset. The government has now increased the rate for the diminished value method to 200 per cent so that deductions will be even more front-end loaded over the life of the asset. This is effectively a form of accelerated depreciation. Labor supports it given the importance of capital deepening in boosting productivity.

There was certainly significant scope in this budget to embark on a process of significant and staged tax reform. When the Treasurer released his Mid-Year Economic and Fiscal Outlook in December, it projected budget surpluses of $42 billion over four years. By the time the Treasurer delivered the budget three weeks ago, the budget envelope, before any new tax or spending measures had been announced, had swelled to $93 billion over the same period. As jackpots go, that is a huge increase—an increase over the period from December to May of $51 billion.

Never before has a Treasurer been presented with such an opportunity to shape our economic future. In the area of tax, the option was certainly open to the Treasurer to announce significant and staged reform, and he did not. There was no vision—no plan for where our tax system should be in 10 years; no plan to fix, once and for all, the high effective marginal tax rates that are holding back workforce participation and undermining the financial wellbeing of too many families in our community; and no proposals to simplify the tax system or make it fairer. Despite the positive and long overdue measures in this bill, middle Australians are still taxed very heavily. When they put in they do not necessarily get enough back. Families who work hard and try to get ahead deserve to see some reward from their efforts. This is particularly the case for second-income earners, who often re-enter the workforce to help pay off the mortgage or meet school fees.

A couple of weeks before the budget, the Treasurer said in a speech to the National Press Club that he wanted to see Australian society and the Australian workforce become the most female-friendly in the world. What we actually see, with the continuation of these high effective marginal tax rates and the fact that they have been made worse in some cases in this budget, is a Treasurer who operates a tax system which is one of the most unfriendly to females in the Western world.

When second-income earners, who are principally women, lose anywhere between 50c and 80c of every additional dollar they earn, these high tax grabs really slug the female workforce, who predominantly earn less than men, who are predominantly looking for better hours of work which are family friendly, who frequently have less choice about how they do that work and who frequently face much greater stress in trying to place their kids in affordable care or in some arrangement which is consistent with their work hours. It is simply obscene when the Treasurer goes to the Press Club and claims he wants to make our tax system and our society the most female friendly in the world and then leaves in place a tax system which punishes their additional participation in the workforce when they want to do a few extra hours to help the family to get ahead, to buy the school uniforms or to set themselves up to deal with the educational expenses of their kids—to do that something extra for their family to move ahead. The government has designed a tax system which really hits those people for six.

So there can be no false claims about the government being female friendly when it comes to tax or society more generally. That is particularly also the case when you look at what is occurring, or not occurring, in child care. We can see the broad sweep of what is happening with their extreme industrial relations changes and how the people who are going to suffer most and first and hardest are those low-income earners, predominantly women who are not necessarily working full time. This government cannot claim to be family friendly when you combine the impact of the IR laws and the tax burden, particularly on middle- and low-income earners, over the life of the government. The government cannot claim to be friendly to low- and middle-income earners and certainly cannot claim to be all that friendly to families. And they most certainly cannot claim to be female friendly when it comes to taxation.

It is not good enough that they have left in place a system where second-income earners lose 60c, 70c or 80c out of each dollar of their additional earnings. Further tax reductions along with child-care reforms are needed to improve incentives for second-income earners. Such reductions will also benefit individuals moving from welfare to work, who also face high effective marginal tax rates of 70 per cent or more. That is a whole story in itself—what the government is doing to people who are attempting to stand on their own two feet by moving from welfare to work. They are attacking their incomes, not just through the industrial relations system but through some very mean, narrow and ultimately unproductive changes to the welfare system which will really punish many people in vulnerable situations.

In a sense, this bill sums up so much of what is wrong with the Howard government. Its failure to invest for the future by not introducing the incentive into the tax system that is required, along with its failure to invest in the skills of our workforce and the education of our kids and our future workers, sums up so much of what is wrong with the government. If we do not attend to these problems, prosperity for this country well into the future cannot be guaranteed. If we are going to guarantee prosperity for the future, we have to invest in it. We have to put incentive in the tax system to enhance participation. The Treasurer’s budget speech did not mention the word ‘participation’ even once, and you can see why when you see the sort of perverse outcomes that still remain in the system despite the once-in-a-generation opportunity the Treasurer had to fix up these problems. That is why I have moved the amendments circulated in my name.

Phillip Barresi (Deakin, Liberal Party) Share this | Link to this | Hansard source

Is the amendment seconded?

Anthony Albanese (Grayndler, Australian Labor Party, Deputy Manager of Opposition Business in the House) Share this | Link to this | Hansard source

I second the amendment. The fact is that the highest marginal tax rates in this country are paid by people moving from welfare to work. The latest budget failed to address that. When there can be a 70 per cent loss on additional earnings of people moving from welfare to work, you have a situation which is long overdue to be addressed. We hear a lot of rhetoric about this government being family friendly. That is why this amendment to the Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006 seeks to point out that the government has simply failed when it comes to addressing issues of workforce participation.

Despite the fact that there are some improvements contained in this bill, the government has not addressed three primary issues: firstly, second earners, most particularly women moving into the workforce, still continue to suffer extremely high marginal tax rates; secondly, individuals who move from welfare into work are punished; and, thirdly, middle- and low-income families with dependent children also can suffer extremely high marginal tax rates. When those issues are combined with the failure of the government to address accessibility and affordability of child care and to take into account that it is families and low-income people who are being put under pressure from the extreme industrial relations changes that the government has made, they indicate that the government should support this second reading amendment moved by my colleague the shadow Treasurer, the member for Lilley, and I commend the amendment to the House.

Michael Keenan (Stirling, Liberal Party) Share this | Link to this | Hansard source

There is not a lot that I admire about the member for Lilley, although in this instance I do admire his front. We have just heard him accusing the government of a litany of sins in the midst of the most sustained economic growth in this nation’s history. This expansion has been created in large part by the policies of this government—policies that were opposed at every stage by the Australian Labor Party. The shadow Treasurer accused the Treasurer of lacking policy vision by not outlining the nature of the tax system or how the tax system will look in a decade’s time. This is from a shadow Treasurer who has trouble articulating an economic policy for the ALP for next week and from a shadow Treasurer of a party that has comprehensively failed over the past 10 years to outline any coherent economic or fiscal policy at all.

In speaking on the Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006, I am pleased to report that the Treasurer recently took time out from his busy post-budget tour of Australia to officially open my new electorate office in Stirling. (Quorum formed) I had mistakenly assumed that the Labor Party had learnt from last year’s experience of trying to block personal tax cuts, but obviously they have not. Let the record reflect that they tried to close this House down whilst the government was introducing this round of personal tax cuts.

What is it about tax cuts that the Australian Labor Party hates so much? Mr Deputy Speaker, I can tell you that the people in my electorate of Stirling are very pleased with this year’s budget. When the Treasurer came on his post-budget tour to open my electorate office, he received a rousing welcome from local community leaders, families and business owners. The people of Stirling know that real and practical benefits will come out of this year’s budget. The Treasurer’s visit only reiterated that this budget will continue to build on the policies that have been put in place over the past decade by the government to ensure that our economy remains strong. One of the things at the heart of this strategy is personal tax reduction—putting more money into people’s pay packets—and another is improving the taxation arrangements for business so that investment and growth are encouraged.

This bill has several purposes: to reduce personal income tax rates, to increase the low-income tax offset and to decrease the amount of Medicare levy paid by low-income senior Australians. It also increases deductions of the decline in value of the depreciating business assets under the diminishing value method. The measures contained in this bill will cut personal income tax for all Australians from 1 July this year. These tax cuts are another step along the road of comprehensive tax reform—a process that was started after the election of 1998 and has provided personal income tax cuts for Australians in the years 2000, 2003, 2004 and 2005.

From 1 July this year the government will reduce the 47 per cent and 42 per cent tax rates to 45 per cent and 40 per cent respectively. This reduction will build on the cuts already made to lower income rates over the years, most recently in last year’s budget. In addition, the government will increase the thresholds so that the 15 per cent tax rate will apply up to $25,000 of income, the 30 per cent rate will apply up to $75,000 of income, the 40 per cent rate will apply up to $150,000 of income and the 45 per cent rate will apply to income earned after that. Under the workings of this bill, the government will cut the fringe benefits tax rate from 48.5 per cent to 46.5 per cent to bring it into line with the top marginal tax rate, including the Medicare levy.

The low-income tax offset will be enhanced by increasing it from $235 to $600. It will begin to phase out at $25,000 from 1 July this year, compared to $21,600 currently. This means that those eligible for the full low-income tax offset will not pay tax until their annual income exceeds $10,000. The Medicare levy low-income phase-in rate will be cut from 20 per cent to 10 per cent, which ensures that low-income taxpayers pay a reduced rate of Medicare levy. Australians who are eligible for the senior Australians tax offset will now pay no tax on their annual income up to $24,867 for singles and up to $41,360 for couples.

Overall, the greatest tax cuts have been provided to low-income earners. This is a point that seems to have been lost on the Labor Party, so I repeat for their benefit that those who pay small amounts of tax cannot receive huge tax cuts on an overall basis. These tax changes will ensure that more than 80 per cent of taxpayers face a top marginal tax rate of 30 per cent or less. The increase in the 30 per cent threshold and the low-income tax offset will provide more incentives for those outside the workforce to re-enter it and for those in part-time work to work additional hours. This is vitally important. We must always strive to make sure that we create a system that puts someone in a job in a stronger position than they would be if they were on welfare.

Under these new arrangements, a taxpayer will need to earn $121,000 to pay an average tax rate of 30 per cent. From 1 July this year the top marginal tax rate will apply to only two per cent of taxpayers. Taxpayers will not reach the highest marginal rate until they earn more than three times average weekly earnings. When this is compared to other OECD countries, reducing the top marginal tax rate and increasing the top threshold will bolster the competitiveness of Australia’s tax system. This bill will put Australia’s top marginal tax rate in line with the OECD average and the increase in the top threshold will place Australia as the 10th highest in the OECD.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

Fantastic!

Michael Keenan (Stirling, Liberal Party) Share this | Link to this | Hansard source

This is very good news. Six years ago the threshold for the top marginal tax rate stood at $50,000. If the threshold for the top marginal rate had been indexed when this government came to office in 1996, as it was under the previous government, it would now stand at only $64,000. Through previous reforms and this bill, by 1 July this year the threshold will be $150,000. (Quorum formed) Again, let the record show that the Australian Labor Party wants to close this House down whilst the government is trying to pass personal tax cuts.

This package provides $36.7 billion of benefit to Australian taxpayers over four years and it reinforces our reputation as a low-tax country. These tax cuts significantly restructure the personal income tax system to increase disposable incomes, to enhance incentives for participation and to improve Australia’s international competitiveness. Australian workers are set to benefit from these personal income tax cuts that will put much needed cash back into their pockets. In my electorate of Stirling this will mean that more than 50,000 workers on average wages can expect to get up to $40 in tax savings each month and around 25,000 workers in my electorate who are on higher incomes can expect to save up to $80 each month. This is an important saving for local workers.

More money in people’s pockets gives them more choices and allows them to start making plans for the future. Workers can choose to save these deductions or they can use them just to help pay the bills. I have heard some talk from the opposition of bracket creep in this debate. I think we need to reiterate the point that 80 per cent of Australians are on taxable incomes of less than $75,000. As people move up in income, they do not automatically move to a higher marginal tax rate under these new arrangements. The great bulk of people will move through the income range from $25,000 to $75,000 without altering their marginal tax rate. In fact, under these reforms, as I have said before, only two per cent of Australians will have taxable incomes over $150,000.

There is more to be done in the area of tax, but it has been noted by organisations such as the Australian Chamber of Commerce and Industry that these changes are a good start for future tax reform. The Business Council of Australia has stated that the changes to the personal tax system will provide additional incentives to work and to save.

Mr Deputy Speaker, if you look at the tax cuts in the context of what has happened over the past five years, this is just another part of a long-term strategy that has been implemented by this government. This is the fifth instalment of personal tax cuts, and there is more room for adjustment and reform in the future. The structure of our tax system is a vitally important element to create our national prosperity. Get the tax system wrong and you rob people of incentives to work. You rob them of the opportunity to work harder to earn more. Tax cuts are all about giving people incentives. They are about encouraging people to work overtime, to work harder, to study, to push for advancement and to try and earn a better life for themselves and their families. Tax cuts are about giving people choices and about improving the quality of people’s lives. At a local level, I would hope that this reinvigoration will have a positive ripple effect.

Under this bill, the big winners will also be our small businesses. In my electorate of Stirling we have a thriving small business network, with the Stirling Business Association being one of the biggest organisations of its kind in Australia. We also have important research and development organisations, across all fields, from aviation technology to cancer drug research. This bill will implement the budget measure which substantially improves Australia’s depreciation arrangements by increasing the diminishing value rate for determining depreciation deductions from 150 per cent to 200 per cent. This will cut business taxes by $3.7 billion over the next four years. The effect of the measure will be to provide the equivalent of a 33 per cent increase in the allowable depreciation rate for all eligible assets. This is going to increase incentives for Australian businesses to invest in new plant and equipment and it will make it easier to keep pace with new technology and remain internationally competitive. Investment is a key element of productivity growth and, therefore, of economic growth.

These changes are consistent with the government’s tax policy strategy of making sure that the tax system has a minimal effect on the allocation of resources in the economy. The measure will apply to assets acquired on or after 10 May this year and includes appropriate integrity measures to ensure assets held prior to that date are not able to be brought into the new arrangements. This means that, under the new depreciation arrangements, businesses can write off eligible assets at an accelerated depreciation rate on their diminishing value—allowing for higher deductions in the early part of the asset’s life and increasing their new present value. This accelerated allowance is offering incentives for businesses to invest in plant and equipment to improve their overall operations.

In my electorate of Stirling I would like to think that a healthy level of business investment will be reached in the coming year, as small business owners make the most of these amendments that are designed to assist them to grow their business. This bill is a help to all Australians. It redistributes surplus taxation revenues and increases the disposable income of all Australian taxpayers. It increases incentives for people to undertake additional work or to start a new business and increases productivity and employment throughout the whole economy. As we are not a low-wage economy, increasing capital investment is an important way for us to remain competitive in world export markets. The reduction in the phase-in rate for the Medicare levy for low-income earners reduces the impact of this levy on the most vulnerable sector of our community.

This bill is another chapter in the progress that has been made over the last 10 years. It is part of one of the biggest investing budgets in this country for a long time. And what a budget it was. I will just take a moment to remind the House of what it contained: a tax cut for every single Australian, a plan to simplify and slash taxes on superannuation and improvements that encourage businesses to invest and grow. This budget continues to build on the policies that have been put in place over the past decade to keep our economy strong. None of the generous tax cuts, the radical slashing of taxation on superannuation, the record spending on defence and national security, the massive investments in our road, rail and water infrastructure would be possible without the prudent management that has been displayed by the coalition since 1996. It would not have been possible to introduce this bill into the House or to have such a generous 11th budget without having had the previous 10 budgets that have steered Australia into the current economic good times. This bill, which delivers to taxpayers the surplus revenue the government has collected, is a vitally important part of that strategy. This bill is about taking the opportunity now to strengthen our economy for future opportunities and future challenges. I commend it to the House. (Time expired)

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

I am delighted to see that the member for Moncrieff is following me in this debate on the Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006 because we all recall very vividly the member for Moncrieff having a bit to say about taxation reform prior to the delivery of this year’s budget. It will be very interesting to see whether the member for Moncrieff is satisfied with the tax cuts being presented to the House.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

Very satisfied.

Joel Fitzgibbon (Hunter, Australian Labor Party, Shadow Assistant Treasurer and Revenue) Share this | Link to 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.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

So you’re opposed to them?

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

Economics 101, I say to the member for Moncrieff. Let me tell the House how these tax cuts should have been funded. These tax cuts are long overdue, and Labor support them; we have indicated that. We think they could have been designed better, but Labor support these long overdue tax cuts designed to compensate people for the higher interest rates, higher petrol prices, higher private insurance costs and all of those things which are hitting families every day. Of course we support them—in distributional terms they are much fairer than those proposed in last year’s budget. But they should have been funded out of the proceeds of our productivity gains over the last decade—the productivity gains we have not made.

When Labor left office we were enjoying productivity growth of around three per cent. In more recent times it has been between one and 1.5 per cent. This is a real issue for Australia. As Paul Keating is still fond of saying, if you have wages growth at four per cent and productivity at three per cent, it leaves one per cent for inflation—pretty simple arithmetic. But if you have wages growing at four per cent and productivity at only one per cent, it leaves three per cent for inflation. Labor broke the back of the inflation bogy but this government is bringing it back as a result of its failure on the productivity front. That is why the Reserve Bank governor has his finger poised on the higher interest rate button. This is a government that went to an election promising to hold interest rates at their current levels. Every time the Prime Minister appeared publicly he was behind a lectern which had written on the front of it ‘Keeping interest rates low’. But that will not be the case—firstly, because these cuts should have been funded out of productivity gains and were not and, secondly, because we are putting a heap of money into consumption, which is in itself inflationary. Our high level of foreign debt is still too much directed to private consumption instead of productivity improvements.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

Mr Ciobo interjecting

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

If the member for Moncrieff disagrees with that, I invite him to put his case and argue it well when he rises to speak after me. I think he will struggle on that case. How can he argue against the proposition that tax cuts will put pressure on interest rates in an environment where the government has dropped the ball on productivity gains? Is he going to deny that productivity is hovering around one to 1½ per cent? I will listen with great interest to what he has to say, because I know he does not have any argument whatsoever. He knows that a golden opportunity has been lost, and the Treasurer knows that a golden opportunity has been lost.

This takes me to the issue of forecasting. Members of the House might have been reading the Financial Review with some interest over the last couple of days because, in the Senate estimates process, Labor have been doing a little bit of a teasing out of their own to try to determine what is going on in this area of forecasting. Something very strange is happening. While there was no increase in the company tax rate, for example, in the budget, the effective tax rate on companies is actually increasing. Chris Richardson from Access Economics made the point that something strange is happening when company revenue is growing at 18 per cent and company profits are growing at 12 per cent.

We challenge the Treasurer when summing up this debate to tell us the basis on which his projections on company tax revenue are made. It is pretty simple. These increases in company tax receipts are critical to funding the tax cuts, and I think it is appropriate for the Treasurer, given the uncertainty that has been raised in Senate estimates this week, to tell us what is happening. He should tell us specifically why it is that the budget is getting an 18 per cent increase in company tax receipts, while company profits are growing by only 12 per cent. He might come in here and say: ‘This is very easy to explain. Companies, particularly mining companies, over the last year or so have been investing heavily in additional capacity to try to catch up with demand, particularly in China.’ That would explain why there would be a disparity in the figures.

Labor say, ‘If that’s the reason, we accept the explanation.’ But nowhere in the budget papers are we given any such explanation. So the Treasurer, in closing the debate, has to explain why it is that we have company receipts growing at 18 per cent and company profits growing at only 12 per cent. As I said, if it is as a result of heavier deductions which flow from the additional investment in productive capacity, we would be satisfied with that answer. But if the Treasurer says, ‘No, that’s not what it is about,’ can he tell us what it is about? It is a new phenomenon, one we have not been familiar with in the past, and I think the Australian people are entitled to an explanation. These revenue forecasts are so important, and of course we all know that revenue forecasting can be manipulated for political gain.

Senator Watson in Senate estimates hearings yesterday made the point that it is possible that real and meaningful wholesale tax reform might have been overlooked because of conservative revenue forecasts. Maybe it is time to take a US style approach and have an independent agency do the forecasting on behalf of the government, or look at the UK model of having, in parallel, an institute funded by the government also measuring these forecasts to keep the government of the day honest. (Time expired)

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

It is always a pleasure to follow the member for Hunter and, more broadly, the Australian Labor Party, especially when the member for Hunter spent a great deal of his time talking about economics 101. Those of us on the government benches always take great interest whenever the Australian Labor Party try to lecture this government on economics 101. The Australian Labor Party, as a testament to their fundamental and comprehensive understanding of economics, left our country with $96 billion of debt, an unemployment rate that reached 11 per cent—one million unemployed Australians—and interest rates that required servicing at 17 per cent or 18 per cent. Yet, despite this track record of the Australian Labor Party, the member for Hunter comes into the chamber and says: ‘Economics 101 says that this government has made all these mistakes. We’re not doing this right; we’re not doing that right.’ So, fundamentally, we should in some way be listening to the advice that comes from the Australian Labor Party rather than looking at our government’s track record.

In rising to speak to the Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006 I am pleased to highlight to the opposition the strength of this government’s performance on taxation. I have been, as the member for Hunter outlined, a strong advocate within government for tax reform. I am proud of my advocacy in calling for there to be reduced levels of both corporate and personal taxation. I am also proud of the fact that the Treasurer has listened to calls that I and others have made. In the budget the Treasurer delivered some $37 billion worth of tax cuts. In large part, this is because of his own leadership when it comes to ensuring that the Australian economy remains strong and, at the same time, ensuring that the Australian people enjoy those benefits. (Quorum formed)

We see the Labor Party’s form: once again, the Australian Labor Party comes in and starts lecturing with its dodgy Labor economics but then, when the government comes in to reinforce the efforts it has made to keep the Australian economy strong, the reaction of the Australian Labor Party is to suddenly call a quorum. I am not surprised that the Australian Labor Party feels it necessary to call a quorum because it is very clear that the Australian Labor Party would rather keep a cap on its very bad track record when it comes to economic management and try to prevent a government member from highlighting our track record.

I would like to turn back to comments that the member for Hunter made. The member for Hunter, who is a member of the House of Representatives Standing Committee on Economics, Finance and Public Administration, made reference to the fact that the tax cuts that were announced by the Treasurer were, to use his words, ‘long overdue tax cuts that the Australian Labor Party supported’. Indeed, we have seen the Labor Party say that, unlike in previous years, they are not going to vote against these tax cuts. But then, shortly thereafter, the member for Hunter said, ‘We shouldn’t be having these tax cuts, because they are placing undue pressure on interest rates.’ So, on the one hand, the member for Hunter says they support these long overdue tax cuts but, on the other hand, the member for Hunter says: ‘These tax cuts are going to put upwards pressure on interest rates. We shouldn’t be having these tax cuts.’ So we see once again the flip-flop of the Australian Labor Party, trying to argue one way and then in the very next breath trying to argue the other way.

I would remind the member for Hunter, because he sits on the House of Representatives economics committee, that the Reserve Bank governor when he last appeared before the committee made it very clear under questioning by the member for Rankin that tax cuts that kept the budget surplus between one and 1½ per cent of GDP would not place undue pressure on monetary policy. The Reserve Bank governor himself made it very clear that tax cuts would not place pressure—

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

Mr Deputy Speaker, I rise on a point of order. The governor made it clear that that was because the government each year was only returning the proceeds of bracket creep and, therefore, there was no net effect.

Peter Lindsay (Herbert, Liberal Party) Share this | Link to this | Hansard source

The member for Hunter will resume his seat. He knows that is not a point of order.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

A point of order that was only equalled by the contribution by the member for Hunter earlier. Nonetheless, the Reserve Bank governor did make it clear that, provided that the surplus remained between one and 1½ per cent of GDP, there would not be upward pressure on monetary policy. That is exactly what this budget does. It is the Australian coalition—in particular, the Treasurer, Peter Costello—that is able through careful economic management to deliver some $37 billion worth of tax cuts to the Australian people. Irrespective of whether you are a more lowly paid worker in Australia, whether you are a middle-class Australian or whether you earn a higher income in this country, you will enjoy tax cuts as a result of this careful economic management by the Treasurer, Peter Costello, and more broadly by the Howard government.

With respect to other comments that were made, I notice that the member for Hunter said, and I quote him exactly: ‘Labor has broken the back of the inflation bogy.’ How did it do that? How was it that the Australian Labor Party brought the inflation rate down? The answer is quite apparent and quite straightforward: the Australian Labor Party did it by having the ‘recession that we had to have’. You would remember, Mr Deputy Speaker, that at the time the Australian Prime Minister, Paul Keating, who prior to that was the Australian Treasurer—the man responsible for the recession we had to have—broke the back of inflation by throwing one million Australians onto the unemployment scrap heap, by driving interest rates up to 18 per cent, by not delivering tax cuts and by making sure that all Australians were penalised by the incompetence of the former Labor government. That is how the Australian Labor Party broke the back of inflation in this country. I can guarantee one thing: the people of my electorate of Moncrieff, the people of my city of the Gold Coast and the Australian people more broadly will never, ever want to go back to an Australian Labor Party that achieves some kind of success with respect to inflation by throwing a million Australians on the unemployment scrap heap, by driving up interest rates and by making sure that Australians pay a very heavy price indeed for low inflation.

What Australians want is the kind of economic responsibility that Peter Costello as Treasurer has been able to deliver, the kind of responsibility that has seen our unemployment rate down at around five per cent—the lowest level that it has been for decades. They like the fact that the Australian economy is enjoying strong productivity growth, because they know that, with an increase in the participation rate, there is going to be a flattening-out of productivity growth in terms of actual statistics. As you have more people coming into the workforce and more Australians off the unemployment queues, which this government has been able to achieve—and the Australian Labor Party knows this—they know that the reflections of productivity growth will not be large in percentage but that, when spread across that vast bulk of people moving into employment, there is strong productivity growth in the Australian labour force. But, more importantly, it has been conceded as part of this debate that the Australian economy—which is now enjoying, as I said, decades-low levels of unemployment—is being super competitive.

The member for Hunter also made reference to the fact that the taxation system is indeed a barometer for the attractiveness of the Australian economy and the incentive mechanism that it uses. If that is the case, if the taxation system provides some clear indication of the level of incentive in the Australian economy, it is very clear that there is strong incentive. The reason there is strong incentive is the same reason that we have Australians coming back from overseas and working in this country. (Quorum formed)

No wonder the Australian Labor Party languishes in the polls, because the people in the public galleries can see the stunts that the Australian Labor Party is engaging in. They see the fact that the Australian Labor Party has no relevance to ordinary Australians and so it engages in these kinds of stunts on an ongoing basis. I am not surprised that the Australian Labor Party languishes in the polls, because it has no relevance, it has no credibility when it comes to economics and it quite simply has no sense of what is important to the Australian people. There is nothing more important to the Australian people than knowing that they can have a strong family, and a key plank of having a strong family is knowing they have enough money left in their pockets at the end of the working week to provide for their family. The bill before the House does exactly that, and they know that as a consequence of this bill going through the House there will be more money in their pockets come 1 July than there would be if the Australian Labor Party were in government, and they are grateful for it.

The Labor Party, including the member for Hunter, as I said, have also said that the tax system is the driver of incentive. So the Labor Party say the tax system is the driver of incentive and yet they voted against tax cuts. In the previous budget we saw tax cuts being delivered to the Australian people. We had a lecture from the member for Hunter, and no doubt the member for Rankin will also lecture us about economic policy. So we have these people from the Australian Labor Party talking about how the tax system is the driver of incentive in the Australian economy and yet, despite this fact, the Australian Labor Party voted against tax cuts.

The inescapable conclusion is that Labor prefers taxes to be higher. Indeed, we see the member for Hunter talking about this in direct conflict with the member for Lilley. We heard the member for Hunter asking why it is that growth in deductions is rapidly outgrowing growth in revenue and how this growth in deductions is of concern, yet the member for Lilley earlier on in this debate came into the chamber and spoke at length about how he thought that this government was one of the biggest taxing governments in Australia’s history. So on the one hand the ALP member for Hunter says, ‘We’re concerned that the growth in deductions is outpacing the growth in revenue,’ and the member for Lilley, on the other hand, says, ‘We’ve got so much revenue growth under this government that we should be holding them to account.’ So once again, as we saw previously, there is the flip and the flop of the Australian Labor Party. With one breath they say one thing and with the next breath they say something else. The simple reality is that the Australian Labor Party will say anything, will do anything, in some attempt to deceive the Australian people into voting for them so that they can end up back on the government benches.

There was another question that the member for Hunter raised. He spoke about why it is that company revenues are up 18 per cent yet company profits are only up 12 per cent. He said that, if the Treasurer was able to indicate that this was a consequence of investment in plant and equipment, a growing of capacity in the Australian economy, he would be comfortable with it. That is a very large part of what is driving these numbers. There is no doubt about it. We have seen capacity growth in business capital investment across the Australian economy expanding rapidly.

But there is another point which should be mentioned, and that is the fact that Australia today is a much more competitive marketplace, so you can get increased revenue growth in companies by having increased volume but lower margins, which of course will help to reduce profits. So the reality is that we are still getting strong profit growth in the corporate sector. We are still getting strong corporate growth, but Australians are benefiting from a more open, more competitive economy, and that is also part of the reason why we see company revenues growing by 18 per cent but company profits growing by only 12 per cent. That is not a bad set of numbers at all, and it is one that all Australians will enjoy the benefits of.

In drawing to a close—given the few minutes I have because the Labor Party called two quorums—I would like to touch on a couple of other aspects. The Gold Coast, the area and the wonderful city that I have the pleasure of representing, is the small business capital of Australia. On a per capita basis, we have the highest concentration of small businesses in this country. I am very pleased by and proud of the entrepreneurial spirit that residents of my electorate have. I am pleased they are willing to roll up their sleeves and go out there and make a buck, and I support them at every opportunity. I was very pleased and delighted that this year the National Franchise and Small Business Convention gave me the federal politician of the year award. I will continue to be a strong advocate for small businesses in my electorate and a strong advocate in making sure that they can continue to make a buck. I am proud to be part of a government that makes it easier for businesses to make a dollar. In this respect, I am also pleased that, as a result of the increased depreciation rates that the government announced in this year’s budget, businesses will enjoy increased cash flow. What’s more, we can expect some of the personal tax cuts in this year’s budget to flow through the economy and into the tills of Australian businesses.

Turning to those tax cuts, this bill will see the government increase the thresholds so that the 15 per cent rate of taxation will apply up to $25,000 of income, the 30 per cent rate will apply up to $75,000 of income, the 40 per cent rate will apply up to $150,000 of income and the 45 per cent rate will apply to income above that level. In summary, it ensures that Australians will enjoy, in relative terms and by international comparison, low levels of income taxation which will put us on a par with the OECD average. It means that Australians can keep in their pockets more of what they work hard for to pay off debt, purchase something they need for their home and provide for their family. This government’s track record is strong, and I am pleased to highlight it for the benefit of all Australians as we continue to manage this economy well—and we do not need lectures from a failed Australian Labor Party.

Craig Emerson (Rankin, Australian Labor Party) Share this | Link to this | Hansard source

The member for Moncrieff finished his monologue—and it was a monologue because he could not even retain in the chamber the 30 members on his side of politics who were called into the parliament to come and listen to him. As soon as they were able to, they made good their escape and I do not blame them, having listened to that contribution. He finished his monologue by saying that this government is a low income-taxing government. Nothing could be further from the truth. This is the highest taxing, highest spending government in Australia’s history. We can come to that conclusion on the basis of income tax alone, but if we add the orphan tax, the $40 billion-plus GST, then unambiguously this government breaks the record, smashes the record, as the highest taxing government in Australia’s history. This is a government that denies that the GST is a Commonwealth tax. But ask the Auditor-General or ask the Statistician—they know it is, and they have said that. Of course the GST is a Commonwealth tax, because we are all here in this parliament debating it week after week, month after month. It passed through this parliament and then the government said, ‘We don’t own this tax,’ so it is an orphan tax.

The changes made in this budget to the income tax system constitute a small step towards income tax reform, and I would not put it any higher than that. But a small step towards tax reform should be supported, and this why Labor is supporting these changes to the tax arrangements in the  Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006. Towards the end of last year, well before the federal budget was prepared, I responded to an invitation from the Treasurer to all interested parties to lodge pre-budget submissions to give our views on what should be included in that budget. I did so, setting out a tax reform down payment, part of which—but only part—has been delivered by this government. I suggested that the 42c rate be cut to 36c. What has the government done? It has cut the 42c rate by just 2c to 40c. I suggested increasing the low-income tax offset from $235 to $625. What has the government done? It has increased the low-income tax offset from $235 to $600. I also suggested that the low-income tax offset be phased out at a higher level of income, at $70,000, whereas this government increased the threshold for the phasing out of the low-income tax offset from $21,600 to $25,000—a very small step but at least a step in the right direction.

The proposals that I put forward in that submission would have given tax relief of $12 a week to low- and middle-income earners and amounts slightly higher than that to people on incomes around $80,000 a year. Instead, the government has given income tax relief of less than $10 a week to low- and middle-income earners. We know that $10 a week is being gobbled up through the triple whammy. Take the higher interest rates. The Treasurer and the Prime Minister of this country gave the impression that there would be no increases in interest rates in this term of parliament if the coalition were re-elected. We have already had two of those and, as I will explain shortly, there is the very strong prospect of a further interest rate rise just down the track.

So the government has implemented a very modest reform proposal. I think it could have been far more innovative. I think it could have done a lot more to reduce the high marginal rates of income tax that afflict our system. It is worth looking at where those high marginal rates of income tax can be found. They can be found where people are wanting to move from welfare to work. We are supposed to encourage Australians to move from welfare to work. Both sides of politics argue that people are better off in a job, yet, instead of encouraging people to move from welfare to work, this government has erected obstacle after obstacle in their way. For example, a sole parent pensioner is going to get the shock of her life on 1 July this year. A single mother will be forced, when her youngest child turns eight, to move from the sole parent pension to the Newstart allowance. That is a $29 cut in her allowance. Worse still, the income-free area—that is, the area in which the sole parent can earn income and not lose any benefit—will be smaller under the Newstart allowance than under the sole parent pension and then the rate at which the benefit is lost will be harsher than under the sole parent pension.

The government, through its so-called welfare reforms, is still creating effective marginal tax rates of up to 75 per cent for single mothers. When you add together the lost benefits and the tax paid as single mothers seek to move from welfare to work, you get 75c in the dollar. If you then add in travel costs, and with the high price of petrol they are going up, child-care costs, and with the high price of child care they are going up, and work clothes, you get a situation where poor single mothers will be expected to work for less than $3 an hour. That is just a reminder of the approach of this government to the idea of moving from welfare to work. It is not moving from welfare to work; it is moving from welfare to welfare. What will a poor single mother do in these circumstances where she is confronted with a $29 drop in remuneration from these benefits? She will have another baby and pick up a $4,000 maternity allowance, which is set to go to $5,000 in 2008. So it is bouncing people from one welfare payment to another, with no assistance and no incentive to move from welfare to work.

Where are the other high effective marginal tax rates in the system? They are on the second earner in a family; again this is usually the mother. Under the family tax benefit arrangements there are punitive penalties for a mother who has had a baby and is at home but wants to move from home to work. The tax paid and family tax benefits lost are huge. The consequence is that around 70c in the dollar is lost. If a top marginal rate of 48.5c seems high to coalition members, surely 70c or 75c in the dollar for single mothers or for women wanting to move back into the workforce is high. But what has the government done about this? It has done very little, and in many areas it has exacerbated the problem because that is what the Prime Minister wants: he wants women to stay at home, have babies and not move back into the workforce. How do we know that? Because he pays wealthy women to stay at home. He gives them family tax benefit part B of $3,300 a year as long as they agree to stay home and not move back into the workforce.

Is it any wonder that, of any OECD country, Australia has among the lowest number of hours worked per woman? They are responding to the disincentives that have been put in place by this government. So these changes do not constitute anything but a very small step towards genuine tax reform. Moreover, they do not constitute genuine tax cuts. Why do I say that? Because for most income earners these tax changes do not give back bracket creep. I have done the calculations and, compared with 2001, people earning $40,000 will still be $15, almost $16, behind the eight ball as a result of bracket creep, even after these tax changes come into force. People on $50,000 will be $25 a week worse off, still behind as a result of the insidious effects of bracket creep. People who are on $60,000 will be more than $33 a week worse off as a result of bracket creep, even taking account of these changes, and people on $70,000 will be $23 worse off. If there is no further tax relief then the problem of bracket creep will march on and on, and the figures will become horrendous by around 2009.

My colleague the member for Hunter drew attention to the potential impact of this budget, in particular the tax changes, on interest rate pressure. He was right to raise this issue. At the time of the last budget, during my speech in the appropriation debate I warned that the way the budget was constructed was likely to put upward pressure on interest rates. This was dismissed completely by government members during the debate. But what happened? Interest rates did rise. The way in which the government could have done something this time to alleviate the prospect of an interest rate rise as a result of the fiscal stimulus would have been to cut government spending. But they did not cut government spending, other than by a paltry $2 billion over four years. But new spending will amount to $20 billion over four years. I can just imagine the discussions that took place in their Expenditure Review Committee meeting. There were not any spending cuts. A minister would have gone in with an ambit claim and would have walked out looking hangdog because only three-quarters of the ambit claim got up. That is why I say that this is the biggest taxing, biggest spending government in Australia’s history.

The member for Moncrieff reacted to the very sensible suggestion of the member for Hunter that there is no reform agenda to create productivity growth in this country. In fact the member for Moncrieff claimed that productivity growth is going strongly in Australia. He had better have a look at the statistics. Productivity growth went into reverse gear in 2004 and has barely recovered since that time. We have barely had net productivity growth since 2004. That goes to the heart of the problem: the lack of a productivity-raising agenda and the petering out of the productivity surge from the great reforms of the Hawke and Keating Labor governments. This government has not embraced a productivity-enhancing agenda, and that is why you do get inflationary pressures and that is why you do get pressure on interest rates.

On the very question of productivity growth, the member for Moncrieff referred to a session that members of the House of Representatives Economics, Finance and Public Administration Committee had with the Governor of the Reserve Bank. The member for Moncrieff said that the Governor of the Reserve Bank said that there would be ‘no problem with tax cuts’. I was the one who asked that question. The governor said that there would be ‘no problem with tax cuts in terms of an impact on interest rates’. But there is a problem with a lack of productivity growth. The Intergenerational report, released by the Treasurer in 2002, assumed that productivity growth would fall back from the record surge of 2.05 per cent per annum, created by the reform program of the Hawke and Keating governments, to 1.75 per cent per annum from 2005 and onwards. Under that scenario the Intergenerational report forecast the slowest rate of growth in per capita gross domestic product from 2010 onwards since the decade of the Great Depression. That is going back from 2.05 per cent per annum to 1.75 per cent per annum. But it has not gone back to 1.75 per cent per annum. It has gone back to zero. And worse, it has gone into negative territory and has failed to recover.

During that same meeting with the Governor of the Reserve Bank, I asked a follow-up question about the impact of the Work Choices legislation. We heard the member for Moncrieff say that the Work Choices legislation will create more jobs. I doubt that. That is the one claim this government has made for the Work Choices legislation. I said to the Governor of the Reserve Bank, ‘If it creates more employment, it can’t be consistent with productivity growth,’ and he said, ‘You’re right.’ So the big claim for the Work Choices legislation can be that it is going to either increase employment or somehow increase productivity growth, but it cannot do both. This highlights absolutely the lack of a productivity-raising agenda.

The member for Moncrieff went back into history and spoke about interest rates, inflation and the recession in the late 1980s and early 1990s. It is therefore apt that I refer to a statement that the Governor of the Reserve Bank made when he was deputy governor back in 1992. I think it is worth reading. He said:

It was clear by the late eighties that policy, including monetary policy, had to be tightened to bring a substantial slowing of the economy. The economy was growing too fast. We were living beyond our means and there was an unsustainable amount of debt financed asset speculation occurring. Some people think that if only the instruments of monetary policy had been adjusted in a more skilful and timely manner, we might have avoided a recession, but I very much doubt it.

…     …         …

… on this occasion, we had to run a monetary policy somewhat tighter than in earlier recessions and to take the risk that the fall in output would be greater than forecast. To do less than this would be to throw away the once-in-a-decade opportunity for Australia to regain an internationally respectable inflation rate.

…     …         …

It is true that we paid a substantial price to reduce inflation, but we had to do it at some stage. We have paid the cost … the task now is to maintain low inflation when we return to growth.

The member for Moncrieff ought to be careful when he invokes the words of the Governor of the Reserve Bank, because the Governor of the Reserve Bank argued formerly—I respect the Governor of the Reserve Bank, but I do not necessarily agree with him on this—that monetary tightening at that time was necessary to break the back of inflation. The trouble is that the circumstances are being repeated. You would think a government would learn from history, but again we have asset price speculation, very strong consumer demand, record current account deficits and record trade deficits—48 trade deficits in a row—and the Treasurer of this country will soon preside over foreign debt of half a trillion dollars.

When the international markets look at the value of the Australian dollar and the structural imbalances in the Australian economy when the resources boom tapers off, it is very likely that the Australian dollar will fall. What is the consequence of that for inflation? It will increase the price of imported goods. We already have strong inflation in the price of non-traded goods. It has only been due to the high dollar—together with the fact that China is producing very low-cost manufactured goods—that the price of imported goods has not risen. If the Australian dollar falls, as we expect it will, that will import inflation. Add that to the inflation already going on in the non-trading sector and you get an inflationary surge. That is why I say the likelihood is that there will be a further interest rate rise towards the end of this year. I am not saying it is a certainty, but the structural balances that were evident in 1989 are writ large again in 2006 and the government is doing nothing about it. The government has not embarked on a reform agenda at all.

I welcome the presence in the House of the Minister for Education, Science and Training. I hope you do a better job than your predecessor. Education is the key that opens two doors. One door leads to productivity growth and prosperity and the other door leads to opportunity for all Australians. With all the revenue coming in, this government has had a marvellous opportunity to invest in the nation’s future—to invest in the nation’s children, to increase our skills base, to increase the number of students going to university—and it has failed to do so. The government has an elitist attitude towards university education. For two years in a row—for the only time in the last half-century—enrolment of undergraduate students has fallen. The minister’s predecessor said to the Australian newspaper that he fully expected the number of university graduates in this country to continue to fall over the next 10 years. I hope, Minister, that you will repudiate that statement. The key to productivity growth in this country is to lift the skills base by making sure that more young people go into the trades and into university.

This is a budget of squandered opportunity. I welcome the tax changes as a very small step towards reform. We must cut those high marginal rates of income tax facing people wanting to move from welfare to work and second-income earners. Sadly, in this budget, the government has done nothing about that, so it gets a very low mark. But at least there is a positive mark, because these changes are a very small step in the right direction. The government needs to embrace a genuine productivity enhancing agenda and should lose no time in doing so.

Andrew Southcott (Boothby, Liberal Party) Share this | Link to this | Hansard source

I do not want to be too hard on the member for Rankin. He is, after all, a comic genius. But we find ourselves in a very unusual position in proposing tax cuts to the Australian parliament in that the Australian Labor Party are supporting the cuts. They have changed their position of 2005, when they opposed tax cuts. They opposed the government’s full tax cuts in 2000 that were part of A New Tax System. While there is reluctant, begrudging support for our tax cuts—

Craig Emerson (Rankin, Australian Labor Party) Share this | Link to this | Hansard source

Mr Deputy Speaker, I rise on a point of order. I think the high standards of the parliament should be upheld by members telling the truth. It is not true that we opposed the income tax cuts of 2000.

Andrew Southcott (Boothby, Liberal Party) Share this | Link to this | Hansard source

We were unable to get our full tax cuts through the parliament. An argument that is presented with this begrudging support of tax cuts for all Australians is that these tax cuts may contribute to inflation. One thing I do know is that budget deficits, such as those Labor built up, are much more likely to lead to higher interest rates than budget surpluses. Labor’s last five budgets, in the early 1990s, racked up over $69 billion of budget deficits. In that period, the budget deficits each year were 2.8 per cent of GDP, 3.9 per cent of GDP, 3.7 per cent of GDP, 2.7 per cent of GDP and, finally, 1.9 per cent of GDP. Compare that with the recent track record of the government’s budget surpluses. It is hard to argue that tax cuts lead to inflation when you have budget surpluses. We currently have a budget surplus of one per cent of GDP; 10 years ago we had a $10 billion budget deficit—in fact, in 1992 and 1993 we had budget deficits of $17 billion.

The Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006 provides tax cuts. From memory, it used to be that, once you earned over $38,000, you would move from paying 34c to 43c of each dollar in tax. Under these changes taxpayers can earn up to $75,000 and pay only 30c in the dollar in tax. (Quorum formed) Ten years ago you had to be on only 1½ times average weekly earnings before you would pay 47c plus 1½c for the Medicare levy on every extra dollar you earned. Under the tax cuts which are part of the bill we are discussing, a worker would have to be on three times average weekly earnings before moving to the top marginal rate of 45c in the dollar. In fact, the total tax for someone on average weekly earnings of $50,000 will be $11,100 per year—on average 22.2 per cent of a worker’s salary will go on tax. But, if they want to earn more through improving their qualifications, promotion or working more hours, for every extra dollar they earn they will get to keep 70c—so only 30c will go to tax. The new tax scales we are proposing are much fairer and also create an incentive for people to save, work and upgrade their qualifications. They have the choice of what to do with their money and get to keep more money as well.

When we look at the scales, we see that from nought to $6,000 the rate is nought per cent, from $6,000 to $25,000 it is 15c in the dollar, from $25,000 to $75,000 it is 30c in the dollar, from $75,000 to $150,000 it is 40c in the dollar, and from $150,000 and over it is the new top rate of 45c in the dollar. We would never have been able to propose tax rates like these without having a majority in the Senate. It has always been the case that, while some of our tax cuts have been supported, we have been unable to have a fair range of tax scales right across the board.

While these are the general tax rates, there are a number of other things for people in different circumstances. For example, in this bill there is an increase in the low-income tax offset. The threshold for the full rebate will increase to $25,000. The area where the phase-out occurs will increase from $27,475 to $40,000. The amount of the low-income tax offset will increase from $235 to $600. For those eligible for the full low-income tax offset—that is, people on incomes below $25,000—there will be no tax until their annual income exceeds $10,000.

Let us look at senior Australians—a very important constituency in my electorate of Boothby. According to the last census of August 2001, over 23,000 residents were aged over 65. That is almost one in five of all residents. Out of the 150 electorates in Australia, Boothby has the sixth highest proportion of people aged over 65. There will be a reduced amount of Medicare levy paid by low-income senior Australians. For those receiving the senior Australian tax offset, there will be no Medicare levy on people on incomes below $24,867. They will pay less than the full rate of the Medicare levy, up to incomes of $29,255.

There is also a senior Australian tax offset. For senior Australians—that is, those who are eligible to receive an age pension or a service pension and are meeting certain age criteria—who are single there is no tax on their annual income up to $24,867 and, for couples, there is no tax on income up to $41,360. This is on top of the announcements in the budget, for example, of a utilities allowance of $102.80 for every household who has a member in it who is of an age pension or service pension age.

When we look at the interaction of the tax cuts in this budget and the increases in the family tax benefit and look at, for example, a single-income couple with children, we see that couples in this circumstance have a real net tax threshold of $48,065—that is, the point at which effectively they start paying tax. When you take into account the family tax benefit that they are receiving and the tax that they are paying, the point at which their tax exceeds the family tax benefit is $48,065. This is a very important initiative of the Howard government. It is something that we have really expanded over the last 10 years and is a very important support for families with young children. One of our priorities is to support low- and middle-income families with children and to provide them with assistance by giving them the family tax benefit. We believe that they are best placed to decide how it should be spent to improve the circumstances of their family. The real net tax threshold of a dual-income couple with children is $51,000. This is the point at which effectively they are paying tax. Again, this is a very significant help. (Quorum formed)

As well as the tax cuts, the changes to the low-income tax offset and the reduction of the Medicare levy for people on low incomes, this bill also increases the diminishing value rate from 150 per cent to 200 per cent for calculating a depreciation deduction. The effect of this is to increase the amount of tax deductions due to depreciation in the first years of a business asset’s effective life. This is a particularly important change for small and medium business and should lead to new investment in plant and equipment, which is necessary for economic growth.

One of the Labor Party’s criticisms of the budget is about productivity. The government’s approach to productivity reflected in this bill has been things like the increase in the diminishing value rate to improve investment in plant and equipment for small and medium businesses, small businesses being one of the engine rooms of the economy. Not part of this bill but part of the government’s approach to productivity is the Work Choices legislation. Anyone who knows anything about workplace relations recognises that increased flexibility improves labour productivity. This is going to be the key in the future as we face an ageing population. We will not see increases in our population and our workforce is predicted to grow only slightly over the next 15 years and into the 2020s. As our workforce will be growing only slowly, it is absolutely critical that we have mechanisms that will provide ways of improving labour productivity.

Over the last 10 years since the Howard government was elected we have seen real wages growth of 16.7 per cent. We heard at the time we introduced our first changes to the Workplace Relations Act that it would lead to lower wages, lower conditions and so on. Look at our record. Our record shows that workers have never been better off. They could only have dreamt about having a Labor government that could have delivered what we have delivered through strong economic management providing very strong real wages growth in a low inflation environment.

Another argument that has been presented is that our budget may contribute to inflation. Over the period of the previous Labor government, inflation averaged 5.2 per cent. Under this government, for the last 10 years, inflation has been 2½ per cent. That is midway between the two per cent to three per cent band which the Reserve Bank uses to target monetary policy. As I said at the beginning of my speech, there is one thing I am pretty sure of, and that is that having budget deficits of $17 billion, almost four per cent of GDP, is much more likely to lead to higher inflation and higher interest rates than having budget surpluses and no government debt—having reduced government debt from $96 million in 1996 to zero and actually having a surplus in the Future Fund.

Chris Hayes (Werriwa, Australian Labor Party) Share this | Link to this | Hansard source

I rise to support Labor’s second reading amendment to the Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006 and give voice to some of the concerns of residents in my electorate who are sick and tired of seeing massive federal surpluses piling up while getting a few coins by way of tax cuts in return. I am sure that the constituents in my electorate are no different from constituents in other electorates represented in this chamber who feel that they should get out of the tax system as much as they put in. I am sure some members opposite, if they spent a little more time with their constituents, would find out how they actually felt about this so-called tax reform. Ultimately, this is not about tax reform; this is about throwing a pittance at the electorate, and particularly an electorate like mine which makes up Middle Australia, and hoping that that satisfies them while this government continues to ever expand its budget surpluses.

For the last week or so we have seen a parade of members opposite coming into the chamber and into the Main Committee to praise this government’s budget. The member for Boothby was no different. They are talking about the government’s financial record. One thing that strikes me as a little bit odd is that you have the Mid-Year Economic and Fiscal Outlook and then have a budget delivered not long thereafter where we find another $51 billion tucked away, something for the government to play with. One has got to wonder. This sofa in the Treasurer’s office must be pretty luxurious if we can discover that amount of money that can become play money for this government—money that could have been put into infrastructure and a whole range of different things that would have benefited not only electorates like mine but electorates of members opposite. But that is not what has occurred under this government. Members opposite have heaped praise on the government for these tax cuts and how they are so well deserved. The people in my electorate work very hard for what they earn. They are hardworking Australians. They are supporting families and doing a sterling job under the circumstances. To have members opposite heap praise on the Treasurer—I am sure in an attempt to jockey for positions in the pending leadership change—is selling Middle Australia short.

Members opposite continually criticise previous Labor governments, not realising that the prosperity that we are experiencing today, the great growth they lay claim to, was in fact delivered as a result of some of the actions taken by the Hawke and Keating governments—the economic vision, the great efforts in creating efficiency and initiative in that period and the efforts that supported hardworking Australians. The figures actually speak for themselves. The member for Boothby was talking not so long ago about productivity. The simple fact is that, under the Hawke and Keating governments, the average productivity growth was around three per cent. Under this government, productivity growth has been around one per cent. As a matter of fact, in 2004 it actually went backwards. If that is what they have to crow about in their financial management, it is not taking the interests of the country forward, it is not giving vision and it is not giving some excitement to the electorates at large such that they are able to think we are living in a prosperous nation which is going to deliver to us into the future.

Members opposite have the audacity to talk about the higher interest rates of the Hawke and Keating governments and they do it at a time when house prices are at record highs and unaffordable. If you use that as the measure, we are hitting an unprecedented time for those people in electorates such as mine, in the south-west of Sydney, who require two incomes to support their mortgages and to buy into that market. As I say, that is the outer western areas of Sydney. I would think that is not dissimilar from anywhere else within the country and the government has the audacity to then refer back to the interest rates in the Hawke and Keating period as if they were somewhat of a disincentive. I was able to pay my mortgage back then—I worked hard, as everyone else did—but my kids are faced with having to borrow up to half a million dollars to buy into the Sydney market, and that is taking into account their savings. Not only they but their partners have to work and commit themselves to working for another 25 years. They propose no reforms in what has been put to us. They are more than happy to sit idly by, trying to ride the wave of the resources boom while not taking any action to invest in the future, be it through education, training or investment in the nation’s infrastructure.

We saw it in this budget. In proportional expenditure the government has reduced the amount of funding going into vocational education and training. This is at a time of—one of the buzzwords around this place—a skills shortage. What are we doing? Proportionally we are reducing the amount of money going into that area. Over time this government is going to deliver higher costs for international businesses to trade with Australia, because we are cutting short on our skills and on meeting the necessary infrastructure development that is going to allow us to participate in world exchange into the future.

Members opposite should not be surprised that the tax cuts they have delivered do so little for them in the polls. They did not give them much of a bounce because they have delivered little into the pockets of real Australians. The bill we have before us today introduces the changes to personal income tax rates and thresholds that the Treasurer heralded in his budget speech as a significant restructure of the tax system. It might be a significant restructure if you are earning around $100,000, but they have not really cut it in any test as assessed by Middle Australia. I doubt very much that these are the sorts of significant tax reforms that people facing effective marginal tax rates of more than 50c are looking for out of this budget. I doubt more that they are significant tax cuts for the residents of Minto, Ingleburn, Hoxton Park and Hinchinbrook or that they are what they would be looking for in tax cuts for them and their families.

Labor’s second reading amendment notes two important points that the Treasurer seems to have neglected when he was considering this year’s budget. It importantly notes that there will be little in the way of benefit to low-income earners from the change in the low-income tax offset because it will not be incorporated into the fortnightly withholding rates. The member for Boothby tried to tell us how people on less than $25,000 will effectively pay no tax. The facts are that, when they work hard week in and week out, they most certainly will be paying tax. They will have withholding tax taken from them for their hourly work. They will have tax deducted in respect of their overtime. These low-income earners are the very people who are going to have to engage an accountant at the end of the financial year to try to get back down to the position where they can offset the low-income tax offset, because this government has not applied this on a fortnightly basis.

Secondly, Labor’s amendment points to the fact that the government once again has failed to address the problems that middle-income Australia cares about most—that is, the crippling high effective marginal tax rates that they face. I do not know how many times recently I have heard people comment to me locally that they feel that they are putting in a lot at work and seem to be getting precious little out of it. People believe they are working harder and harder to make ends meet. When you consider the composition of income earners in my electorate of Werriwa, it is not unsurprising that people feel that they have not got a hell of a lot out of this budget when they will not get a lot out of the changes to the tax rates and thresholds introduced by this bill. The most recent statistics available indicate that the average total income in Werriwa is a little under $36,000. It is estimated that 97 per cent of income earners in the Werriwa electorate in the 2000-01 financial year earned less than $78,000, more than 80 per cent of them earned less than $52,000, while more than one in four earned less than $28,800.

The residents in my electorate of Werriwa are not high-income earners, but that does not make them any less deserving of tax reform. It does not make them any less deserving of getting a break from the high effective marginal tax rates. It does not make them any less deserving of getting back out of this tax system exactly what they have been putting into it. This bill will result in the vast majority of income earners in my electorate receiving around $10 a week. They will receive only an increase of about one per cent of their disposable income. They will receive tax cuts that are spent well before they have been received. That is this government’s fantastic new deal with Middle Australia.

Let me just raise a few things. Since my colleague the member for Boothby took it upon himself to raise Work Choices, I would like to talk about Work Choices in conjunction with this new deal for Middle Australia. He claims it introduces flexibility, but what it does is take away the right of job security. It allows your boss to sack you without reason. It allows your boss to take away penalty rates and overtime rates, as we have just seen in the Spotlight arrangement. Currently, overtime and penalty rates are so important for people in the western suburbs of Sydney in maintaining their family budgets. The member for Boothby has indicated that that is one of the positives of this triumphant approach of the government. I know he did not mention Welfare to Work, but I will put that in on his behalf to complete the triumphant approach that includes this tax arrangement and Work Choices. All in all, as a tax arrangement, it ends up at around $10 for people in my electorate; but, in having been subjected to Work Choices, they now lose their job security. They now have a situation whereby their potential for wages growth has been significantly impacted upon in the negative.

To say that Middle Australia has been short-changed you would have to be rather kind. This government is presenting a deal to Middle Australia that is similar to the appalling deal that was recently imposed on new employees of Spotlight. Despite the Treasurer’s comment that tax cuts contained in the budget meant that middle-income earners would no longer be subject to bracket creep, we all know from the changes to the rates and the thresholds contained in the bill that that is just not the case at all. Anyone in this place who has done the calculations—and I have done a breakdown of people in my electorate—knows that that does not stack up. A typical income earner in the south-west of Sydney on around $50,000 a year is expected, if wages continue to grow at the current rates, to pay more in bracket creep than they will get in tax cuts over the next 10 years. That is on top of the government having done nothing in this bill to address the effective marginal tax rates faced by middle-income Australians. As I say, over the next 10 years, if wage growth continues, they will have paid more in bracket creep than they will have gained from these tax cuts.

Just relating that back again to what the member for Boothby had to say, he waxed lyrical in discussing the wages growth that has been experienced over the last 10 years, but what he did not say—and he made a point of calling the overlay of Work Choices the flexibility needed—is that this government is backing itself in on containing wage growth in the foreseeable future. This is not about continuing the wage growth that occurred over the last 10 years; this is about trying to address the problem it sees as existing by containing wage growth, by cutting wages, by cutting overtime, by cutting penalty rates and saying it can contain the impact on effective marginal tax rates.

We know that is wrong. We know that this is simply a plank in the government’s overall approach which seeks to exploit middle-income Australia. It seeks to exploit their situation not simply by looking at their household budgets and how they are going to maintain paying their mortgages, their rent, their car payments and matters that are affected by interest rates changes or alternatively affected by higher petrol prices but also at the same time by directing their concerted efforts into containing the growth of wages and conditions in the immediate future through the introduction of Work Choices. Embarrassed as it might be about Spotlight and the abattoirs at Cowra or Naracoorte, this is what is happening. As all those organisations have said, ‘We are only doing what the government is allowing us to do.’ That is precisely the strategy that is being developed in this place.

I mentioned earlier that people are regularly telling me that they face a tough choice when they are offered a little bit more overtime because they have to weigh up the cost of the benefits that are taken away from them, particularly when they look at the effective aspects of the taper as it applies to family tax A. People are telling me that they keep working, and working hard, but that they feel they are not getting ahead. They work hard and they work longer hours, but they do not seem to be getting any more in their bank account and, at the end of the day, their spending probably remains the same—although it has probably increased when you take into account their mortgage, their credit card, repayments on vehicles, petrol costs and child care, which have all increased over the recent period of time.

These people are describing the problems associated with high effective marginal tax rates. They are describing the problems they face working and paying tax in a system that does not give them back what they put in. The tax system is a reverse incentive. It discourages people from trying harder. It discourages people from working extra hours in overtime or in other ways trying to add extra income to the family budget. Middle-income families—families on meagre incomes, between $40,000 and $65,000—are facing effective marginal tax rates of 51.5 per cent. This is the level at which the tax and welfare systems collide. These are real barriers and real disincentives, which should be addressed by any real tax reform. The tax rate for those on incomes between $40,000 and $65,000 is a whole lot higher— (Time expired)

Luke Hartsuyker (Cowper, National Party) Share this | Link to this | Hansard source

It was with some amusement that I heard the member for Werriwa trying to claim some reformist zeal with regard to the activities of the Australian Labor Party. He has not been in the House very long. It has only been since the previous Leader of the Australian Labor Party headed off to take up a life as a leading author and write interesting books about the current Labor crop and some of their predecessors. Members opposite claim a reformist zeal, yet in my time in this House every time a reform is proposed, they oppose it. They have opposed everything this government has tried to do to build a stronger Australia. They oppose things this government does to try to return tax to taxpayers.

The Leader of the Labor Party spoke against and voted against our tax cuts. He learnt his lesson because he was marked down very badly. It was an interesting strategy for the Australian Labor Party to vote against tax cuts—it was a very bad strategy. It was a bit like saying that the $600 family payment was not real money—a strategy which had the paws of the member for Lilley all over it—that $600 per child returned to families was of no use, as though you could not buy clothes for children with $600 or that $600 could not assist in providing a holiday for a family. Not much credibility there, just as there is not much credibility with regard to the alleged reformist zeal of the members opposite. (Quorum formed) The members opposite claim reformist zeal. They talk about reform, but they always vote against it.

The Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006, which is before the House today, implements some of the key elements of the coalition’s ongoing tax reform strategy, continuing to focus on the restructuring of the personal income tax system, increasing disposable incomes for all Australians, enhancing incentives for workforce participation and improving Australia’s international competitiveness. It is the view of those on this side of the House that when government can meet its responsibilities to the community then funds available after that should, wherever possible, be returned to the taxpayer. That is what is being implemented through this legislation. This legislation involves cuts to personal income tax through the raising of income tax thresholds and a reduction in rates. It provides other benefits, such as improvements in relation to the low-income tax offset and the conditions of SATO—the Senior Australians Tax Offset.

How is the government able to return money to taxpayers? How is the government able to do that whilst still providing improved services? We can do that because we have been able to keep the economy strong. We have been able to assist families and seniors because we have been keeping the economy strong. We realise that there is a need to support business and to put policies in place that enable business to thrive. That is what this government is all about: getting the settings right, allowing business to flourish, generating incomes and generating wages for families, thereby allowing this government to provide services for all Australians. This government has adopted a policy of a strong surplus and this budget continues that and will deliver a surplus of $10.8 billion in 2006-07.

But what about the performance in the past of the alleged reformers across the chamber? I do not have to look too far back to see their track record. What was the government surplus in 1991-92? I wonder whether the member for Farrer is aware what the government surplus was. I looked for surpluses only to find that there was not a surplus in 1991-92. In fact, there was a deficit—$11.58 billion or 2.8 per cent of GDP. I thought, ‘No luck in 1991-92;  what about 1992-93?’  I looked again—a big daddy deficit of $17 billion or 3.9 per cent of GDP. In 1993-94, there was another $17 billion deficit. Seventeen is a number that really resonates with members opposite. We had a $17 billion deficit, and they delivered 17 per cent mortgage interest rates. It is a number that still haunts them to this day. While this government is able to run a surplus and deliver tax cuts, the opposition were able to deliver deficits and 17 per cent interest rates.

Members opposite were actually out there in the financial market competing with small business and home owners to borrow funds, pushing up interest rates. We had double digit unemployment—10.9 per cent—under the stewardship of the members opposite. If they were to repeat that sort of rate today, we would be looking at around 1.2 million unemployed—a disaster for Australian families. They broke their promises on tax cuts. What happened to the l-a-w law tax cuts? I am glad to say that this government honours its commitments to the Australian people. This government is able to deliver services and cut tax and, as I said, this legislation implements that.

The 15 per cent tax threshold will rise from $21,600 to $25,000. The 30 per cent tax threshold will rise from $63,000 to a maximum of $75,000. The 42 per cent and 47 per cent tax rates dropped to 40 per cent and 45 per cent respectively, and the threshold at which the highest marginal rate cuts in increases from $95,000 to $150,000. That is a huge increase. It reflects the desire of this government to provide incentives for people to work harder and encourage people to make this country more productive. It allows this country to have a higher standard of living, without the government placing a heavy burden on taxpayers. A single income family with two children pays no net tax until the family income exceeds $48,065. This government looks after individual taxpayers and families.

We also encourage seniors to contribute towards their retirement. There have been some welcome measures in this budget with regard to superannuation. We are fully aware of the implications of the Intergenerational reportthe very rapid ageing that is occurring in this country. There is a great need for people to save for retirement and the superannuation changes that have been announced in the budget are, indeed, most welcome. The benefits from a tax fund will now be tax free for people over the age of 60. People will be no longer forced to take their super but will be able to take those benefits when they need them. The current age based contribution limits will be streamlined. This is a great improvement in the area of superannuation. The government also is focused on the needs for people who are dependent on the age pension. The changes to the taper rate for the assets test is a measure welcomed by people dependent on the age pension and who have saved for retirement such that they have substantial assets, assets which are effectively reducing their pension entitlements. The changes to the taper rate, effective from 20 September 2007, will be welcomed by those people.

Small business is very much the subject of this budget. This government realises the importance that small business plays in the economy. Some 1.2 million small businesses drive our economic growth. They drive job creation and this government recognises that. We have made some very welcome changes in the area of depreciation, giving businesses incentives to invest in plant and equipment. Under this legislation there will be an increase in the diminishing value rate used for calculating depreciation of eligible assets from 150 per cent to 200 per cent. This means that you can write-off the cost of plant and equipment more quickly. One of the most vital elements to small business is cash flow. One thing that these depreciation changes do is improve the cash flow position of small business, enabling them to reinvest in their business and generate more jobs. I offer an example of a Coffs Harbour banana farmer who buys a new four-wheel drive which is used on a farm. It costs him $50,000 and he will depreciate that asset over its useful life. If the annual depreciation rate were $10,000, that would be increased by a substantial amount.

The improvement in the cash flow position for business is a very important element very much focused on by this government. We are also halving the incorporations fee from $800 to $400, saving businesses some $216 million over four years. We are increasing the simplified tax system average turnover threshold from $1 million to $2 million, and this will assist 65,000 small businesses. The increase in the net assets threshold for capital gains tax for small business concessions will be increased from $5 million to $6 million. There are additional funds for research and development. There are more funds for the National Skills Shortages Strategy. But I think improved depreciation is a major benefit offered to small business—a major benefit which will be welcomed by businesses generally to improve their cash flow, to improve their ability to offer employment and to allow them to be more productive.

The changes to family tax benefit will certainly be welcomed in my electorate. The maximum rate of assistance per child has increased some 75 per cent from $2,400 in 1996 up to $4,200 in 2006. From 1 July 2006, families will be able to earn $40,000—up from $33,361 in 2005-06—without having their entitlement to family tax benefit reduced. This measure will provide a substantial improvement to the wellbeing of families and provide $9.62 per week for eligible families. I also commend the budget’s extension of the large family supplement of $248 from families with four children to families with three children. As I have said, this government likes to support families. This government believes we have a strong responsibility to support families, and this government does that through a range of measures. The improvements to the family tax benefit regime and the extension of the large family supplement are important elements of that.

The budget also provided substantial investment in infrastructure. Infrastructure is a matter very dear to the hearts of people in regional and rural Australia. This government realises that without strong infrastructure regional Australia cannot flourish. This government realises that infrastructure is the backbone of driving rural and regional Australia. Improved telecommunications have been very much a focus of this government. The Connect Australia package is very much welcomed by people in regional and rural areas. We see quality telecommunications as a major driver of employment right across regional Australia, but physical infrastructure is also important. Better roads, better rail and better physical infrastructure are vital to Australia.

That is why this budget has included a substantial increase in funding for infrastructure. I would like to particularly note the $160 million being contributed by this government for the upgrade of the Pacific Highway—a vital road link between Sydney and Brisbane—which is being matched by the New South Wales state government, meaning that there is some $1.3 billion committed to the Pacific Highway up to the year 2008-09. Tragically, there has been a substantial number of deaths on the Pacific Highway. These road improvements aim to mitigate that terrible toll. These road improvements will make travel between Sydney and Brisbane more efficient and safer. It is something that will be welcomed by all members of this House.

But there is no point in upgrading road unless you upgrade rail. The investment in AusLink, as previously announced—the $450 million funding for upgrade between Brisbane and Sydney and the additional $270 million for rail upgrades between Melbourne and Brisbane—is vital. This work will aim to get more freight off road and onto rail. That is absolutely paramount. If we are going to stop our roads from clogging up and if we are going to maintain a smooth system of freight transport in this country, it is vital that rail does its share of the heavy lifting. The initial AusLink package of $450 million aimed to take 120,000 containers a year off road onto rail by 2011 through providing a new, revised signalling system, reducing grades, reducing curve radius and providing a general track upgrade. The additional $270 million provided in this budget will further enhance that package.

It is interesting to note that the New South Wales government also makes a substantial saving in maintenance by the federal government taking over responsibility for the Sydney to Brisbane rail link. By the federal government maintaining that rail line through the ARTC, the New South Wales government enjoys significant savings in operating costs in its budget. It does not mention that too often—in fact, I do not think I have heard those words pass its lips—but it is a contribution that this federal government makes to supporting New South Wales and the New South Wales government. It is a contribution that the New South Wales government is loath to mention too often.

This budget sets in place a range of measures that are going to build a stronger Australia. This is a budget that returns tax to taxpayers. This is a budget that supports families. This is a budget that supports infrastructure. These measures are vital to the future of this nation, and I commend the bill to the House.

Simon Crean (Hotham, Australian Labor Party, Shadow Minister for Regional Development) Share this | Link to 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).

Tony Windsor (New England, Independent) Share this | Link to this | Hansard source

I rise to support the Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006 that is before the parliament. Many people in the electorate of New England—and, I am sure, in other electorates as well—would have been prepared to have given up some degree of tax relief for greater spending in the health area. Many surveys have been conducted which would suggest that people are crying out for better delivery of health services—and I am fully aware that a lot of those services are through the state governments. I do not want to enter into that debate, but I want to put on record the fact that, in my electorate particularly, people have raised that issue—that, if a surplus is left over after the legitimate costs of government, some of that money at least should be delivered into the health system, particularly for the training of professionals and obviously for capital facilities.

This debate gives me the opportunity to talk about a number of tax issues, some of which are currently being deliberated on by members of the government. I am pleased again to see the Parliamentary Secretary to the Prime Minister, Malcolm Turnbull, at the table. He may well be subjected to something that he has heard before. I have to reinforce some of the issues I have raised before, because there does not seem to be any action at this time. But I am extremely confident that, with his support and recognition of these worthy issues, something will be done. I, of course, refer to the taxation treatment of the compensation/adjustment processes. As an aside, I was interested the other day that the Prime Minister referred to an adjustment package for the people of Beaconsfield. From memory, it was $8 million. The parliamentary secretary or the minister might discuss that briefly at the end of the debate. I am interested in how that money would be expended and how the taxation treatment of that expenditure would be judged by the Australian Taxation Office.

The major issue I would like to raise relates to a number of areas of income tax policy and to the personal taxation matters of particular individuals. The best, but not the only, example I can find is the treatment of compensation/adjustment moneys to people who have lost their water entitlements in a voluntary sense—although extreme pressures were applied—across a number of ground-water systems in New South Wales. Six valleys across New South Wales are taking a reduction in their water entitlements so that sustainability of the resource can be gained in the future. I am sure that most people, even though it creates a deal of hardship for those individuals, would recognise that what they are doing is for the public and environmental good and that it is for the sustainability of a resource—in this case, water.

In that situation, the New South Wales government, the Commonwealth government and the irrigators or entitlement holders themselves agreed to a compensation package of $150 million. It was a three-way package. The state would put in $50 million, the Commonwealth would put in $50 million and the irrigators would put in $50 million in kind. Bear in mind that the irrigators were giving up a lot more than what this package was about—but it was about the total sum of money that they could garner from the governments.

At the time that package was agreed to, no-one told the water entitlement holders that the Australian Tax Office would judge those payments of compensation for the loss of a capital asset as income and that they would have to pay personal tax in the year of receipt of those funds. Prior to that, accountants had been treating the payments as capital. There was no doubt in their minds and in the minds of many others—and I think also in the minds of many others within government who were wrestling with this particular problem—that the loss of a capital asset should be seen as an entitlement to be treated under the capital gains taxation umbrella and not under the income tax umbrella.

I have raised this issue with the Prime Minister on a number of occasions. To give him credit, the Prime Minister on those occasions has responded, twice in writing, to the issue that others and I have raised. He has said that, as far as the government and the tax office are concerned, compensation payments to water entitlement holders are not treated as capital loss but as income, because these people are not exiting the industry. The Prime Minister quoted a couple of examples—the dairy industry and the sugar industry—where essentially exit packages which have been put in place would be taxed under the capital gains umbrella but not under the income tax umbrella. By saying that, he was implying that these were different arrangements and you could not compare the two systems—one was for exit and the other was for a reduction in entitlement—even though some of these people are losing nearly all of their entitlement and will have to exit the irrigation industry, even though they may well remain farmers.

However, the issue goes further than that. Currently, there is another assistance package available to those in my electorate and also in the electorate of the member for Gwydir, and I have been in contact with some of these people. It is the Brigalow assistance fund. This fund was put together by the New South Wales government to assist people to adjust to sustainability of the timber resource in the Pilliga scrub and in connection with the Brigalow timber asset. I might read from the deed of release and indemnity with which this package has come forward. However, essentially this package is to do the same thing, which is ‘to reduce a resource to a sustainable level’, and a package to compensate those people has been put in place. Bear in mind that the Prime Minister has said on a couple of occasions now that reduction in entitlement is treated as income and exit is treated as capital.

Clause 3 of the deed of release and indemnity of the Brigalow assistance fund says that the fund is to ‘provide assistance to individual businesses that have decided to exit the timber industry as a result of the creation of the community conservation area’—which has been created in the Brigalow area in the electorates of New England and Gwydir. There is advice also that the tax office is treating as income those payments to those people to exit that industry for good sustainable and environmental reasons. That creates a degree of inconsistency of interpretation.

We have a number of issues. We have water entitlement reductions being treated as income, timber exit being treated as income, dairy exit being treated as capital and sugar exit being treated as capital. Then, only last week, the Australian Taxation Office came out with a ruling on the fishing industry for where there is a reduction in the catch—similar to these other issues—to gain sustainability of the resource for all these very good reasons. Lo and behold, that particular adjustment package will be treated as capital. So here again we get constant confusion. The only consistent part of these arrangements is the inconsistency of interpretation.

I recognise that this is a difficult issue for the government and that it is trying to come to grips with it—and I compliment it for that. But, with 30 June racing upon us, this has to be rectified within the next month so that accountants et cetera can have a consistent interpretation regarding the way these matters are treated.

There is another issue within the Namoi ground water precinct, where government money was granted to a number of irrigators. To start with, I think it came through the Namoi Valley adjustment process and eventually, to the best of my knowledge, it was subsumed into the Regional Partnerships arrangements. A number of irrigators received funds to put in a channel to alleviate the very same problem. There had been an overallocation of water and sustainability had to be arrived at. The approach of sustainability would mean a considerable loss of income-earning capacity. Therefore, the government assisted some of those people to channel water into what was called a hot spot so that the diminishment of their income-earning capacity could be alleviated. I am told—and I inquired into this under freedom of information—that the receipt of that grant of moneys was tax free, and no-one has suggested anything to the contrary. It is another degree of inconsistency—government money being treated in three different ways. In fact, I am told, in the last case, GST was paid on the grant.

I call upon the parliamentary secretary and the minister to really have a good look at this particular issue. If they are serious about natural resource management—and I think some of the aspects of the National Water Initiative and other natural resource management initiatives are positive—and about those longer term benefits being taken up, by the farm sector in particular, but other land users in general, then they must address this matter. You cannot have a circumstance where you say you are going to compensate people and come along a bit later, when the package has been put together, and say, ‘Sorry about that; we are going to tax you 40 per cent of the total arrangement.’ That means, in many cases, that the Commonwealth’s gratuity is going to be going back through the tax—

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

Cyclone Larry grants won’t be taxed.

Tony Windsor (New England, Independent) Share this | Link to this | Hansard source

The member for Hunter, a very prominent figure in tax matters, highlights that Cyclone Larry money will not be taxed—and, in my view, nor should it. But neither should these people who are giving up their assets, their income-earning capacity, for the long-term good of the nation. To trivialise these people and say, ‘By the way, on the way past we’re going to tax you. We’ll give you some money to give up half your water’—87 per cent in one case—‘but on the way past we’ll treat it as income in the year of receipt.’ That is an absolute disgrace. What about the message it sends? The member for Hotham was talking about the message on superannuation earlier—having something that encourages people to save and then taxing them on the way through. This is exactly the same sort of thing. The message that we are sending is the wrong message. If we are serious about natural resource management policy into the future, we have to address these sorts of matters.

The other issue that I would like to raise briefly relates to personal income tax. The Minister for Revenue, who is at the table, is very much aware of this. I am an admirer of the minister, but I cannot believe that he has allowed the bureaucracy to get this into a bill. I urge him to stand up against Treasury in future arrangements.

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

No, the Treasurer!

Tony Windsor (New England, Independent) Share this | Link to this | Hansard source

The Treasurer or Treasury—there are many stories about that. The issue that I raise for the minister at the table is the treatment of fuel excise rebates under the BAS arrangements. The implications to the cash flow of the farm sector must be obvious. In one of my light-hearted moments I suggested that this has been deliberately put there so that the National Party and the National Farmers Federation can claim a victory—

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

Could be; good theory!

Tony Windsor (New England, Independent) Share this | Link to this | Hansard source

I am certain that the minister will see the error of his ways here and capitulate to those hardworking ‘New Liberals’ and the National Farmers Federation, that corner store of the ‘New Liberals’, and rectify this matter. I think it is very important that it is rectified because it is obvious that the cash flow impact on the farm sector is going to be severe.

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

We need to see the bill soon to remove uncertainty.

Tony Windsor (New England, Independent) Share this | Link to this | Hansard source

I am introducing amendments to that legislation, although I am hopeful that the minister will recognise the error of his ways and change that. I cannot believe that the ‘New Liberals’ have allowed that particular area of the legislation to even get into the document. I would have thought that they would have been part of the process of determining legislation. Hopefully, under their new arrangements, they can actually be part of the progressing and formulating of legislation, because it is pretty obvious that they have not been in this particular case. Or could it be a stunt, where the ‘Old Liberals’ actually put up an issue, knowing full well that the ‘New Liberals’ will want it changed? I am hopeful that it will be changed.

The other issue that relates to taxation matters is the removal of the Fuel Sales Grants Scheme as of 1 July and the impact that that will have on the personal expenditure of country motorists. The minister would be aware that the Fuel Sales Grants Scheme was put in place to equalise the impact of the goods and services tax back in 2000. I applauded the government, as a state member of parliament, for doing that. And our good friends, the National Farmers Federation, applauded it at the time as well. That has been removed now—$270 million—and country motorists will bear the costs of that at the bowser. Contrary to the view that many in the government have put that the government are incapable of doing anything about fuel prices, that it is all a global matter and out of their hands, I believe that there is a lot that they could have done. This is a case where they are actually putting up fuel prices for one sector of the community. And that sector will be country people, who will have to pay an extra 1c to 3c a litre.

The great tragedy in this issue is that the ally of the ‘New Liberals’, the National Farmers Federation, actually came out and said that the scheme was not working and was used as an organisation to suggest that it should not be in place, that it needed to be replaced, and supported the government’s initiative. The one thing that the National Farmers Federation president, Peter Corish, did not say at the time was that farmers do not pay it. It was all very well to embrace this issue, knowing that the normal motorist in country Australia could pay it. His members were not going to pay it, but he was endorsing the removal of it so that the rest of country Australians would have to pay that additional tax.

I urge the minister to listen to what people are saying on those matters. I think he has the capacity to listen to people. I wish him well in his new job. But I also urge the parliamentary secretary, who I am sure now is fully on top of these taxation matters. He is well known for his diversity of view on tax and entitlements. He is working very hard on the state ownership of water and the transferability of water, so I am sure he should be well on top of that.

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

We want outcomes, though—outcomes!

Tony Windsor (New England, Independent) Share this | Link to this | Hansard source

The member for Hunter is quite right; we do want outcomes. The accountants in my electorate—and, I am sure, in Gwydir, Parkes and Riverina, those electorates which will be impacted by this taxation ruling—are saying the same thing: that we do require some outcomes on this issue.

Peter Dutton (Dickson, Liberal Party, Minister for Revenue and Assistant Treasurer) Share this | Link to this | Hansard source

Can I begin by thanking all those members who have contributed to this debate on the Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006. I even extend that courtesy to my old Independent friend, the member for New England, for his contribution, and I have taken on board all of his advice, as varied as it is. On a serious note, the measures contained in this bill will cut personal income tax for all Australian taxpayers from 1 July 2006. Importantly, they will cut business tax by $3.7 billion over the next four years by substantially improving Australia’s depreciation arrangements.

Personal tax cuts are another step in comprehensive tax reform that has seen income tax cut previously in 2000, 2003, 2004 and 2005. From 1 July this year, the marginal tax rates of 47 and 42 per cent will be reduced to 45 and 40 per cent respectively. In addition, this bill will increase tax thresholds, so that the 15 per cent tax rate will apply on income of up to $25,000, the 30 per cent tax rate will apply up to $75,000, the 40 per cent tax rate will apply up to $150,000, and the 45 per cent rate will apply to income thereafter. The low-income tax offset will be enhanced by increasing it up to $600 and the level of income where the offset will begin to phase out is increased from $25,000 from 1 July 2006. This means that those eligible for the full low-income tax offset will not pay tax until their annual income exceeds $10,000.

As part of this debate, there has been some mischief by members opposite on the issue of the low-income tax offset. I place on the record that the entitlement to the low-income tax offset is carefully targeted towards low-income earners and can be claimed upon assessment in a taxpayer’s annual tax return. Claiming the low-income tax offset upon assessment avoids taxpayers incurring significant debts when they have an increase in income throughout the year. Labor’s proposal to allow taxpayers to claim the low-income tax offset throughout the year will result in tax debts for taxpayers whose incomes increased throughout the year because they will have claimed too much low-income tax offset. The government has strategies to minimise the creation of tax debts, while the opposition does exactly the opposite—it wants to create more.

Senior Australians who are eligible for the senior Australians tax offset will now pay no tax on their annual income up to $24,867 for singles and up to $41,360 for couples. Overall, in percentage terms, the greatest tax cuts have been provided to low-income earners. These tax changes will ensure that more than 80 per cent of taxpayers face a top marginal tax rate of 30 per cent or less over the forward estimates period. Reducing the top marginal tax rate and significantly increasing the top threshold will improve the competitiveness of Australia’s tax system compared with other OECD countries.

Australia’s top marginal tax rate will be in line with the OECD average and the increase in the top threshold will place Australia 10th highest in the OECD. This package provides $36.7 billion of benefit to taxpayers over four years and reinforces Australia’s reputation as a low-tax country. These tax cuts significantly restructure the personal income tax system to increase disposable incomes to enhance incentives for participation and to improve Australia’s international competitiveness.

The measures in this bill will also substantially improve Australia’s depreciation arrangements by increasing the diminishing value rate for determining depreciation deductions from 150 per cent to 200 per cent. The effect of the measure is to provide the equivalent of a 33 per cent increase in the allowable depreciation rate for all eligible assets. This will increase incentives for Australian business to invest in new plant and equipment and make it easier for businesses to keep pace with new technology and remain competitive. Investment is a key element of productivity growth and, hence, of economic growth.

The increased depreciation rates under the diminishing value method align depreciation deductions for tax purposes more closely with the actual decline in the economic value of an asset, which will lead to improved resource allocation in the economy. This is consistent with the government’s tax policy strategy of ensuring that the tax system has minimal effect on the allocation of resources in the economy. Taxpayers will get the benefit of the improved depreciation arrangements for assets acquired on or after 10 May 2006. For the reasons I have outlined above, I commend this bill to the House.

Kim Wilkie (Swan, Australian Labor Party) Share this | Link to this | Hansard source

Before I put the question, I remind honourable members of their obligation to rise in their place when they seek the call. Having one’s name listed on a sheet of paper is not sufficient to expect to be called. Members must actually rise in their place.

The original question was that this bill be now read a second time. To this the honourable member for Lilley has moved as an amendment that all words after ‘That’ be omitted with a view to substituting other words. The immediate question is that the words proposed to be omitted stand part of the question.

Question agreed to.

Original question agreed to.

Bill read a second time.