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

I am very keen to continue talking on the Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008 because it is probably the most substantial business that the government is going to transact, certainly thus far in this chamber. And that is a good thing, of course, because it was coalition policy that the government adopted following its complete lack of a tax policy in the lead-up to the election—something that I found extraordinary, as I would assume that a lot of Australians found extraordinary, going into the campaign in 2007. The Labor Party had no tax policy; all they could was to copy ours when it came out. That is a very sorry indictment on the economic credentials of the Australian Labor Party and the Treasurer.

Prior to being interrupted by question time, I was saying that it is a fundamental Liberal principle that the government collects what it needs in order to conduct the business of the Australian government and to provide the services that the Australian people expect the Commonwealth government to provide. When a government has collected excess money, it makes sense—and it is the morally correct thing to do—to return it to the Australian people. After all, they were the ones who earned it in the first place. Sadly, if you believe the Treasurer, this will be the final time that this parliament passes such substantial tax cuts. In the future, the new government are going to keep your money, because they believe they can spend it more wisely than you. I think that is the wrong policy.

We have heard a lot in this debate about the economic legacy of the previous government. It is fundamentally important to remind the House of just how impressive was that legacy. The policies of the previous government created 2.2 million jobs. That is an extraordinary figure. The policies of the previous government eliminated all government debt—the $96 billion that we inherited when we came to office. The Australian people prospered during this time. Growth in real wages grew by 21½ per cent. There was a doubling of household wealth. There was a record high participation rate in our economy. We delivered the highest number of surplus budgets of any government in Australia’s history and the lowest number of days lost to industrial stoppages.

Contrary to the nonsense that we are hearing from the new government—which obviously has a very cunning strategy to pretend it did not inherit an incredibly strong economy—the Australian economy, as characterised by such independent bodies as the OECD, is one of the strongest in the world. It was called ‘the wonder down under’ by the Economist magazine. Few of our trading partners find their economies in such a robust condition.

Probably my favourite indicator from the time of the coalition government—and this is a wonderful indication of how successful the economic management was in the Howard-Costello years—is that when we came to power in 1996, on a per capita basis Australia was ranked 12th. In a sense, we were the 12th richest country in the world. Over time there was a progression. In 2001, we became the 10th richest country per capita in the world. That means that the Australian people were getting richer compared with our trading partners. Again, tough but necessary decisions were made—for example, reforming the taxation system—and we achieved ongoing success. By 2005, the Australian people were the eighth richest people on the globe. By the conclusion of the Howard government, the Australian people were the seventh richest people per capita in the world.

So we inherited a situation where Australia was the 12th richest country in the world and, by the time we left office, Australia was the seventh richest on a per capita basis. That is a pretty strong legacy. Let’s stop this snake oil that the government is peddling—this nonsense that it has not inherited a tremendously robust economy. It is absolute nonsense that the government has not inherited a very strong fiscal position. Let’s stop that nonsense and acknowledge that the Howard-Costello years were golden years for the Australian people and for the Australian economy.

I have only a number of minutes left, so I will conclude my remarks. The coalition strongly supports this bill. It is the most important thing the government has done since it was elected. Of course, it is a complete rip-off of coalition policy. What it will do, very happily, is create jobs. It will provide an incentive for more people to go into the workplace. It will benefit low-income Australians, and it will benefit the Australian economy as a whole. It is the right thing to do. It is a tremendous shame that it is the last time whilst this government occupies the Treasury bench that we will sit in this parliament and return to the Australian people surplus moneys that the government has raised, as is right and proper. I support the bill, and I lament the fact that it is the last time we will be passing a bill of this nature until we get rid of this government.

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

Today I speak in support of the amendments contained in the Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008. These amendments will cut personal income tax for all Australian taxpayers from 1 July 2008 and will honour another of the Rudd Labor government’s commitments. Labor supports real and genuine improvements to our system of taxation, and these tax reforms are designed to reward the hard work and crucial efforts of Australians in keeping our economy strong. Quite frankly, these adjustments are a down payment on a more internationally competitive tax system that will enhance the economy’s productive capacity and help attract and retain highly skilled workers in this country.

Lifting the supply of labour is a key component to the government’s five-point plan to tackle inflation. We know that labour shortages are now widespread. Employers in my electorate of Werriwa are frequently reporting that labour shortages are the No. 1 constraint to their businesses expanding. If you put that in a national context, it is also the factor which is imposing economic constraints on our economy and putting pressure on inflation; and as a consequence we are seeing a rise in interest rates. The government’s tax reforms will boost participation in the labour market, and we have long championed that as a cause.

In line with Labor’s tax plan, which was issued in the lead-up to the election, this bill will: firstly, amend the Income Tax Rates Act 1986 to reduce personal income tax; secondly, amend the Income Tax Assessment Act 1936 to increase the maximum amount of low income tax offset; and, thirdly, amend the Medicare Levy Act 1986 by increasing the income threshold at which the Medicare levy becomes payable for those eligible for the senior Australians tax offset.

As the amendments in this bill are of particular interest to people in my electorate of Werriwa, I will make this the focus of my comments. According to the 2006 census, Werriwa has a population in excess of 143,000 residents, and they fit into just about every cultural, ethnic and religious demographic there is. Werriwa covers a wide expanse of south-western Sydney and has a very diverse population. The last census found that 33 per cent of residents were born overseas and more than 60,000 people speak a first language other than English. There are people from all parts of Europe and Asia as well as from smaller Pacific nations like Fiji, Tonga and Samoa. We also have one of the largest Koori communities in New South Wales. This rich mixture combines to produce a cultural diversity that lends depth to the south-west of Sydney while reinforcing a very strong sense of local community.

Werriwa is full of young families, and it is a sought-after place to raise a family. Perhaps the member for Macarthur—known locally as the ‘mayor of Mosman’—does not think so these days, but it truly is a great place to raise a family. I should know, because my wife and I have resided there for the last 30 years. It is where we have raised our family, and we have been part of building our community in the south-west of Sydney. Just as we did, young families continue the same process of raising their families, building their communities and contributing in all walks of life. Whether they be members of the Islamic community, based around Sule College; the Bangladeshi community of Minto; the Filipino communities of Ingleburn, Eagle Vale and Campbelltown; or the Fijian-Indian community of Liverpool, they are all Australians working together to build their communities for their families. I remain as committed as ever to community-building in south-western Sydney. It is an area where there are no pretensions. People simply get on and do their bit.

Today, starting a family goes hand in hand with the added responsibilities of home ownership, mortgage repayments and paying the rent. I know the pressures this can place on young families, and I know that Australian families are doing it tough and feeling the effects of the 10th increase in interest rates. The families in my electorate are struggling to meet their repayments, let alone being able to afford the little extras like shoes, holidays and school fees—things that ought to be factored into raising a family. The important thing to know is that families in Werriwa are working hard—but they cannot do it alone. That is why this particular bill is so important.

As I said earlier, this bill will reduce personal income tax. From July this year, the government will increase the threshold for the 30 per cent rate from $30,000 to $37,000 and reduce the existing 40c rate to 37c by 2010-11. These tax cuts restore fairness to the personal income tax system, with the greatest proportion of income tax cuts flowing to low- and middle-income earners. That is where it will make an impact in my electorate of Werriwa—where, according to the 2006 census, the mean individual weekly income in 2006 was $464 per week. These people will increasingly feel the effects of this tax regime. The Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008 will also increase the maximum amount of the low income tax offset. From 1 July this year, it will increase from $750 to $1,200; from 1 July 2009, it will increase from $1,200 to $1,350; and from 1 July 2010, it will increase to $1,500.

Importantly, this plan provides the greatest tax cuts in percentage terms to those who need it most. I know full well how these reforms will significantly improve the financial position of working families in my electorate. They will now have the ability to make decisions—particularly second-income earners in a household—as to whether to return to the workforce. This legislation provides a positive incentive to encourage participation in the workforce. It will enhance the incentives for them to upgrade their skills and gain higher qualifications, and it will allow them to keep more of their wages and become more highly skilled and productive. That has to be an overall benefit for our community generally. But to a household it crosses a threshold by encouraging greater participation in the workforce. That has to be a good thing not only for the local economy of Werriwa but also, on a global scale, for the economy of this country.

Almost 10 per cent of people in my electorate are aged 65 years or older. Fortunately, I do not fall into that category as yet, but I am sure that some time off I will fit into that statistic and I will benefit from this government’s commitment to support the aged population by increasing the income threshold at which the Medicare levy becomes payable for taxpayers who are eligible for the senior Australians tax offset. This ought not to be taken for granted. After talking to many seniors in Werriwa, I know that they think it is not only sensible reform but also well overdue. As a consequence of the increase in the low income tax offset, those eligible will not be liable to pay income tax until they reach an income of $28,867 for singles and $24,680 for couples in 2008-09. In 2009-10 those rates will increase up to $29,867 for singles and $25,680 for couples. In 2010-11 those rates further increase to $30,685 for singles and $26,680 for couples. As a result of the low income tax offset, senior Australians will not be liable to pay income tax until they reach those income levels. In addition, senior Australians will not be liable to pay the Medicare levy until they reach those same levels.

In conclusion, I welcome this amending bill because it will deliver assistance to working families in my electorate, particularly low- and middle-income earners. The government is listening and understands that these amendments are carefully designed to enhance the incentives for labour force participation. As I said earlier, it is crucial to encourage greater participation in the labour force in order to increase our national productivity. The impact of the tax cuts on taxpayers will depend entirely upon their taxable income level and the measures will increase the disposable income of families. For us in the south-west of Sydney, an area heavily dominated by families, this will be much welcomed. The overall tax cuts will deliver assistance to working Australians under financial pressure and will help prepare Australia to meet its economic challenges. I commend the bill to the House.

Andrew Southcott (Boothby, Liberal Party, Shadow Minister for Employment Participation and Apprenticeships and Training) Share this | Link to this | Hansard source

I rise today in support of the Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008. My one disappointment is that these tax cuts are not being implemented by the architect of this policy but by the imitator. The Treasurer really is the artful dodger of Australian politics, coming in here and presenting, as one of the most important limbs of any Australian government’s economic policy, their tax policy and presenting what is after all the work of another individual. We all know that this policy was not in any way drafted by the Treasurer. It was not in any way drafted by the Prime Minister. These are tax cuts and this is a tax policy developed and drafted by members now on this side of the House. We now have a bill which almost exactly mirrors the announcement which was made by the then Prime Minister and the then Treasurer on 15 October 2007. This was an important announcement encompassing $34 billion of tax relief. It is a matter of record that the Liberal Party and the National Party cut tax in 2000 with the move to A New Tax System and $10 billion of income tax cuts. We cut income tax in the 2003, 2004, 2005, 2006 and 2007 budgets. Although we are no longer in government, the tax cuts which will be delivered in 2008, 2009 and 2010 are the tax cuts that we took to the Australian people. I cannot imagine former proud Labor treasurers—for example, Paul Keating and, to go back a bit further, Ben Chifley—coming in here and presenting as their own what is, after all, the work of someone else.

For me, one of the great unknowns about this whole episode is that no-one really knows what the story is behind Labor’s tax policy. On the one hand, it may be that they never had a tax policy—that they were always planning to go with whatever the previous government proposed on tax. On the other hand, it may be that the member for Lilley, the Treasurer, did develop a tax policy but it was so inferior that they imitated and plagiarised the tax policy that the Liberals and Nationals took to the last election. What is needed is a Paul Kelly, a Michelle Grattan or a Pamela Williams to find the inside story of what happened. What happened in those days when Liberal and National members and candidates were out there selling their tax policy and the now Treasurer and the now Prime Minister were bunkered down trying to work out how to respond? But it is fortunate for the Australian people that, whatever is the case—whether the Labor Party had no tax policy or whether they just dropped the tax policy that they had prepared—the Labor Party adopted our policy.

As all members will be aware, we proposed a series of tax cuts commencing on 1 July 2008. They involved increases in the low income tax offset, an increase in the threshold at which the 30c rate cut in, and cuts in the marginal rate for the next two rates—the 35c and 40c rates. So there is really only one difference between the policy that we took to the election and the bill that we are discussing, and that is that those with taxable incomes in excess of $180,000 will see the marginal tax rate held at 45 per cent and the tax cuts delayed until at least 2011-12. So there you have it. The tax policy of the Labor government was designed by the member for Higgins—and that will be the case for the next three years. So I am very pleased to support the bill. This is the policy that I was out there explaining to people at shopping centres and at railway stations.

In addition to these tax cuts providing important benefits for families and benefits particularly for people on low and middle incomes, there is also another very important purpose that these tax cuts serve—they boost workforce participation. If we are going to have continued economic growth in the Australian economy and we are going to avoid the significant challenges to the Australian economy which are posed as a result of our ageing population, increasing workforce participation is vital. We need to encourage greater levels of workforce participation to help offset any predicted future impacts of an ageing population. Research undertaken by the Productivity Commission in 2005 predicted a significant fall in the participation rate to 56.3 per cent by 2044 as a result of an ageing workforce in Australia—as a result of the predicted much slower labour force growth in the future.

While Australia has seen an increase in the participation rate over the last two decades, chiefly as a result of sustained economic growth under the coalition government, certain groups continue to be under-represented compared with other comparable OECD countries. We need to see these groups much more represented in the workforce in order to counter the challenges of an ageing workforce. When we look at the OECD data from 2005, we see that, for older men and women aged between 54 and 65, our participation rate was ranked 13th out of 30 OECD countries. When we look at the data for people aged 25 to 54, we see that our participation rate was 22nd out of 30 countries. When we look at the data for women of child-bearing age, we see that Australia had the eighth lowest level of participation in the OECD. When we look at comparable countries, we see that New Zealand’s participation rate in the 54 to 65 age group is 15.2 per cent higher than our rate and Canada has a participation rate for women of child-bearing age 7.1 per cent higher than our rate. Most members will recognise that New Zealand and Canada have very similar societies and are similar countries to Australia. So when we look at the experience of New Zealand and Canada we see that it should be achievable for Australia to improve its participation rates in those groups I have nominated.

As a direct result of these personal income tax cuts—and this is agreed by economists—we should see about 65,000 people join the workforce in the medium term. The tax benefits in this bill, for families in particular, are very significant. During the election campaign, we said that 65 per cent of women who returned to work after having a child would pay a tax rate of 15 per cent or less by 2010. In my own electorate of Boothby this is particularly important. George Megalogenis, in an article in the Australian, referred to a lot of data from the 2006 census. I was very interested to read that in the 2006 census, out of the 150 electorates represented in this House, the electorate of Boothby had the fourth highest percentage in the nation of both parents working. In almost two-thirds of couples with dependent children, the father works full time and the mother is in either full- or part-time employment. When we looked at families in Boothby with dependants we found that in 45.7 per cent of them the father works full time and the mother part time. This was the third highest in the country. Both these figures were obviously well above the national averages.

On behalf of families in my electorate, can I say that these tax cuts will be very welcome. As I said, this was a policy that I was very supportive of previously. I am very pleased that the Labor Party are introducing the policy—basically the policy that we took to the election. As we said during the election campaign, for a family where there is one parent on average weekly earnings working full time and another part time, these tax cuts will see a reduction of around $50 a week by 2010. So these tax cuts are particularly important for families. They are really designed to reduce the tax burden for people on low or middle incomes and they are really designed to help families who have two incomes. It is very common in a family now to have one person in full-time work and one in part-time work. As I said, in my electorate this is a particularly common way that families work. The tax cuts will encourage some people to enter the workforce or re-enter the workforce. As I said, our estimate is that 65,000 people will enter the workforce.

There is OECD data, published by Jaumotte in 2004, which indicates that improving tax incentives for those working part time, resulting in an increase in disposable income, can have a mobilising effect on female participation in the workforce. These personal income tax cuts will provide further incentive and financial benefits for those entering or re-entering the workforce and will help families to deal with increased costs of living.

In addition to cutting taxation, increasing the threshold and cutting the rates, the amendment bill also incorporates the coalition’s proposal to increase the low income tax offset and the effective tax-free threshold. It raises the effective tax-free threshold to $14,000 by 1 July 2008. That increases in 2009 and 2010. This increase in the low income tax offset will provide incentive for low-income earners and those in receipt of welfare payments to increase the number of hours they work or to move into the workforce, as it increases the offset amount to $1,200 in the first instance, then $1,350 in 2009 and $1,500 in 2010. It also provides additional incentives for people to increase their skills. It rewards their hard work. As a consequence, these tax cuts will provide further incentive for individuals to increase their productivity.

In addition to providing incentives for families on two incomes, people on low incomes and those in receipt of welfare payments, these tax reductions will also benefit senior Australians. For those eligible for the senior Australians tax offset, there is likely to be an increased participation rate in part-time employment in particular. In keeping with the policy outlined by the member for Higgins prior to the election, senior Australians eligible for the senior Australians tax offset and the low income tax offset currently do not pay tax after assessment until they reach an annual income of $25,867 for singles and $21,680 for each member of a couple. From 1 July 2008, these income levels will be lifted to $28,867 for singles and $24,680 for each member of a couple. This equates to a tax offset of approximately 20 per cent more than the current level for eligible seniors by 2010. Again, there is a body of OECD research which indicates that reductions in taxation for seniors do result in a return to work or an increase in hours worked.

These tax cuts are payable due to strong economic growth and strong budget management over 11½ years. The tax cuts will provide additional incentives for Australian workers, particularly for low- and middle-income earners, by rewarding them with increased disposable income in return for their hard work. They will assist 65,000 Australians who are currently outside the workforce to enter or return to the workforce. These tax cuts are good for families, particularly two-income families. They are good for taxpayers on a low income. They are good for senior Australians as well.

As I said at the outset, my one disappointment is that these tax cuts are not being implemented by the architect of the tax cuts; they are being implemented by the imitator of the tax cuts. Really, the Treasurer adopted this policy. While we welcome it, it was an extraordinary thing for the Labor Party not to have developed their own tax policy. One of the key elements of any economic policy is to have a tax policy. I remember the days of Paul Keating and all of his mini-budgets and budgets and the tax policies he presented. For the Labor Party not to have a tax policy was an extraordinary thing. I wonder whether we will ever find out the true story of what happened there—whether the Labor Party had developed a tax policy or whether they were always going to adopt our tax policy. They recognised that they could never do the work to come up with tax scales like this, which are particularly targeted at people on low and middle incomes and dual-income families. Fortunately for the Australian public, while the government changed, the tax scales that were authored by the previous government remain, and that will be the case until 2010. I am pleased to support this bill and I commend it to the House.

Greg Combet (Charlton, Australian Labor Party, Parliamentary Secretary for Defence Procurement) Share this | Link to this | Hansard source

I rise to speak in support of the Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008. It is delivering on another one of the Rudd Labor government’s election commitments. The tax relief provided by the bill is economically responsible and delivers real benefits to working families. The tax cuts, especially the increase in the low income tax offset, will improve the performance of the economy and attack inequality.

From 1 July this year, the government will increase the 30 per cent marginal tax rate threshold so that the 15 per cent marginal tax rate will apply on up to $34,000 of income, an increase in the threshold of $4,000. In addition, the low income tax offset will be increased from $750 to $1,200. It will continue to phase out at 4c for every dollar of income above $30,000. That means that those who are eligible for the full low income tax offset will not incur a net income tax liability until their annual income exceeds $14,000—an especially important initiative for low-income earners.

For the first time, from 1 July 2008, low-income earners will receive half the benefit of this offset through their regular pay, which will be important in household budgeting, rather than receiving the total as a lump sum when their income tax returns are assessed. This will have a more practical impact on working families attempting to run their weekly budgets and will provide a more visible incentive to participate in the workforce.

Further tax cuts will apply from 1 July 2009, including an increase in the 30 per cent marginal tax rate threshold so that the 15 per cent marginal tax rate will apply on up to $35,000 of income. In addition, the 40 per cent marginal tax rate will be reduced, under the bill, to 38 per cent. The low income tax offset will be increased on 1 July 2009 from $1,200 to $1,350. This means that those eligible for the full low income tax offset will not incur a net income tax liability until their annual income exceeds $15,000.

From 1 July 2010, the threshold for the 30 per cent marginal tax rate will increase so that the 15 per cent marginal tax rate will apply on up to $37,000 of income. In addition, the 38 per cent marginal tax rate will be reduced to 37 per cent and the low income tax offset will also be increased from $1,350 to $1,500 from 1 July 2010. This means that those eligible for the full low income tax offset will not incur a net tax liability until their annual income exceeds $16,000.

These tax cuts will help the nation face the economic challenges confronting it today. We are—as we have heard on many occasions, but the point needs to be underlined—facing a great challenge with the highest underlying inflation rate in 16 years. We in the Rudd government have inherited this legacy from the previous Howard government, which squandered a once in a generation opportunity. Unless we can address these longer term issues, we will face even more serious constraints on future growth and competitiveness, at tremendous cost to Australian living standards. We have demand rising faster than supply and there are only two ways to rectify this. One way is to increase inputs, capital and labour so that output will more closely approximate demand in the economy. The second way is to increase productivity. Increasing the labour supply is a key component of the government’s five-point plan to tackle inflation. Labour shortages are now widespread in the economy and in numerous surveys employers list skills shortages as the No. 1 constraint to business investment and expansion. You find that in large, medium and small businesses across the country.

The tax reforms contained in this bill will significantly improve the financial incentives for second-income earners and those on welfare benefits to make the transition into the workforce or increase their hours of work. These incentives will be reinforced by other measures to be implemented by the government, which I will refer to in a short while. Economic modelling undertaken by the Treasury indicates the personal income tax reforms alone will lift aggregate labour supply by around 65,000 persons in the medium term. This increase in workers, together with the increase in the effort of existing employees, will make available around 2.5 million additional hours of work to the economy each week. Incentives to increase labour force participation are vital if we are to attack the supply side constraints that are plaguing the Australian economy. These constraints have existed and been evident for some time. The previous government did not attend to them and this is widely regarded as one of the causes of the inflationary pressure that the country now faces.

Our labour force participation rate among 25- to 54-year-olds—that is, the prime workforce—slipped from 19th best in the OECD in 1994 to 20th in 2006. Over the last 12 years, Australia only managed to increase the labour force participation rate among 25- to 54-year-olds by 3.3 per cent. Our performance in lifting the labour force participation rate amongst men was even worse. In the 12 years to 2006 the participation rate amongst men in that category fell by 1.3 per cent, dropping Australia from an ordinary 22nd in the OECD to a disgraceful 26th, or fifth worst in the developed world. Australia’s female labour force participation rate is only the 12th best in the OECD. We are also in the middle of the pack in terms of the participation rate for older workers, with 12 developed nations ahead of us. To state the obvious, these are very problematic issues that confront the economy, especially considering that we have had 17 years of economic growth. That was a sustained period of growth, but we are now confronting some significant constraints.

You would expect that the growth we have experienced would be encouraging people back into the labour force, but public policy measures supporting that goal have been lacking. The tax cuts in this bill, most notably through the increases in the low income tax offset, will lift incentives for people to move from welfare to work, thereby placing downward pressure on inflation and interest rates.

Beyond increasing the participation rate, we need to examine how we can increase the number of hours people are working in the economy. I hasten to add that we should do that not necessarily by asking full-time workers to work longer hours but by developing policies to encourage part-time workers to take on more hours and to ensure that there are sufficient jobs for these employees and for people who wish to participate to a greater degree in the workforce.

I acknowledge that there are a lot of people who are happy to work part time; part-time work might suit their lifestyle and provide a good work-family balance. However, the evidence is that a significant number of part-time workers would like to work more hours per week. The latest ABS data found that one in five part-time workers, or 571,900 people, want more work. Fifty-seven per cent of these underemployed people would prefer to work full time. In addition, 46,000 full-time employees were put on short hours due to lack of work.

It should be noted that the proportion of men working part time, as a share of male total employment, is almost double that of the OECD average, and the female part-time proportion is 1½ times the OECD average. So there is a high incidence of part-time work in our labour force relative to other developed nations. The greater significance of part-time workers in the Australian economy saw the average annual hours worked per person in employment actually fall by 3.3 per cent between 1994 and 2006.

Reducing this underemployment in part-time workers is perhaps one of the fastest ways to increase our labour supply and relieve some of the inflationary pressure. If all the underemployed part-time workforce were able to work their ideal hours, this would add 325 million work hours to the national economy annually. This is the equivalent of finding almost another 200,000 full-time employees. Just imagine the impact on the labour supply and the inflationary pressure relief that would provide.

On the evidence available, the main obstacles to working these hours are lack of work, lack of skills and transport problems. The government are committed to addressing each of these three policy areas. The government will pursue the appropriate macroeconomic settings for maximum employment. We also have a comprehensive skills agenda, beginning with a plan for 450,000 additional training places. Furthermore, Labor are delivering on our commitment to establish Infrastructure Australia within 100 days of forming government. This organisation will audit our infrastructure needs and coordinate the provision of infrastructure. This will help improve the transport infrastructure of Australia. The interaction of these policy areas is an example of the effectiveness and necessity of a holistic policy approach, something the former government was unable to embrace.

While targeted tax cuts will add to the labour supply and thereby help relieve inflationary pressure, they will have other impacts that are quite counterintuitive. For example, the OECD has found that employment growth tends to be associated with lower average labour productivity growth. Thus, as the government encourages greater labour force participation, we must complement this with other policies designed to boost productivity.

Training is essential to this challenge. The OECD has estimated that a 10 per cent increase in the stock of human capital accumulated through job related training is associated with an increase of around 1.5 per cent in productivity. Thus, skills development not only helps to increase labour supply through new entrants and upskilling existing workers; it ensures that these additional workers will boost the productivity rate.

The Labor government, in its first 100 days, has commenced the measures necessary to implement its commitment to the rollout of trades training centres in all of Australia’s 2,650 secondary schools.

Steven Ciobo (Moncrieff, Liberal Party, Shadow Minister for Small Business, the Service Economy and Tourism) Share this | Link to this | Hansard source

Mr Ciobo interjecting

Greg Combet (Charlton, Australian Labor Party, Parliamentary Secretary for Defence Procurement) Share this | Link to this | Hansard source

That is not a farce. The Labor government has also commenced the implementation of the $1 billion Computers in Schools package, which will allow every Australian student in years 9 to 12 to have access to a school computer. As I mentioned a moment ago, we are committed to providing an additional 430,000 skilled training places from July 2008 to lift the productive capacity of Australia, and we will launch an expression of interest for 20,000 new training places in areas of skills shortage from April 2008.

Another measure that will boost productivity and thereby increase our national competitiveness and relieve inflationary pressure is parental leave. According to the OECD, additional parental leave increases the level of productivity, in part by allowing workers with family responsibilities to maintain their links to the workforce. In response to this the government has asked the Productivity Commission to examine ways the government can provide improved support to parents with newborn children. The Productivity Commission will look at the economic and social costs and benefits of paid maternity, paternity and parental leave. From my experience in my previous role representing employees, I know that it is an important issue on the bargaining table in enterprise-level negotiations. Thus, the Rudd Labor government will attack the causes of inflation, such as labour shortages, through tax relief and then ensure that these new entrants to the labour market have the skills to get a job and the skills to improve productivity.

The impacts of the tax cuts on social and economic equity are also extremely important. It is important to set the context for these tax cuts—the context is a decade of rising inequality in Australia. Both income inequality and poverty increased between the mid-1990s and now, notwithstanding 17 years of record economic growth. The incidence of low pay has also increased by a massive 14.6 per cent between 1995 and 2005. This is the share of workers earning less than two-thirds of median earnings. This increase was 27 times the average increase in the incidence of low pay across the developed world, and it is one of the legacies of the workplace relations system of the former Howard government.

These trends were exacerbated by the Howard government pursuing what I consider to be its own version of class warfare. Over the life of the Howard government, taking into account bracket creep and the GST, workers on average wages got just $23 per week in tax cuts while high-income earners got a tax cut that was six times higher—$143 per week. The provisions of this bill provide the greatest tax cuts in percentage terms to those most in need: low- and middle-income earners. Compared with their income tax liability for 2007-08, not taking into account the Medicare levy, a person with taxable income of $20,000 will have an income tax reduction of around 56 per cent; a person with taxable income of $50,000 will have an income tax reduction of around 18 per cent; and a person with taxable income of $100,000 will have an income tax reduction of around eight per cent by 2010-11.

The income category that will receive the highest percentage income increase is for those earning $40,000 per year. A person on $40,000 per year will increase their income by 4.5 per cent by 2010-11 as a result of these reforms. Higher income earners will enjoy tax cuts, but not to the relative extent enjoyed by those on lower incomes. By delaying the tax cuts for those earning $180,000 and above, Labor was able to afford to establish an education tax refund for all families receiving family tax benefit A with children at school. This is another initiative that will increase Australia’s human capital, thereby increasing productivity and international competitiveness.

The tax cuts contained in this bill will improve both equity and economic efficiency. The greatest beneficiaries of these cuts are low- and medium-income earners. These cuts will encourage people to re-enter the workforce and will encourage others to work more. This will add to labour supply and remove a supply-side constraint to the continuing growth of the economy; hence, the reforms will reduce inflationary pressures, place downward pressure on interest rates and assist working families in a very practical way. In combination with other policies of this government, such as on education and skills formation, the tax cuts will improve the competitiveness of the economy and make up for some of the neglect the country has endured over the past 11 years due to the previous government. I commend this bill to the House.

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

Mr Acting Speaker, if we ever needed—

Peter Slipper (Fisher, Liberal Party) Share this | Link to this | Hansard source

For the benefit of the honourable member, I believe that the correct term for the person occupying the chair is ‘Mr Deputy Speaker’ or ‘Madam Deputy Speaker’, not ‘Acting Deputy Speaker’.

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

Thank you, Madam Deputy Speaker! Seriously, Mr Deputy Speaker, I am pleased to speak to the Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008. If we ever needed a reason not to support the tax cuts in the form that they are in this piece of legislation, I think that we have seen that in the last four to five days in the debate that we have all participated in over the possible downgrading of income to carers and in the politics that has been played in contemplating the possible disregard for carers and pensioners. The debate has been played out in here, and the Prime Minister has made various considerations, maybe based on political ramifications, maybe based on reality or maybe based on being overseas when the issue blew up. Irrespective of why that has happened, I think it has highlighted one of the reasons that we should not pursue the tax cuts in this legislation.

The government is obviously concerned about inflation, and most other people are as well. It is obviously concerned about the Reserve Bank’s reaction to the interaction of inflation brackets and interest rates and the impact that will have on mortgage holders and on our competitive arrangements in terms of some of our—

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

Order! There is too much audible conversation across the table. I am sure that the honourable member for Moncrieff would not want to be dealt with again by the chair, and the parliamentary secretary at the table, the Parliamentary Secretary for Multicultural Affairs and Settlement Services, ought to contain himself as well.

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

Thank you, Mr Deputy Speaker. I concur with your ruling. There is an obvious and legitimate concern at all levels of government that inflation and interest rates could be a problem to the Australian people and could be—in my view will be—a political dilemma that this government will have to deal with.

I will not be supporting this legislation. I will not go through the semantics of calling a division, but I would like it recorded that I do not support this legislation in the form that it is in. I think that it will feed inflation, which will feed interest rates. It will pour fuel onto a fire that does not need to be fed. If there is some reason to provide low-skilled, low-income earners with a break in terms of their tax bracket, do that. But that is only one-third of this package; the other two-thirds do not need to be put on the fire at this time.

The former government—and no doubt the member for Moncrieff will correct me if I make an incorrect statement here—put about $50 billion into the economy by way of tax concessions in the last 12 months. That is part of the problem we are dealing with now, with inflation and the interest rate consequence that the Reserve Bank is looking at. The new government will compound that problem if it pours this amount of cash, $31 billion, into an economy that it is trying to calm down. We have lived through the last five days of that calming down process. The Treasurer and others are on the one hand saying, ‘This is going to be a hard budget; we’ve got to claw back because of inflation,’ and on the other hand going to throw a bucket of money on the fire. Everybody knows what is going to happen as a consequence of that. And there will be political consequences, as there should be, if the Prime Minister and others cannot see what they are potentially doing in feeding an overheating economy with cash of this magnitude.

I go back to what I call the Howard trap. Most people in politics will remember that, right back at the early part of the election campaign, and in the weeks prior to that, we had this era of ‘me too-ism’. It was a clever strategy when you wanted an election to be fought on one issue, that of industrial relations—‘me too, me too’ policy agreement. It was quite obvious at that time—and all the Liberal Party’s internal polling indicated this—that the former government were heading for a loss. So the card was played: ‘We will propose $34 billion in tax cuts on day one and Rudd will “me too” it. If he does “me too” it, what we will have taken out of the marketplace is any capacity that he would have had in terms of infrastructure building, capacity building.’ I believe that was deliberately done by the former Prime Minister as a last card to play but one that had a jagged edge in it that would trap the government with the dilemma that it has now.

Another instance is the carers debate, a debate that we should never have had. But we had it, because the current government is looking at ways and means of cutting back on its spending—yet, on the other hand, it is going to go on a massive spending spree. It is looking at ways and means of cutting back on spending because it is worried about the inflationary effect that the budget could have and so it has to have a massive surplus. If it looked, as a way of dampening down the economy, at a removal of the tax cuts, or a transfer of part of them into superannuation or into the low-skilled area that the Treasurer has talked about—and there may be other areas—it would be less inflationary. But there is no doubt in my mind that carrying through with this at this time in our economic cycle is going to be inflationary and a lot of people will pay. It could be modified to be more applicable to today’s circumstances.

I think everybody knows that governments make promises, and they are based on what they know at a particular time. But we do know now that we are in an inflationary cycle. I think most commentators would say that there are things that we could do in terms of that particular cycle that we are not doing. What we are doing is looking at cutting a whole range of programs, some of which are needed—they may be social programs like the carers issue; and pensioners are having dreadful trouble, particularly single pensioners, trying to balance their budgets. In a lot of senses infrastructure is being ignored. If there were a massive surplus that could be redistributed back to the community via tax cuts, one would have thought that there were no infrastructure requirements in the economy. I think all of us know that there is a real dearth of projects out there that need to be addressed. I highlighted a number today in my address-in-reply speech. For instance, 110 million tonnes of freight, half the freight on the eastern side of Australia, goes through the Hunter Valley and the north-west, and a bottleneck is developing on the Murrurundi Range, where we are trying to feed small trains through a tunnel that is too high. It is about infrastructure—Newcastle port, Gladstone port and other ports. What the government is saying is that we have to make savings, not spend on long-term infrastructure; whereas long-term infrastructure—according to the theory that I was led to believe, anyway—is less inflationary than short-term cash at such a time in the economic cycle.

So there are many things that need to be done for the economy that need money spent on them. But we are getting this constant message that we cannot afford to spend because we are going to suffer inflation, and then this other message—and even some people today have been saying this—that the tax cuts will stop inflation. They may well, at that very low level of income base where they transfer people from welfare to work, but that is not the target of the great majority of these particular tax cuts.

If the government are looking at making savings, there are a number of areas they can look at. There would be argument in this place about this, but one of the areas that I believe was very poor policy of the previous government—and it has cost about $4 billion since 2004—is the baby bonus. The implications of the baby bonus, through the way it has been directed, the way it has in many cases been abused, the way it has been misused or not directed to the child in a lot of cases, really does need to be examined, modified and directed better. I hope that the new government does look at the impact of the $5,000—or whatever it is—being expended to everybody who has a child, whether that child is coming into a loving family or is coming into no family at all. I think there are some real social issues as well as economic issues there.

Another area that this bill does not embrace, but which I think we need to look at in terms of its broader economic implications and our long-term future, is real tax reform in other areas. We have this absurd structure in this country called fuel excise, introduced for dubious reasons, way back, by Malcolm Fraser when he believed that we had to adopt a fuel taxation regime so that the nation would be ready for a fuel shock at some future time. With the fuel excise currently at, I think, 38c a litre and GST, depending on where you are in the nation, running at 12c or 13c a litre, over 50c a litre is taxation of one sort or another. Some would argue that we need fuel taxation to pay for upgrading the roads. I do not think anybody would argue with that if the $14 billion that is raised by fuel taxation—and that figure does not include the GST; that is the excise itself—were transferred to roads and rail. People might not argue with that. But my understanding is that, out of that $14 billion, no more than about $2 billion goes back into the road network in some shape or other. The argument that the user pays does not apply. The user is abused by that piece of taxation.

There is another absurdity in taxation policy. The new government has said a lot about climate change and renewable energy sources—solar energy, water energy and wind energy. There has not been a lot said about biofuels by this government. We have this absurd arrangement in place whereby we are trying to encourage renewable fuels—for a whole variety of reasons—but after 2010, I think it is, if you are a biofuel producer in Australia you will pay full price excise. So the argument that was used many years ago, by both sides in this parliament—that we need to tax fuel to send a message that we have got to conserve fossil fuels, to send a message to the V8 drivers that they have got to go back to four cylinders—is a nonsense because here is a non-fossil fuel that we are still going to tax. Instead of creating an incentive for people to look at renewable alternatives with some greenhouse gas positives, we are going to treat biofuel as though it is a fossil fuel and tax the production of it. And people wonder why no-one has bothered to go into biofuels. Why would you, when you need at least a seven-year excise exemption period to make it stand up? No-one has had that amount of time to do it—and they will not do it under a regime that follows the fossil fuel tax system.

If the Labor government are serious about some of these issues to do with renewables and climate change—all the buzzwords that we are hearing now—I suggest that they have a serious look at the role of biofuels. It does not necessarily have to be grain and sugar cane; look at some of the lignocellulose research that is being done. There is very little talk about that in this country, but there are options that have some impact not only in the carbon debate but also in relation to greenhouse gas emissions.

There is a lot of talk about how carbon taxation is going to be set up and whether we should go down the road of the Europeans, who made a mess of it, or invent our own system. It all sounds very interesting and positive. People suggest that we will have to eventually have some sort of emissions taxation regime. There is very little talk about the role that soil carbon can play in naturally sequestering carbon in the soil in organic matter and humus. Former Prime Minister John Howard did not even involve the agricultural sector in a carbon task force to look at how all of the players—not just the coalminers and the resource brokers—could do something or develop a system that does something about the issues raised in the carbon debate and look at Australia’s role in how we come to grips with them. The farming sector and the very soils that we all stand on were left out of the equation.

I am not suggesting that soils are the miracle cure, but I was pleased the other day to see the Prime Minister indicate—at the Outlook conference, I think it was—that the new government would actually look at and do some research into natural sequestration by way of changing farming and pasture technology to achieve a better outcome in the accumulation of soil carbon. What that means in terms of the total debate I do not know, but it is important that we at least find out rather than just ignore it and say it has all got to be done by clean coal capture, geosequestration and other suggested alternatives. Maybe our soils are part of the solution, but if you had talked to the previous government you would have found they did not identify that soils existed in terms of that particular debate. There are carbon trades taking place in parts of the United States at this very moment where no-till farming—conservation farming—techniques have accumulated soil carbon. It is being traded as we speak.

We are told that there are problems with measurement—how you actually measure the carbon in the soil to see whether it is going up or down and how you can physically trade something like that if the measurement is a problem. I would have thought research into that problem should be happening now. That is why I was pleased with what the Prime Minister had to say the other day. I think the government are actually going to have a look at this issue. If it does not work, we can rule it out. But the earlier work on soil carbon was not based on climate change. We have a different issue now, and that can become part of the solution. As a parliament we need to encourage those sorts of issues.

In conclusion, Mr Deputy Speaker—and thank you for the degree of licence that you have given me—I will be opposing the tax cuts. I believe there are a lot better ways of spending this money that are far less inflationary and are far more important to the long-term infrastructure of this nation—such as, perhaps, on superannuation. I believe that, if the Prime Minister reversed this decision and went to the people and explained the reason why, he would have a resounding endorsement of that change in policy and not, as has happened in the past, criticism from the community about breaking a promise. So I urge the government to break the promise and put the money to a more effective use at this time in the economic cycle.

Peter Slipper (Fisher, Liberal Party) Share this | Link to this | Hansard source

I would commend to the honourable member for New England the provisions of standing order 126 if he wants his dissent to this legislation to be formally recorded at the appropriate time.

David Bradbury (Lindsay, Australian Labor Party) Share this | Link to this | Hansard source

I rise in support of the Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008. I think that there are a number of very powerful reasons why the House should support the bill. First and foremost, from my perspective, is that this encapsulates one of the election commitments that the Labor Party took to the last election, and I am very pleased to be speaking in support of a bill that now implements and delivers on that commitment.

I heard the comments from the member for New England and I know that they were heartfelt. One thing about those comments and the position from which the member for New England comes to the debate is that, unlike those of us on this side of the chamber, he was not a part of a party that made a commitment such as this before the election. We were, and I am very proud to now be speaking in support of a bill that delivers on that commitment. I think the member for New England, and others within this place, would agree that it is essential that we deliver the election commitments that we make in order to keep the faith of the electorate. Indeed, we only have to look at some of the examples of where governments in the past have failed to do so to see the great distrust that that brings—not only upon members of governments but upon all of us as parliamentarians and as members contributing to public and political life.

One of the key reasons why I speak in support of this bill is that, if we examine where the first tranche of these tax cuts is being directed, these tax cuts are very much targeted towards low- and middle-income earners, and that is a significant point to reflect upon as we debate this bill. I note that earlier today—or, indeed, last night—the OECD released a report. I will read from the press statement that accompanied the report. It was an international study but part of that study commented on a number of countries, which included Australia. The press statement on the report said:

Across OECD countries, tax changes have tended to favour low-wage earners. But in a few countries—

and it goes on to name those countries, which include Australia—

tax reforms have mainly benefited higher-income groups. In addition, low wage-earners can find themselves paying higher taxes if targeted tax concessions such as employment-conditional benefits or tax credits are not adjusted to take account of inflation. Where such tax reliefs exist, fiscal drag can erode their value, with particularly strong effects on low-wage earners.

The significance of this point is that—whilst it is true that there have been a number of initiatives that have brought about tax cuts over the last decade—as the OECD report suggests, in large part those measures have been targeted towards higher income earners. What we have in this bill and, in particular, in the first tranche—those proposals to take effect from 1 July—is a range of measures targeted specifically towards low- and middle-income earners.

I would like, in the course of this debate, to speak specifically on the low-income tax offset, but I do acknowledge the range of positive measures that are included within this bill. I should say that, against the background of this bill, is the fight that the government is currently engaged in: tackling inflation. I note that this has been an issue that has been commented on not only in the course of this debate but certainly in much of the commentary on whether or not the government should keep its election promise in relation to these tax cuts.

The government has a very strong plan. We all know it is a five-point plan. That plan is directed at tackling inflation. The five components to that are: firstly, delivering a budget surplus which is at least 1.5 per cent of GDP; secondly, lifting national savings; thirdly, investing in skills and education; fourthly, investing in infrastructure; and, fifthly—and I think most importantly in the context of this debate—lifting workforce participation. One of the most significant achievements or outcomes that we are likely to see as a result of the passage of this bill is an increase in workforce participation. Treasury modelling has identified that, if these reforms are implemented, 65,000 additional workers will be added to the aggregate labour supply. At a time when labour shortages are a critical constraint on our nation’s productive capacity, it is imperative that we pursue policies such as these that are going to lift our workforce participation.

I would like to now turn my attention to the low-income tax offset, which, I believe, is an initiative that really does stand out in terms of the range of tax reforms that this parliament has considered over recent years. I know that there has been much derision targeted at the Treasurer in relation to his commitment to delivering these tax cuts. There has been much criticism; I know people on the other side have said that they are not even his tax cuts—that he was not the architect of them. There has been no greater advocate of the benefits of providing tax credits to working families, working tax credits, than the Treasurer. The Treasurer, not only when he was the shadow Treasurer but for many years before that, has been a consistent advocate of the need to provide tax credits to low-income earners to lift workforce participation. In fact, the truth of the matter is that, in many respects, it was the former government appropriating policies of the then shadow and now current Treasurer—policies he had been advocating for some time—when they first released their tax package in the lead-up to the election. So let us not be misled into believing that this was a case of policy by xerox, as some on the other side seemed to be suggesting.

One of the great elements of the low-income tax offset is that it allows us to deliver a benefit to low-income earners that does not flow on to higher income earners. The way it works, as many speakers have commented on in this debate, is that as a result of these measures we will be increasing the low-income tax offset from its current level of $750 to $1,200 in the first year. There will be increases in the next year and then again in the 2010-11 financial year. I will concentrate on the first tranche—the changes that will come into effect as of 1 July this year if the bill is passed. The effect of lifting the offset from $750 to $1,200 will be that low-income earners will effectively be able to derive up to $14,000 worth of income per year without being subject to tax. They will, of course, be subject to tax, but once the tax offset is taken into account it will offset their tax position and essentially they will have a tax-neutral position. That is a policy tool designed to increase the incentive that is available for low-income earners when making the decision about whether or not to enter the workforce or, in the case of those who have left the workforce, whether or not to re-enter the workforce.

I note that where I quoted the OECD report earlier there is reference to these low-wage traps, often known by economists as poverty traps or unemployment traps—the OECD refers to them as low-wage traps. These are the barriers to employment for low-income earners. These are the barriers that mean that for a low-income earner the difference between working and not working may be that if you go to work you end up worse off as a result of an increased effective marginal tax rate. The low-income tax offset allows us to minimise that disincentive and, as a result, provide an incentive for people to get back into work.

This is a significant issue right across the country and, as I indicated earlier, Treasury modelling says that 65,000 additional workers will be able to be brought online for the aggregate labour supply. In addition to that, the real impact for many working families in my electorate will be the impact on the second income earner. For many it is a choice, but for a lot of people it is not a choice, particularly with the rising cost of living and rising interest rates. Many families—in fact, more and more families—need a second income in order to pay for the basics: their food and their rent or mortgage repayments. We all talk about the importance of work-life balances, but in balancing those demands the second income earner—more often that not that would be a woman, but that is certainly not exclusively the case and is less so as time goes on—often faces very high effective marginal tax rates on re-entering the workforce. I know that various economists have pointed to that in the past, particularly to the interplay between the family tax benefit arrangements and the tax system. All these factors combine to emphasise the importance of any policy tool such as the low-income tax offset that provides additional incentive for those making that decision about whether or not it is worth while to go back to work.

I have spoken to many people in my electorate when campaigning over the years, and I have to say that many of them say to me that they sit down, do the figures and ask themselves, ‘Is it worth while for the second income earner to go back to work once you factor in the costs of child care?’ I will be very pleased when the opportunity arises to speak in support of Labor’s increase in the childcare tax rebate to 50 per cent, which is another fine initiative and one that will have a real impact on working families in electorates such as mine. I look forward to that opportunity. As an aside and whilst we are talking about tax matters, I make the point that that was another very smart policy initiative insofar as many people around the place were calling for tax deductibility of childcare expenses. The childcare tax rebate at 50 per cent ensures that those on the highest marginal tax rates effectively get the same benefits as if it were tax deductible, but a greater benefit is derived for those who are low-income earners insofar as they are not limited by the amount of tax that they pay in terms of the deduction that they get—which they would be if we went down the tax deductibility path. In that regard, and particularly when you consider that the childcare tax rebate only impacts on out-of-pocket expenses, that rebate, combined with these other initiatives, will have a real impact on workforce participation, particularly for the second income earner in a family.

I was interested to hear earlier in this debate the member for Wentworth, whose contribution really did not add a lot to the debate. There was a lot of criticism of the government, there was a lot of hot air and there was a lot of spin, but there was very little substance. I think the reality of his contribution is that it underpins and reflects that, whilst the government has a policy that is being implemented, there is no alternative tax policy on the other side. I have heard and read many of the comments of the member for Wentworth criticising the government’s policies and criticising the government’s economic management, even in this early period of our government, yet there are no alternatives. The member for Wentworth talks about the need for more serious tax reform, but he has not actually articulated those proposals—at least not whilst in his current role. That is what concerns me, because he did take the trouble to articulate some of his views on tax matters before he moved into this role.

I have to say that, in relation to the low-income tax offset, I am only glad that it was not the member for Wentworth controlling tax policy before the last election and it was the member for Higgins. Had it been up to the member for Wentworth, he would not have gone down the path of the low-income tax offset, which achieves all the equity and workforce participation gains that I have just spoken about. He put his proposal out in the form of a tax plan, or, as I think the member for Higgins previously said, ‘It is not a tax plan; it is actually 281 tax plans.’ If I could borrow from one of those tax plans—the plan to increase the tax-free threshold from $6,000 to $10,000—the flaw in that approach is that not only are you delivering an increase in the tax-free threshold for the low-income earner but also you are delivering a tax benefit to people right up the scale. It does not matter how much you are earning, you still get the benefit of that increase in the tax-free threshold; whereas, with the low-income tax offset, you have a policy that is targeted to those people who need help the most. That is why it is a policy that this government supports.

If I can also comment on some of the other proposals that the member for Wentworth outlined in his 281 tax plans. In fact, if I can read from an article in the Sydney Morning Herald dated 21 November 2005, it talks about a tax plan that the member for Wentworth espoused when he had all the freedom of being on the back bench. From it, I guess you can get a sense of what he really believes. The article announced his tax plan under the headline ‘Turnbull tax plan rewards the rich’—I am sure we are all shocked and surprised to hear that! The article states:

People earning $1 million a year would pocket income tax savings of more than $100,000 under cuts to the top marginal rate proposed by the government backbencher—

as he then was—

Malcolm Turnbull, secret Treasury documents obtained by the Herald show.

We all know they were only secret Treasury documents because the member for Higgins and his staff leaked them, because they could see the folly of his proposals. They could see that increasing the tax-free threshold was not the way to go, that the low-income tax offset was a better way to go. The article further states that, as compared to the $100,000 worth of tax cuts that someone on $1 million would have received under the member for Wentworth’s proposal, the average worker on an income of $50,000 would only get $600.

When the member for Wentworth talks about the need for audacious tax reform, since he has failed to articulate any alternative policy we can only assume that he is still advocating his 281 tax plans that he released as a backbencher. We all know that the member for Higgins is now talking about leaving this place. Who is going to stop the member for Wentworth from continuing down this path of delivering a tax policy that would achieve such inequity? That is what our proposals are about: providing greater equity in the way in which the tax system works.

I know that members such as the member for New England, who made a valuable contribution, say that it is okay to deliver benefits to low-income earners and maybe the low-income tax offset is reasonable, but we should not be delivering the other benefits. In the 2008-09 income year, the only other change will be to shift the bracket that divides those on a 15 per cent tax rate and those on a 30 per cent tax rate. We are talking about shifting that from $30,000 to $34,000. There is an equity point in this. If you introduce something such as the low-income tax offset but you do not deliver a tax benefit to those on incomes slightly above it, in the next bracket above it, you are actually creating a higher effective marginal tax rate for those people. In fact, this is what the previous government did on one prior occasion when they introduced tax cuts without ensuring that relief had been provided to middle-income earners.

In an article by economist and professor of public economics Patricia Apps, she said that the low-income tax offset is a policy device for reducing the transparency of the true new rate scale and has been used in successive budgets to allow the Treasurer to announce changes in the income tax scales that do not include the then 34c rate that cuts in after the 15c rate. Essentially, what is being said here is that it is critical to ensure equity that we also pass on tax cuts to those in the bracket immediately above this.

In conclusion, the policies which drive his bill are policies designed for improving and lifting our productive capacity. They are designed to increase workforce participation and, on that basis, they should be supported because that is a key plank of the government’s fight in taking up the challenge of inflation—the challenge that the previous government has left us with.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question agreed to, Mr Windsor dissenting.

Bill read a second time.