Andrew Murray (WA, Australian Democrats) Share this | Hansard source

I am continuing my speech on the Tax Laws Amendment (Personal Tax Reduction and Improved Depreciation Arrangements) Bill 2006, and I was at the question of whether effective marginal tax rates can be reduced to no more than the top income tax rate. The sustained high-powered campaign to lower the top tax rate of 47 per cent applying to our best-off Australians contrasted starkly with the lip-service given to addressing the much higher effective tax rates applying to our worst-off Australians. So I posed a challenge to the Treasurer: would he work to make sure that no Australian would suffer an effective marginal tax rate greater than the new top tax rate of 45 per cent? A challenge is easy, but what would it cost? Could it be done? These questions are very big ones that have no simple answers. They are also ones which have not received a great deal of attention.

Effective marginal tax rates of up to 70 per cent apply to low-income Australians when income tax and the removal of welfare are combined when moving from welfare to work. High effective marginal tax rates affect the willingness to work. Reducing EMTRs competes as a policy objective with other important objectives. Targeting of assistance to those most in need was the major objective of family assistance reform through the years of the last Labor government. Those reforms dramatically increased the adequacy of assistance to low-income families but also produced much of the EMTR problem facing us today.

The present government has both exacerbated and relieved the problem to some degree. Creating part B of the family tax benefit stacked another income test onto those already faced by women re-entering the workforce. Reducing taper rates reduced EMTRs for some and extended assistance further up the income range. However, it also increased EMTRs for middle-income families. Very high EMTRs have been reduced as the objective of unemployment assistance has changed. They had to come down to encourage part-time and casual work amongst recipients. At the same time, if they came down too far, unemployment assistance could become some sort of income supplement for low-income workers. That has not been the traditional role of unemployment assistance.

The problem to be addressed is how to produce lower EMTRs without compromising the other equally important objectives of family assistance and low-income support. EMTRs are produced by the overlapping of income tests on government payments, subsidies and income tax rates. The more payments, subsidies and rebates a family attracts, the higher the EMTRs. There are not only income tax rates but also a low-income rebate and a Medicare levy that both modify the tax rate and have phase-out ranges that can add to EMTRs. Family assistance is broken into two parts which overlap and inevitably produce higher EMTRs when combined with tax rates, levies and rebates. Families with youth allowance dependants face further stacking when the family income test for youth allowance is added. Other families may have further complications due to public housing subsidies.

Research on how many people are facing high EMTRs is surprisingly thin on the ground. A NATSEM report by Gillian Beer in 2002 gave an idea of the considerable scale of the problem. She found that high proportions of families with children, and especially sole parent families, faced high EMTRs. In 2000, David Ingles from the ANU mapped out three approaches to EMTR reduction: harmonisation, integration and separation. The harmonisation approach essentially tries to ameliorate the existing system by adjusting income tax and income tests to avoid the most serious conjunctions of withdrawal rates. In terms of fundamental reform, Ingles canvassed integration of tax and income tests. Separate means tests for welfare payments would be removed and replaced with special tax scales for those in receipt of payments. However, he warns that the differing definitions of income used for income tax and for welfare may be too far apart for integration to be feasible except as a very long term goal.

The opposite approach is to aim for full separation of the tax and welfare regimes. One suggested model involved adding family tax benefits, youth allowance and rent assistance to basic income support payments in a family and subjecting them to a single withdrawal rate. A tax credit would be provided to ensure that no tax was paid until all income support and additional payments were exhausted under the income test. This would ensure that the family was subject to only the taper on the income test for payments until they ceased and then taper on the tax credit plus the underlying tax rate.

All of these approaches involve quite radical restructuring of tax and welfare systems, but government action to date has just modified EMTRs to some degree through reduced tapers and tax rates. Without fairly fundamental recasting of tax and welfare interaction, any further adjustments to the existing system may tend to shift the EMTRs to another income or benefit group and, like squeezing a balloon, it will not get smaller but just bulge out in a different place.

However, having said all that, we still remain with the impossible situation where the community, media, business and many members of parliament have squealed loudly about the high top tax rate, wanting to bring it down from 47 per cent, and yet that same squealing is not going on for low- and middle-income Australians who face high effective marginal tax rates of 70 per cent or more. Therefore, you have to ask the question: why won’t the Treasurer address that issue and ensure that no Australian pays a tax rate greater than the highest top tax rate, whether it is an effective marginal tax rate or the nominal rate?

The Democrats have argued that Australia’s tax-free threshold is too low. Australia’s income tax free threshold is $6,000, and it has remained unchanged since 2000. It is not indexed and is therefore constantly losing real value. If it had been indexed since 2000, it would now be well over $7,200. Had the 1980 personal threshold of $4,041 kept pace with earnings, it would now be over $14,200.

Working Australians have a much lower tax free threshold than the three million senior Australians who enjoy a tax-free threshold well over $20,000. People cannot live on $6,000 a year. Australia’s welfare floor is around $12,500, calculated as the minimum income required for basic subsistence. There is no justification for taxing the income of someone earning that amount. However, the budget papers indicate that, once the proposed low-income rebate has been taken into account, a person whose income is below $25,000 per annum has an effective tax-free amount of $10,000 per year, excluding Medicare. I am glad that the Treasurer has recognised the long and consistent campaign by the Democrats for the effective tax-free threshold to be lifted.

The tax-free threshold is supplemented by a numerous and distorting array of tax exemptions, concessions and deductions, plus a myriad of welfare measures. Raising the tax-free threshold significantly should be accompanied by base-broadening measures. Revenue advantages would be matched by a simplification of the tax act.

Australian governments regularly benchmark themselves against the 30 countries of the OECD. Australia’s tax-free threshold compares poorly with the OECD. With the caveat that it is difficult to readily compare tax systems in the OECD, the data indicates that Australia’s current $6,000 tax-free threshold is less than half the OECD sample average of $15,400.

There is support for the Democrats’ position from many sources. However, the Minister for Finance and Administration, Senator Minchin, in answer to questions in the Senate, recently said that the government will not raise the tax-free threshold because of the cost. Apparently it would cost over $35 billion over four years if the tax-free threshold were raised to $12,500, which is roughly the poverty line.

The Democrats’ answer has been that raising the tax-free threshold significantly is a necessary equity and work-motivating reform that should be phased in over a number of years and that it can be funded from the surplus and base broadening. You either have a meaningful tax-free threshold or you do not, and $6,000 is not meaningful. Those who argue that there should be no tax-free threshold but instead tax credits and benefits to low-income Australians probably have a stronger case than those who argue that the tax-free threshold should remain at $6,000. We do not take that point of view. We think that the tax-free threshold should continue to rise, and rise not only meaningfully but consistently with the CPI.

Unlike the superannuation proposals, there is no significant public or media interest in the income tax cut bills. Indeed, the Labor opposition did not even take up its full 20 minutes in speaking to this bill in yesterday’s second reading debate. The ACTU, whilst it has been strongly critical of the gross benefits accruing to high-income earners in comparison to low- and middle-income earners, is not getting a matching kind of response from the Labor Party, which accepts that these income tax cut bills will pass and should pass without much concern. Both the media and the public regard the bills as a done deal.

The problem with the tax cuts package is the excessive generosity to better-off Australians compared with the benefits—which do exist—that are accorded to lower-income Australians. However, we Democrats do not have the time, the opportunity or the resources to develop a comprehensive alternative package. You need extensive access to modelling and research capabilities. Given the Senate numbers, it would be a futile waste of time for us to put up a complete alternative package.

Given our long and consistent support for raising the real income of low-income Australians, despite the inordinate largesse to high-income Australians, it is difficult for the Democrats to oppose a tax cuts package that delivers an effective $10,000 tax-free threshold and raises the disposable income of persons earning $10,000 by 3.8 per cent and persons earning $25,000 by 4.6 per cent. The Democrats do not consider the income tax package as a whole to be worthy of outright condemnation, because there are sufficient equity and positive policy elements within it concerning low- and middle-income Australians, and certainly if the government had left the highest tax level at $125,000 and the rate at 47 per cent then there would be very little room for criticism.

However, the Democrats will attempt to amend this package. We do criticise the policy choices and priorities made by the government. Our greatest concern is that the Treasurer, despite his obvious intellect and abilities, and the Treasury, despite their obvious intellect and abilities, have failed to come up with a meaningful, long-term tax reform plan. That is a matter that has been the subject of great commentary by the business and academic community, who are quite damning, in many respects, of the failure of the Treasurer and the Treasury to match the sort of long-term planning they did with respect to indirect tax with an equivalent long-term view for direct tax.

The Democrats suggest that, with respect to this package, there are only two possibilities for amendments that we can have a look at. The first would be a small tax-free threshold rise or the second would be a partial indexation of the tax rate. If we raised the tax-free threshold to $7,500, it is estimated that it would cost $8½ billion over four years, less the saving from keeping the top rate at $125,000 and 47 per cent. That would save $5.05 billion. So the net cost would be $3.45 billion over four years, which we think is easily affordable in the context of the forward estimates. As an alternative, partial indexation can be revenue neutral and is perhaps easier to sell. Organisations like the ACCI strongly support indexation of tax scales. Indexing the present $6,000 tax-free threshold would cost only $2.4 billion over four years, less the saving from keeping the top rate at $150,000 and 47 per cent, which would also cost $2.4 billion. So the net cost would be zero. Both propositions benefit all taxpayers, although the benefit is greater for low-income taxpayers.