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

To approach this bill, which has a very substantial price tag of tens of billions of dollars attached to it, I think you need to look at it from three perspectives. Firstly, does the bill represent good income tax policy? Secondly, what is the opportunity cost of spending this money in this way? Thirdly, how does this bill contribute to the needs of fiscal policy?

Dealing with income tax policy first, the Democrats have long had a view that what is needed with respect to income tax policy is not strategic reform but structural reform. We long criticised the coalition when they were in government for not having such a plan. I want to use the opportunity of these remarks to stress to the new Labor government that, in their own review and their own decisions about tax, they need to present to the Australian people a structural plan, not just a strategic plan.

The Democrats have five pillars attached to our taxation reform plan. We believe there should be a comprehensive structural overhaul that fosters the development of a modern civil society, stimulates growth, competition, jobs and investment and is equitable, efficient and inclusive. Our five-pillars agenda for income taxation reform focuses on, firstly, raising the tax-free threshold—this bill does not do that. Secondly, it focuses on indexing tax thresholds—this bill does not do that. Thirdly, it focuses on broadening the taxation base—this bill does not do that, but that is done to a degree in the budget. It focuses, fourthly, on reviewing and addressing negative tax-welfare interactions. Fifthly, it focuses on lowering taxation rates and raising taxation thresholds, which this bill does address.

Unless you have a structural view of income taxation, you cannot properly address the way in which the system operates. At the moment, it is complex and it is highly inefficient due to significant churning effects and unnecessary tax concessions. We think the purpose of income tax policy should be to fall within overall tax objectives of improving measures of equity, simplicity and efficiency within the Australian taxation system. As I say, the bill does address the issue of lowering taxation rates and raising taxation thresholds, but, unless you index to inflation your tax thresholds, in the end whatever changes are made in a bill like this are eroded over time as the value of money falls. That has been a fundamental weakness of our income tax system and remains a fundamental weakness of our income tax system. I note the Australian Chamber of Commerce and Industry continues, along with many other peak groups, to advocate the indexing of tax rate thresholds. It is a bullet that needs to be bitten.

The second area of interest with respect to the broad policy issues that surround this bill is the opportunity cost issue. The bill itself captures forward estimates—I think, with respect to income tax changes already established through the 2007-08 budget and those that are proposed through this bill—which over the next three years will be another $57 billion of expenditure. When you are spending that amount of money, you say to yourselves: ‘Could you spend that better elsewhere?’ And the answer is: you always can because you always have alternatives that others suggest.

I note, for instance, the Australian Greens take the view that you would be better off not passing these income tax reductions and using the money for the community in different ways. I have noticed surveys over time which have indicated that many Australians—a very substantial portion of Australians—believe that improving services should come ahead of these tax reductions. The Democrats do not take that view. We take the view that a substantial slice of the income tax changes is necessary, particularly for low- and middle-income Australians. We take the view that it is necessary from two perspectives. The first is from a perspective of catch-up. Because the value of money has been eroded by inflation over time, you are restoring people, to some extent, to where they would have been if not for inflation. The second reason we support it is we think the disposable income of low- and middle-income Australians needs to be increased in order to allow them to advance their living standards in a way which keeps the equity and inclusiveness characteristics of Australian society. We do not think it is an either/or situation—that none of this money should be given to Australians and it should all go back into services—but we do not think, either, that all the personal income tax reduction is warranted. That is the opportunity cost argument, and it is always an interesting and difficult decision to make as to what you give up because you are spending it in this particular way.

The third area is fiscal policy. With respect to this bill, the government fails. It does not fail because of what it is doing in this bill; it fails because of what it is doing in the budget. If the intention is to fight inflation, you have to ask, ‘Where do inflationary pressures come from?’ There are exogenous pressures, about which the government can do very little. Those exogenous pressures obviously relate to such high inflationary impact items as the increase in the cost of energy, petroleum fuels in particular, increases in the costs of things like foods as they are rising elsewhere in the world and increases in the cost of money. The cost of money has risen very substantially, even without regard to the Reserve Bank interest rate increases, essentially because of international events. That cost of money flows through, of course, to the price of goods and services. Australians can do very little about those exogenous or external events and simply have to wear them in an inflationary sense.

The other side is endogenous—those things which are domestically based and domestically caused. Principally, the problem has been identified as supply side, not demand side so much. Of course, you do need to address demand in the sense of dampening consumer demand, and that is what the Reserve Bank has been trying to do in its blunt way. But primarily you can see the examples of supply side effects in the recent wage increase figures. For instance, the recent figures I saw—if my memory is correct—for Western Australia showed wage increases of 5.9 per cent, principally from the mining sector effects, and elsewhere in Australia as low as three per cent. That clearly shows a supply problem in WA, and not as much elsewhere.

If you go to somewhere like the Pilbara, you would see that people are being compensated in terms of wage costs and businesses are being compensated for the difficulties in business activity there, all of which induces higher prices, because of a failure to invest in two areas: hard infrastructure and social infrastructure. People want to be compensated for the fact that they have to live in dongas, which are converted containers, or sleep in the back of their cars or sleep in caravan parks and so on. I note with some concern that the government has just sucked another $2½ billion, I think, out of the Pilbara companies and others with its ending of the condensate concession. I do not condemn the ending of the condensate concession. My concern is, having sucked that $2½ billion out, that I want to see you put $1 billion back into our social infrastructure—into our housing and our amenities for our communities up in the Pilbara and elsewhere. By all means, change the condensate policy—I think it is a good change; I support the change—but what are you going to do with the money? The problem is you are not spending it in the supply side area, which would actually reduce the inflationary pressures. What you are doing is quarantining that money. You are leaving for another day the expenditure in the very areas where you would reduce the supply price pressures.

I think there is a problem with the fiscal policy settings in your budget. You have got real growth. You are not reducing aggregate demand. There is over one per cent real growth, in other words, ahead of inflation. From a consumer perspective, you are not making the budget aggregate demand neutral. You are in fact adding slightly to inflationary pressures at the consumer side and with respect to the capital side you are quarantining investment which could actually reduce supply pressures. That is an economist’s perspective from me, but I think it should be a legitimate concern in examining the effects of this budget.

Turning specifically to the provisions of the bill—as you are well aware and hopefully my explanatory note makes this even clearer—you are affecting a number of settings at the threshold rates level and moving the thresholds themselves. The sense of things is that lower income Australians will see a shift in the 15 per cent rate, which currently ends at the $30,000 threshold level, so that it ends at the $34,000 threshold level. It is an excellent change and one I and my party support. At the 30 per cent level, the threshold shifts to $80,000 from $75,000. From the perspective of middle-income Australians, the Democrats think that is a good idea. What we do not think is a good idea is the proposed shift to $180,000 for high-income Australians. There is no credible economic or social policy reason for that to occur. That is the first criticism I would set.

Another thing the government has done—and its effect is good but I am not convinced that the policy is the best one—is to introduce changes that increase the maximum amount of low-income tax offset. That will shift from $750 to $1,200 from 1 July 2008, then lift to $1,350 from 1 July 2009 and finally lift to $1,500 from 1 July 2010. The effect of this is that those eligible for what is known as LITO—that is, low-income tax offset—will not incur a net income tax liability until their annual income exceeds $14,000, and this grows to $16,000 by 1 July 2010. It is a good idea in its effect. The Democrats actually support a tax-free threshold around $20,000, below which people do not pay tax. If you did that, you would take a huge swag of people out of the income tax system—I might say that 85 per cent of them are women in part-time and casual work. You would not have to have them involved with all the compliance activities or have the Taxation Office involved with all the compliance activities and costs that surround that.

Unfortunately, the LITO system means that instead of using a tax-free threshold device so that you exclude up to two million Australians from having to put in tax returns, you force all these people to put in tax returns, to go to tax agents, to make work related tax deductions of well over $1½ billion, maybe more, and to be in this system. So the intent is right—give low-income people an ability not to have to pay tax up to $16,000 by 1 July 2010 with respect to this bill—but the method is a churning method. It is complex, inefficient and wrong. Good intent; bad process. Senior Australians also do well. Their tax offset, which is known as SATO, will lift from $28,867 for a single person on 1 July 2008 to $30,685 by 1 July 2010, and for couples from $24,680 from 1 July 2008 to $26,680 from 1 July 2010.

With respect to these tax cuts the Treasurer made a number of points. He said Labor had promised specific tax cuts and he is keeping his promises. That is terrific, but I have already noticed a number of promises that have not been kept and sometimes for good reason. You cannot keep every promise. For instance, I think cutting the cut-off point for wealthy welfare benefits from $250,000 to $150,000 is a broken promise and I am glad you have broken it. It is a good idea. You do not always have to keep your promises, but it is important that you keep your most important promises. I am not going to criticise the government for doing that. Although I think, in view of the fiscal emergency of inflation that the government talks about, it could well have not needed to deliver the high-income tax cuts.

Secondly, the Treasurer says these tax cuts give necessary relief to working families. Every time I hear that phrase I want to scream. I want to know what defines ‘working families’. It is not a phrase that connotes wealthy Australians and there are a whole lot of families who are worth a lot to me and who are not working. Think of old people; they are families. ‘Working families’ excludes them. It is a horrible phrase. Thirdly, he says tax cuts will ease pressure on wage claims. I think he is right in that respect. At the lower end I think it does relieve those pressures. Fourthly, he says these tax cuts improve workforce participation. Yes, he is right, especially in the low-income area and in the middle-income area. At the upper-income area he is absolutely wrong. It will do zip, zero and nothing to support the cause of workforce participation for high-income Australians. You are just giving them tax cuts at that level because the coalition are their mates. It was their idea and you are just following on. That policy is stupid, unnecessary and wrong.

The idea that wage claims will be influenced above the $75,000 to $80,000 threshold is fanciful. The idea that workforce participation will be enhanced above that level is unlikely, and I say to you that the Reserve Bank will raise rates again if aggregate demand increases to levels it regards as threatening. Tax cuts increase aggregate demand, so you should be cancelling or deferring non-essential tax cuts. That means cancelling or deferring those at the upper end. The conclusion I have is that there is merit in accepting the LITO and lower income tax changes.