Taxation Bob McMullan - Shadow Treasurer Shadow Minister for the Arts

Speech

Transcript - Fabian Society - 31 May 2003

Simon Crean in his Budget Reply speech quoted his father's favourite quotation about tax, from the American jurist Oliver Wendell Holmes, who famously said: "When you pay taxes you buy civilisation".

Similarly, the Commission for Taxation and Citizenship in the United Kingdom in its report Paying for Progress, published by the British Fabian Society, found a direct connection between peoples' views of taxation and their views of citizenship and society.

In Australia, while that fundamental recognition exists, Australians are not convinced that if tax is the price we pay for living in a civilised society, then it follows that the more tax we pay, the more civilised we become. It is important for us to recognise there is no automatic reason why they should think that.

Those who advocate new functions for government must win the support of the community for the argument that the new functions are so valuable, worthwhile or necessary, that we should be prepared to pay more tax for them.

This is not a task that is impossible; but it is a task that is more difficult than is sometimes acknowledged by those on the left of Australian politics.

One example can be seen in the response to an excellent piece of research on the 2001 federal election by Shaun Wilson and Trevor Breusch of the Australian National University. [1] This research was interpreted by many as showing that Australians are prepared to pay more tax to fund higher quality services. But this is in fact a misreading of their research. Wilson and Breusch's study does show that a growing number of Australians are prepared to pay more tax or forego tax cuts in return for improved services. But they make it clear that that is -- or was at the 2001 election -- a minority view.

Recent polling conducted for Hawker Britton, a government relations consultancy from Sydney, prompted a similar response. This polling found that a majority of Australians were prepared to forego their tax cuts if the money was spent on health. This is an interesting argument, but my suspicion is that it is more of a commentary on the perceived trifling and inadequate nature of the tax cuts than a commentary on overall attitudes to tax cuts versus public spending.

We need to address the important issues of the adequacy of taxation to meet social objectives, the structure and composition of our taxation system, and the social, economic and environmental consequences of the tax system. But to address these issues we need to go back to first principles.

The Fabian Society report I referred to before offers an unremarkable but worthwhile description of the three roles of taxation:

1. Tax as a source of revenue for government;
2. Tax as an incentive or disincentive; and
3. Tax and its role in redistribution.

The paper also outlines ten principles of taxation. Not all of these are relevant to Australia, and I don't agree with all of them. But from these principles we can set out six principles to guide Labor's thinking on taxation in Australia.

1. Progressivism and equity
2. Efficiency in the economy
3. Incentives to reduce socially damaging behaviour
4. Administrative efficiency both for government and taxpayers
5. International cooperation to maintain effective tax systems; and
6. Sufficiency.

These ideas on the role and principles of taxation give us some worthwhile guidance on the directions we should take in reforming our tax system.

A comprehensive assessment needs also to look at the risks and burdens associated with taxation, which we should seek to minimise.

The first and most obvious is the burden of taxation on individuals and families. The money governments take in taxation is money not available to individuals and families to meet their everyday needs and aspirations.

The second burden of taxation is its capacity to create economic distortions. In his excellent book Where to from here – Australian egalitarism under threat, Fred Argy says taxes have efficiency costs because they tend to distort the economic decisions of consumers and producers, forcing them into less-preferred choices. Taxes also have administrative and compliance costs, and encourage avoidance and minimisation practices that are wasteful and distorting.

In recent years it has been extremely difficult to conduct a rational discussion of taxation policy. The only acceptable topic for discussion has been the competition to see who can produce the lowest taxes, rather than on striking a balance between the need to keep taxes to a minimum consistent with providing the requirements of a decent society and the social aspirations of our citizens. This has been similar to the broader debate on fiscal policy, in which rational discussion has been extremely difficult because of the surplus fetish.

Some have claimed that good fiscal policy can only be achieved by delivering permanent surpluses irrespective of the economic circumstances. Fortunately, this fetish has been killed off. It was killed off primarily by the fact that Peter Costello ran a budget deficit in 2001-02. He tried to explain it away by claiming that it was a necessary measure to provide economic stimulus. In fact, we all know it was actually a panicked reaction to what was then the government's declining political fortunes.

The final nail in the surplus fetish was driven in by the Howard Government's refusal to criticise any decision of the Bush administration. This prompted Peter Costello to defend the Bush tax cuts and the massive budget deficits which it will generate.

Mr Costello told the parliament on 5 February:

The US President sent his budget to Congress in the last day and has put forward a budget program with a projected deficit of 2.8 per cent of GDP for the United States in 2003—a sum of some $US300 billion. In Australian terms, that would be the equivalent of a deficit in our budget of $A20 billion in the forthcoming year. Obviously, that is very substantial fiscal stimulation, which we welcome. And we welcome the fact that fiscal stimulation, together with monetary policy, is now being put forward to stimulate a return to sustained growth in the United States...

In the wake of Mr Costello's argument that his 2001-02 budget deficit is justified, and after his claim that George Bush's deficit is justified whenever he does it and for whatever purpose -- because it must be right because he is the President of the United States after all and a Republican at that -- the facile suggestion that we should have a surplus under any circumstance will not arise again for quite some time.

That takes us back to the more rational proposition that we should balance the budget over the cycle. Accepting this proposition means accepting that we will have surpluses in good years and deficits in bad.

I hope we can also move to a more rational basis of tax policy discussion in the future. This Fabian Society seminar is a useful place to start.

After addressing the role of tax and the first principles, we should address frankly the question of whether it is a good thing or a bad thing or whether it matters at all that the Howard government is the highest taxing government in history.

Some commentators have suggested it really doesn't matter at all or that it is an inevitable by-product of the continuing and growing demand for public services.

To an extent, the second argument, about the rising demand for services, has merit -- although it is extremely difficult to point to the improved or increased public services that are being provided at the moment by the Howard government's record tax take. But I believe that the decision to focus on Peter Costello as the highest taxing Treasurer was correct and appropriate, for the following reasons:

• First, it helps explain why Australian working families – the battlers – are feeling under real financial pressure despite the reports they read each day about how happy they should be about the economy;
• Second, families know they are taking on more and more of the responsibility for funding what used to be core public services – such as health and education – and they wonder why in spite of this they are paying more and more tax; and
• Third, it explains why Labor believes we will be able to go to the next election offering tax cuts. We don't need more revenue. The current high level of tax should be enough to meet our commitments. The misguided priorities of the Howard Government will give us ample opportunity to reallocate money to meet the objectives of an incoming social democratic government.

The Baby Bonus remains the starkest example of these misguided priorities. It gives assistance to families based on the principle that those with the highest income get the most assistance and those with the lowest income get the least.

The government has estimated the Baby Bonus will cost $500 million a year when it is fully operational, but the scheme is so poor, and therefore the take-up rate is so low, that it may ultimately cost less.

Labor is committed to abolishing the Baby Bonus program and redistributing the money to assist families in more equitable ways. We will outline the details of our alternative over the months ahead.

The only tax increase we have in mind is the continuing commitment we have had for some years of a small, 0.1 percentage point levy on top of the Superannuation Guarantee Charge, which we will use to guarantee a national scheme of employee entitlements. This would replace the taxpayer funded and totally inadequate government guarantee of employee entitlements. This is hardly a generous guarantee. It guarantees Australian workers eight weeks redundancy pay if they are low-paid, while the government supports the highest paid executives having 52 weeks and more in redundancy pay. This means $2 million redundancy payment for the wealthiest, compared with $5000 for the average worker. Needless to say, we remain committed to our comprehensive, totally-funded scheme to replace the government's unfair approach.

There is another tax change we have proposed that is relevant here. It is the so-called golden handshakes tax. Our proposal is to deny tax deductibility to companies for golden handshakes to executives for the portion of their package above $1 million. While this will generate some revenue in the first few years, it is not our ambition that this should be a revenue measure. This fits rather into the role of using the tax system as a disincentive to anti-social behaviour. What we want is to have the golden handshakes cease. If companies wish to pay executives handsomely, they should disclose the agreements and the shareholders should approve them. Let them make these excessive payments, and society will get its share of these payments through the income tax system. But let there be no more golden handshakes subsidised by the taxpayer.

The next point about this being the highest taxing government is that while the $4 tax cut for most Australians was derisory -- and as the Hawker Britton research shows, not valued significantly by taxpayers – Labor will support the tax cut and still responsibly pay for our spending commitments. We have shown that we can manage the Budget responsibly and at the same time deliver the $4 tax cut in full, save Medicare, save the Murray River and offer tax cuts on superannuation. That is a worthwhile social package of which the tax cut is a modest and useful element.

The superannuation tax cut is important. We will take the government's proposed reduction in the high income surcharge, which benefits only 4 per cent of workers, and spread it to everyone. This will be part of a package of measures to drive enhanced superannuation adequacy. It is also the first instalment in Labor's program of tax cuts for working families, which we hope to be able to introduce. If the Budget allows, we will deliver these targeted tax cuts to deliver immediate benefits and future opportunities to those working families who look to Labor governments to protect and advance their interests.

The last point which we have to face and address positively is the question of the impact of bracket creep on the tax system. Bracket creep is unquestionably taxation by stealth. It erodes public acceptance of the tax system. Voters become more and more aware that although they are paying more taxes, the government has not convinced them they are getting value for money. They are not getting worthwhile new services. As a result of inflation they are merely drifting into higher tax brackets without getting any benefit.

Although I am not a supporter of indexation of the tax scales -- which would tend to lock in an already unsatisfactory situation -- I do believe we have to be transparent. We should offer Australians a clear view about how much extra they are paying in bracket creep. We should explain that the government will return bracket creep in tax cuts, or will choose to use the extra revenue to fund new services, or will use some of the money to offset accumulated liabilities such as the Commonwealth government's unfunded superannuation liability. Whichever of these options is chosen, we should ensure it is transparent and obvious to Australians.

I will have something to say soon about the mechanisms we propose for making this aspect of the tax system more transparent, but we have made the commitment that we will be open with the Australian people about the extent to which bracket creep is being returned by tax cuts or used to fund new services or to meet liabilities.

It is important that we do this because, as the British Commission on Taxation and Citizenship has found – and this is a view reinforced by experience in Australia -- there is a significant disconnect in the public mind between the taxes they pay and the services they receive. I consider there is an important role for government in achieving social, economic and environmental purposes. But those of us advocating an active role for government find resistance from taxpayers. This is the result of our failure to convince them the services they receive are connected to and paid for with the taxes they pay.

In some way, we need to make this connection if we wish to take initiatives based on changes to the tax system. This is not an impossible task. The Hawke Government came to office with a commitment to introduce a Medicare levy. The Medicare levy was and remains widely accepted because of a clear connection between the tax and the service remains.

The Hawker Britton research to which I referred earlier suggests that 79 per cent of Australians would be prepared to support an increase of the Medicare levy if they could be convinced the proceeds were going to be used effectively and efficiently to fund our hospitals.

This is not a case for increasing the Medicare levy. But it is a clear indication that Australians can be convinced of the case for changes to the tax system if they can be convinced they will receive value for money.

It is not just Labor governments that can do this. In NSW, Nick Greiner introduced the 3 X 3 special petrol levy to fund road improvements. It would be overstating the case to say this levy was popular, but it was certainly broadly accepted.

As the Commission on Taxation and Citizenship said at page 6,

the evidence of disconnection leads us to believe that the legitimacy of taxation will only be achieved when the public understand better how their taxes are spent and feel more confident that they are being spent well'.

The commission describes this as a renewal of the civil contract between citizens and the state. It goes on to say, and I quote, ‘This is partly about rejuvenating the democratic process'.

The commission outlined three broad approaches that can help citizens understand better what is being done with the taxes they pay.

First, information about the objectives of government and its performance should be made transparent. The Queensland Government regularly produces a document reporting to the Queensland people against their publicly stated objectives. This is a practice that should be adopted more widely.

Second, it is then essential that government performance is independently audited – not just in the sense of proper financial auditing but also in reporting to the people on performance against objectives.

Third, the public should be better informed about taxes and public spending. Better information will help people feel more connected.

But ultimately it is the quality of public debate about taxation and spending choices which most matters. It is up to government to facilitate this debate, and we will be putting forward specific propositions to achieve that goal in the weeks and months ahead.

The United Kingdom concept of an Institute of Fiscal Studies which reports regularly on the United Kingdom budget and its implications against the government's stated objectives is an initiative worthy of serious consideration by Australian governments.

Over the first term of an incoming Labor Government, beyond the tax measures I have already outlined, we don't see any need to increase taxes. In fact, our plan is to offer tax cuts - whether they are superannuation tax cuts or others. We certainly intend that any tax cuts we deliver should be targeted to provide assistance to the working families who have been caught in the squeeze of the Howard Government's three-tier approach.

This can be seen in this government's attitude to the funding of universities. Under this approach the poorest can rely on scholarships, however meagre; the richest can buy their way in even if they don't top the merit list; and the working families on low to middle incomes gets squeezed out of the best courses at the best universities. They are squeezed out of the best-paid professions. The aspirations for which so many men and women worked -- the ambition of providing better opportunities for their children -- are therefore frustrated.

We intend to put forward concrete proposals, both in education and other policy areas, including potential initiatives in the tax area to assist working families to meet this challenge.

This is a key issue in enhancing our democracy. It is a key issue in reinforcing the legitimacy of the equalising role of government.

We need a debate on the role of government, on the role of taxation and public spending. We need to be rigorous in ensuring that tax is not a dollar higher than it needs to be -- nor as far as we can make it a dollar lower than we need to deliver the society Australians are convinced they can and should aspire to.

At the end of the day, this is another example of the contest in public debate between the conservative strategy, based on fear, and the social democratic alternative, based on hope. This is best reflected in our differing approaches to the challenge of intergenerational equity. The conservatives argue that the only response to this challenge is to make Australians worse off now; they raise the fear that otherwise a Malthusian disaster awaits. This is reflected in the conservatives' view that because in 15 years time we may have a funding problem in the pharmaceutical benefits scheme, we should impose a 30 per cent increase in the price that families pay for pharmaceuticals now. I regard this is as nothing more than a disguised tax increase. The government attempts to justify this approach on the basis of the fear of a looming intergenerational crisis.

But there is an alternative strategy based on the hope that intelligent investment in productivity, improvements in workforce participation and proactive fiscal policy will strengthen our capacity to meet future challenges and fund future demand. Taking this approach, we can confidently look forward to our ability to meet the intergenerational challenge.

We should use every Budget to strengthen our capacity to meet the intergenerational challenge. This is a much more positive approach than that taken by the government. For example, we should reduce the tax that Australians pay on their superannuation so that they have more capacity to fund an adequate retirement without increasing the burden on our children.

This is a much more positive and hopeful approach to the intergenerational challenge than merely hiking the price of pharmaceuticals today against the fear of a worse tomorrow.

We need to lead and inspire Australians about the capacity of active government to deliver the hope of a better society. We need to promote an active debate about the balance between those positive roles and the potential impact on the overall tax burden. We need to properly consider the contribution that taxation and the spending it allows on public services can make to a successful modern social democratic government, and to a successful modern social democratic nation. The level of tax and the manner of its collection are both critical in this debate.

This is a debate we are prepared to join. It will be a debate based on the modern application of traditional Labor principles.

The conclusions might be different from those of previous eras. But they are conclusions that will apply the same principles as in the past, based on the the same hopes, in a contest with conservatives – who continue to play on the same fears they have always exploited.

This is an important choice. It is an important debate. I welcome the continuation of a 100-year-old commitment by the Fabian Society to advancing that debate and those hopes.

[1] ‘Taxes and social spending : the shifting demands of the Australian public', Shaun Wilson and Trevor Breusch, in Australian Journal of Social Issues, 38(1) February 2003 39-56.