The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

25 February 2009

NO.004

Tax Reform for Prosperity, Productivity and Fairness

Address to the Nation Tax Symposium

National Press Club, Canberra

25 February 2009

Thank you to everyone for coming along this evening, and particularly to Julian (Disney) – Julian, it was good to have a yarn the other day – for ensuring we have such a good cross section of Australia’s welfare, union and environmental community here to discuss Australia’s taxation system, including friends from ACOSS and the ACTU.

Congratulations to the ACTU, ACOSS, the Australian Conservation Foundation and the Consumers’ Federation of Australia for organising this important symposium. For drawing together representatives from unions, community services, environmental and consumer groups to discuss the Tax Review and the potential challenges, opportunities and choices facing Australians over the next few decades.

I’d also like to welcome the announcement earlier today of a further consultation process for the Tax Review.

Importantly, this consultation will entail public meetings to be held in all capital cities and two regional centres – Geelong and Wagga Wagga. This will help capture perspectives from the general community on the tax-transfer system that may not be represented by peak organisations or provided in written submissions.

This is very important, just as events like tonight are also important as we go about this vital task of tax reform.

Before I get into the main game tonight, I do just want to say a few words about the values underpinning the Government’s $42 billion Nation Building and Jobs Plan.

The Plan was all about temporary investment with lasting gains – gains that stay true to the values of fairness and opportunity that all of us hold so dear.

We can be collectively proud of the fact that such worthwhile initiatives as the biggest school modernisation program in our history; a massive investment in social housing; a commitment to insulate more than two million homes with the effect of taking something like one million cars off the road are part of our Plan – all these things to stimulate the economy while delivering for some of the most deserving people in our society.

And the tax bonus and various other payments we are providing to support jobs now, also have a worthy congruence – because those on low and middle incomes who need the most help are also those whose spending is likely to have the most positive impact on our economy.

And most of all, we are doing all we can to support jobs now and into the future. Because we understand, like you do, the human cost of joblessness in a global recession as fierce as this one is.

There are many familiar faces here. And many of you will be familiar enough with me to know I’ve always seen economics as about people, more than spreadsheets.

You also know that before I became Opposition Treasury spokesman and then Treasurer I spent a number of years as the Shadow Minister for Family and Community Services. And during that time I got to know many of you.

I learned a lot and that experience confirmed a number of things my previous political and academic life had taught me. In particular it exposed two fictions that lay at the heart of the previous government’s approach to economic policy.

The first was their portrayal of welfare and union leaders as merely sectional interest groups, with no interest in Australia’s economic future.

In recent years we’ve seen those who look after the disadvantaged and the low paid put together a powerful case that increased fairness and opportunity are the basis for future economic strength and prosperity.

And this case – so eloquently put by so many of you – has helped inform the Government’s pursuit of higher productivity through an Education Revolution, increased workforce participation and social inclusion. You made the case that a fairer society is a wealthier society.

The second fiction – which I address at length in my book Postcode – was the idea that the economic boom of recent times meant all Australians have never had it so good – a view my latest shadow treasury opponent continues to propagate.

It’s true the recent commodities boom significantly increased national prosperity – due in large part to the reforms of the Labor Governments of the 1980s and ’90s. But during that boom too many Australians were left behind.

Too many were allowed to leave school early. Too many were given insufficient help to move from welfare to work. Too many were left open to exploitation as a result of WorkChoices. And too many were left without the skills they needed to move from unskilled, low-paid work to a better future. We didn’t make the boom pay.

The Government was elected with a mandate to change all that. We’ve made a start. And now, despite the tough economic times, our emphasis on greater prosperity for the nation through increased opportunity for all will not change.

Our tax and transfer system will have an important role in achieving this national goal. This Government believes in tax reform and improving our transfer payments system. That’s why we established the Henry Review.

We believe it is important that every Australian has their say in the design of their future tax and transfer system. We want a diversity of views – from business, from the welfare sector, from the union movement, from environmental groups and from individual Australians from all walks of life.

And that’s why forums like this one are so important.

Let me put it simply: the purpose of a better tax and transfer system is to promote national prosperity in a way that is consistent with our national values of fairness and equity.

We’ve made a start on this.

In the 15 months we’ve been in office, we’ve already made the tax system fairer and more efficient.

We’ve delivered on our election commitment to give working families some much needed tax relief through personal income tax from 1 July last year.1 We’ve already legislated further tax cuts from 1 July this year and again from 1 July 2010.2 These tax cuts are part of a plan that shows working Australians we’re serious about making work pay.

The Government has also demonstrated its commitment to better targeting social security payments – making sure they are no longer received by millionaires. In the 2008-09 Budget, the Government imposed a means test on the Baby Bonus, so that only those households earning $150,000 or less are eligible to receive it.3

For the first time, access to Family Tax Benefit Part B was also restricted to households where the primary earner earns $150,000 or less.4

Since we’ve come to office, we’ve also had to confront the impact of a severe global recession – the likes of which we haven’t seen for many decades.

The Government has acted swiftly to support jobs and invest in long-term growth. This includes upgrading school facilities across the country, improving the quality and energy efficiency of our housing stock, investing in new training places, and accelerating the implementation of our nation building funds and projects.

We’ve also brought in a new investment tax break for businesses to encourage capital investment, worth an estimated $2.7 billion over the forward estimates period.

But the need to respond swiftly and decisively to the global recession shouldn’t mean we lose sight of the need for longer term and more fundamental reforms.

The basic structure of our tax-transfer system has remained largely unchanged for two decades, and piecemeal changes have over time added complexity, deepened inequities and added to the compliance burden for taxpayers.

Clearly the time has well and truly come to look at the design of our tax-transfer system and embark on a fresh reform path to improve equity and efficiency in the tax system and position us to meet future challenges.

To achieve the purposes we set, we need a tax system that is internationally competitive so it can create jobs, that rewards hard work, and that is simpler and more equitable.

Tonight I want to hear from you.

But first I want to set out very briefly some of the priorities for us to jointly consider.

Strengthening the National Economy

We traditionally consider the primary purpose of our tax-transfer system as raising sufficient revenue for the provision of quality government services and ensuring the right mix of incentive and redistribution to those in need.

Especially in difficult times like these, we need strong revenues to support purposeful public activity.

But I want our tax and transfer system to be much more. I want it to be a springboard for us to modernise and strengthen the national economy so we can support more jobs and generate more wealth for all to share.

The tax-transfer system can directly affect just about every conceivable decision and transaction in the economy. Decisions about working, saving, investing and consuming that determine our overall living standards. So it’s important that it sends the right signals.

Encouraging Productive Investment

The quality of investment the tax and transfer system encourages is particularly important.

As an important point of principle, we want to promote productive household and business investment decisions.

So we need to address tax biases that encourage speculation and other unproductive investments. Removing these biases where we can offers the potential to increase productivity and long-term economic growth.

Reducing High Effective Marginal Tax Rates

Our tax and transfer system should also reward hard work by removing the disincentive and plain unfairness of high effective marginal tax rates.

More direct targeting of assistance to those in need is important for ensuring equity, but it can also reduce the benefits to individuals from returning to work and discourage them from fulfilling their potential.

While the OECD has recently found that Australian employment-to-population rates and participation rates are above the OECD average,5 this is no cause for complacency.

In the long-term, to be a fairer society and better allocate skills when our economy recovers from the global recession, we can’t afford to have a tax system that discourages so many people from contributing those skills.

Low income single Australians can face effective marginal tax rates of more than 70 per cent.6 For single income families, these rates can be over 90 per cent.7 And these figures do not capture the other costs of working, such as child care costs.

The Community Tax Forum will have valuable views on the potential trade-offs between a targeted system and participation disincentives, and I welcome your views.

Eliminating Complexity

Another factor that diverts spending and investment away from productive outcomes is complexity.

It’s true some complexity is unavoidable – particularly where the tax and transfer system is open to exploitation through unintended loopholes that need to be closed. But ultimately complexity is regressive and should be minimised.

The ultimate test of complexity is whether businesses are encouraged to make productivity-raising and job-creating investments, and whether employees and those not in the workforce are able to easily understand their entitlements and obligations.

Almost three-quarters of Australians use a tax agent to complete their tax return.8 This is considerably higher than in other comparable countries – in New Zealand, for example, the same figure stands at 30 per cent.9 Surely we can design a tax return system simple enough to make this sort of cost to working families unnecessary. As a matter of principle, working families should not have to pay hundreds of dollars per year to accountants to fill out their tax return.

And I believe businesses should be spending their money employing extra staff, purchasing extra services and investing in new capital equipment, rather than hiring expensive tax lawyers to beat the tax man.

Over the long-term, perverse incentives in the tax system are not sustainable. So the Henry Review will examine this aspect as well.

Improving Equity - Ensuring Benefits Remain Adequate

Our tax system also must increase equity. Australians have a long-founded commitment to equality, to the principle of a fair go and compassion for those doing it tough. The tax-transfer system should help us achieve these objectives.

Let me say, I believe in the principle of progressive taxation. A fair and robust system taxes people on a progressive basis, according to their capacity to pay, and provides a safety net for the least well-off, who have not enjoyed the benefits of growth.

Despite our efforts, the current worldwide economic downturn means the income support safety net will become important for more Australians. As a result, we must ensure payments remain adequate and that no one is allowed to fall between the gaps of the system.

We must do everything we can to give people the opportunity to participate in and contribute to society.

This Government wants all Australians to live with dignity. To this end, we commissioned the thorough review of the support available to our seniors, carers and people with a disability, to allow us to develop an appropriate and considered response to the challenges we have inherited.

The Pension Review – led by the Secretary of FaHCSIA, Dr Jeff Harmer – will report to Government in the next few days.

The Henry Review will also provide recommendations to the Government on the broader retirement income system next month.

We will consider both sets of recommendations and provide full responses in due course.

Cracking Down on Avoidance

A fair tax-transfer system also minimises opportunities for people to avoid their responsibilities.

To bolster the integrity of the system, we have moved to tighten the operation of various arrangements, such as fringe benefits tax, family trusts and employee share schemes.

We have also provided $700 million in extra funding over four years to the Australian Taxation Office to enhance compliance activities, focusing on large businesses and wealthy individuals.10

The sort of integrity and compliance we demand from low income Australians we will also demand from high income Australians.

These measures help ensure that everyone contributes their fair share of tax, and so spread opportunity by improving the level of services the Government can provide, as well as raising community confidence in the system. Tax reform cannot shy away from this important goal.

Improving International Competitiveness

There’s one further point – and that’s the need for our tax system to remain internationally competitive to attract investment and jobs.

It’s true that when all forms of taxation are taken into account, Australia is far from the most highly taxed nation in the OECD.11 But it’s also true that now, more than ever, Australia’s economic fortunes are linked to our ability to attract investment and international business. And that means our ability to support jobs.

One of the questions facing our taxation review – and one we must all engage with – is the competitiveness of Australia’s statutory corporate tax rate. Our corporate tax rate was the ninth lowest in the OECD in 2001 – by last year it was the 22nd lowest.12 And OECD analysts13 have recently argued that competitive corporate taxes can boost economic growth by increasing both the quantity and quality of investment leading to higher labour productivity and real wages.

As I have said before, we need a tax system that is internationally competitive and these arguments for reducing company tax rates are something the review panel will also need to consider.

Conclusion

Tonight, I want to leave you with the assurance that this Government will not let the challenges of our current downturn deflect us from our longer term reform agenda.

In tax, we want to put together a blueprint for the next quarter century – a plan implemented over time, and determined by economic circumstances. I welcome the Community Tax Forum’s help with this.

Getting the right reforms in place will mean adequate funding available to provide public goods and services for communities and adequate assistance for individuals and families who are less well-off well into the future.

But this also requires us to put in place changes that increase our international competitiveness and minimise distortions that affect the quality of investment. It will also require us to get rid of disincentives to work and to ensure everyone contributes their fair share of tax.

But if we get this right, it will help us achieve the sort of purpose I know everyone in this room agrees with: the creation of a nation that is more modern, more productive, more prosperous, but also more equitable and more socially and environmentally sustainable. A nation that supports jobs and rewards hard work.

I want to thank you for coming and now hear some of your ideas for reform.


1 Income Tax Rates Act 1986, Schedule 7, Part I.

2 Income Tax Rates Act 1986, Schedule 7, Part I.

3 From 1 January 2009, a Baby Bonus income test will be introduced. As at 1 January 2009, the income limit for the six months following the birth of the child is $75,000.

4 From 1 July 2008, Family Tax Benefit (FTB) Part B is limited to families (single parent or couple) where the primary earner has an adjusted taxable income of $150,000 per year or less.

5 OECD, 2008, Employment Outlook, OECD, Paris.

6 Australia’s Future Tax System Review Panel, 2008, Australia’s future tax system – Consultation paper, Australian Government, Canberra, p.108, Chart: 4.11.

7 Australia’s Future Tax System Review Panel, 2008, Australia’s future tax system – Consultation paper, Australian Government, Canberra, p.94, Chart: 4.5.

8 Australia’s Future Tax System Review Panel, 2008, Australia’s future tax system – Consultation paper, Australian Government, Canberra, p.171.

9 OECD, 2005, Survey of Trends in Taxpayer Service Delivery Using New Technologies – Table 9, p.59.

10 The Government has funded the ATO with an extra $700 million over the next four years specifically to build compliance through assistance and education activities.

11 Australian Treasury, 2008, Australia’s future tax system – Architecture of Australia’s tax and transfer system, Australian Government, Canberra, p.202, Chart: 5.1 and p.204, Chart 5.3.

12 KPMG 2008, KPMG’s Corporate and Indirect Tax Rate Survey 2008, KPMG, London.

13 Johansson, A, Heady, C, Arnold, J, Brys, B and Vartia, L 2008, ‘Tax and Economic Growth’, Economics Department Working Paper No. 620, OECD, Paris.