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

5 November 2009

NO.030

Tax Reform for Australia's Future

Address to the Economic and Social Outlook Conference

Melbourne

5 November 2009

Introduction

Thanks Michael for that introduction, and for welcoming me here today in what is an eventful week for our economy, with the release of the mid-year update on Monday, Tuesday's tightening of monetary policy, and tomorrow's release of the Reserve Bank's Statement on Monetary Policy.

Both MYEFO and the RBA Board's decision provide further evidence of an economy beginning down the long road to recovery, having survived the most dramatic synchronised global downturn in three quarters of a century. And tomorrow we will see more evidence of that from the Reserve. Our economy is stronger, our unemployment is lower, and the budget position has improved substantially from the forecasts in the May Budget. We now expect the economy to grow by 1½ per cent in 2009-10 and unemployment to peak at 6¾ per cent. Still higher than we'd prefer – but lower than we'd feared.

This stronger than expected economic performance is the result of Australia's resilience and the success of stimulus efforts both in Australia and overseas. Stimulus had a greater than expected impact on confidence and kept Australians in work, and combined with a better than expected global recovery, has meant Australia avoided a deep recession.

The economic hazards are not behind us yet. Incomes remain under pressure, with the falling terms of trade bearing down on business profits, and declining hours worked bearing down on household budgets. Business investment remains weak, and we still expect private activity to contract this financial year. But we can now confidently say we've come through the worst global recession in 75 years, in a stronger position than any other advanced economy.

Nobody is happier than I am to see our economy outperform the expectations we held for it in May this year. Australians have every right to be proud of their resilience and their ability, in conjunction with a powerful policy response, to withstand the worst the world can throw at us.

But Australians are not keen on victory laps, and I'm a bit the same. So instead of focusing on recent policy successes I want to focus my remarks on the challenges that remain – on the pressures that will shape our economy, and the policy agenda made necessary by those pressures.

Consider the projected size of those challenges.

Over the next 40 years our population will increase by 60 per cent, and the proportion of our people aged over 65 will increase from 13 to 22 per cent.

Our arid continent, and our resource base make us highly vulnerable to the physical and economic effects of climate change.

And the growth of internal demand in countries like India and China is going to transform our export markets and domestic economy out of sight.

How do we ensure the new challenges become opportunities for progress, not the causes of a dip in the upward trend of our living standards? How do we ensure they help us retain our famed social cohesion in the face of potential major disruptions?

There are many policy levers we can pull, but today I want to argue that part of the answer must lie in the creation of a fairer, simpler and more competitive tax system.

Tax Reform

Tax reform has become something of a personal crusade for me over the last decade – although for different reasons than for some of my predecessors.

I believe it can help us improve the social as well as the financial balance sheet of the nation. It can be a positive force for businesses, for individuals and for so much more besides.

I have been coming to this conference ever since it started in 2002, speaking almost every time about our tax system and how we reform it. I've talked about the importance of tax incentives to families – to help them afford childcare, educate their children, and achieve work-family balance. I've talked about how the interactions of the tax and transfer system can destroy incentives to work, especially for low-income earners. And I've talked about the importance of helping Disability Support Pensioners engage in work, instead of just calling them bludgers.

To me, tax reform isn't just something that should interest economists.

It is of major significance to every single one of us.

Because tax itself is the price we pay for a decent society. And altering the way we tax people and companies provides one of the most effective means we have of achieving the community's wider social and economic objectives.

Economic performance over the last decade has made the need for tax reform greater, not less. Growth slowed during the last decade to 3 per cent per annum, down from 3.2 per cent the decade before.

One driver is that productivity growth slowed to 1.5 per cent per annum compared to 2.2 per cent the decade before. Participation was higher, 64.2 per cent compared to 63.2 per cent in the decade prior, but our participation rates for 55 to 64 year olds are the lowest of the five main English speaking countries. This is a powerful case for why we must seize the opportunities for reform, to deliver sustained prosperity.

Next month we take another step along the path to the tax system of the future, when the Henry Review hands down its final report.

It's been eagerly awaited, which is understandable. There's never been a review with quite this scope, including taxes and transfers across all three levels of government. It will provide a sturdy framework that will guide reform decisions for the next decade and beyond.

Tax Reform Will Not Be Easy

I should say up front that tax reform will be difficult and at times controversial. Unpicking a complicated and well-entrenched tax system is never easy. Indeed it may be one of the hardest tasks I will face as Treasurer, including the challenges of the last 18 months.

Some may say that when establishing this review we broke the 'golden rule' of reviews – that is, never set one up without knowing in advance what it will find.

But we did this on purpose. Real reform is about taking a long-term perspective, and having enough intellectual strength to draw on new thinking and the best evidence.

I can't say I've enjoyed every piece of newspaper speculation. And I'm sure over the coming months we're going to hear a lot of that old refrain: "Can the Government rule out… insert horror tax here." But I can say I haven't regretted giving Ken and his team such a broad remit.

Reform is hard, and made even harder by an expectation that every single taxpayer must be financially better off for a change to be made. This ignores a simple reality of tax reform – that in a fiscally constrained environment there will inevitably be winners and losers. This view also fails to recognise that what's good for the economy can be good for the broader community as a whole.

Reform usually involves difficult choices and trade-offs. For instance, if it's to be revenue neutral, cutting some taxes logically means raising some others. And increasing the efficiency of the tax system may mean some unpopular choices. Taxes like stamp duty or insurance duty discourage people from making rational decisions such as moving home to be near a better job or downscaling when they retire. They are obviously inefficient. But they might also be relatively popular, precisely because people can avoid them even if it means changing important life decisions to do so.

Abolishing these taxes would also mean other revenue sources are needed for the State and Territories to fund hospitals, schools, public transport and roads.

My state and territory treasury counterparts will be saying that while these may be bad taxes, at least they are their bad taxes and that I should keep my grubby Commonwealth mitts off them.

Tax Reform Will Take Time

I raise these issues not to point to specific recommendations of the Review, but simply to highlight the sorts of issues that make tax reform so difficult.

I think that it's precisely because tax reform is hard, that opportunities for major tax system reform don't come along very often. The last comprehensive review of taxation, the Asprey Review, was commissioned in 1972 and reported in 1975.

It took 25 years to implement the major recommendations.

Tax reform won't happen overnight this time around, either. But I also hope we won't have to wait 25 years!

I expect the report will provide a ten-year plan for reform, with recommendations that are evidence‑based, and built on sound, best practice tax policy. I don't expect that the Review will contain draft legislation, or anything resembling it.

The Government will receive the report at the end of this year. We'll consider its recommendations very closely and we'll release the report, along with an initial response, in early 2010.

Our response to the Review's recommendations will come in various forms. There may be some things that we can do immediately, or at least start to consult and develop immediately. In saying this, changes to tax take time, and we'll continue to pursue our measured implementation processes, including our commitment to extensive community consultation.

I expect that other recommendations will need more community debate.

We'll foster this debate over the coming years. But we won't be pursuing these reforms until the community is ready. In some cases this may mean we don't pursue some options without a mandate from the people.

Principles for Tax Reform

I've done my best not to pre-empt what the recommendations of the Review might be, and I will try to keep that discipline, including in the Q&A session that follows these remarks.

But I can tell you about the three highest priority objectives that will be central to our response, which are to make the tax system fairer, simpler and more competitive.

Fairer

Fairness is a value that's part of our national character. When I talk to different parts of our community, one thing that people always emphasise is fairness.

People rarely say to me "this rule is a bit inefficient". It does happen, but usually only in gatherings like this. What people say is "this rule is unfair".

The rule might be unfair because it treats you differently to the person down the street, especially if it's just because they have a better accountant than you. It might be unfair because somebody you know earns more but pays less.

There are other aspects of fairness that people don't complain about quite as much, but that I think are equally important.

It can be unfair if our system, in trying to help the worst off, inadvertently locks them into a cycle of disadvantage. Australia has the fifth highest rate of jobless households in the OECD and the fourth highest rate among households with children.

In this context, fairness means providing a fair reward for work done, and ensuring people have an incentive to work harder and improve their financial situation. But financial disincentives are not the only thing that can lock people into disadvantage – they need skills and good health too.

The very core of our tax system – our progressive, personal income tax base, including taxation of fringe benefits and capital gains – has been shaped by fairness. Someone earning $150,000 has two and a half times as much income as someone earning $60,000, but in 2009-10 they will pay almost four times as much tax.

However, some parts of our system may not live up to our ideal of fairness.

Take superannuation. Our unique superannuation system leaves us well placed, compared to other countries, to face the challenges of an ageing population. And I agree with the Panel's Retirement Income Report that it's important that we maintain incentives for Australians to save for their retirement through super. But I know that some have asked the Review whether aspects of the current taxation of superannuation contributions work against our progressive personal tax scale.

Because superannuation contributions are taxed at a flat rate of 15 per cent, the value of concessions on contributions increase as a person earns more income. Less than 2 per cent of taxpayers earn more than $180,000 each year, but they receive a concession worth 31.5 per cent of their contributions.

Compare this to an average family with kids and total income of $115,000. The primary earner on $80,000 or $90,000 would receive a concession worth 24.5 per cent of his or her contributions, and the secondary earner would receive a concession as little as 1.5 per cent if he or she earned under $35,000.

Overall fairness, however, requires us to think about a wide range of retirement-related policies, and I look forward to the Review Panel's recommendations on a whole array of complex matters related to fairness over a person's lifetime, and to the adequacy and sustainability of the retirement system.

Simpler

A simpler tax and transfer system would please everybody.

It's astounding that more than 70 per cent of Australian taxpayers pay someone else to complete their tax return – more than any other country.

We shouldn't be content with a system that is so complex that an average person with simple tax affairs feels unable to do their own tax return. That's why I'll be especially attentive to any recommendations that make lodging a tax return easier.

In fact, given today's technology, and the ability to pre-fill forms with data electronically, I'd like to hear how a person could complete their tax return with just a few clicks of a mouse.

We should also try to minimise duplication when collecting information from taxpayers, transfer recipients and third parties, like employers and other businesses.

Government collects data from businesses in many different ways, and on many different forms, and tax is a large part of this burden. It's mind numbing to contemplate that government collects 9648 unique data items from different businesses. The Australian Tax Office alone collects 2671 of these, and then there are the State Revenue Offices on top of that.

The Standard Business Reporting Program has already identified a potential reduction of 71 per cent in the data business need to report, but perhaps there is more we can do.

Do we really need as many different taxes as we have? Can we harmonise the taxes businesses face if they operate across state and territory boundaries? These are more questions for us to consider in the coming months.

More competitive

My third objective for tax reform is boosting Australia's economic competitiveness. We're living in an increasingly globalised world, and one in which our tax system influences the level and allocation of investment and savings.

Whether we like it or not, today foreign investment in Australia can be significantly affected by how we tax it.

Our aim should be to minimise disincentives to invest in Australia, but only where this will benefit us. Taxing returns from investments has a place in any sensible mix of taxes, and we need to make an informed and balanced judgement as to how we do it, including the level of company tax.

Attracting capital investment is something Australia has been good at, particularly in the resource sector. Our current account deficits are evidence of that.

Obviously we want to keep investment in the resource sector as high as possible. But we also need to maintain the revenue it brings, and we need to ensure our tax system promotes investment, and by implication jobs and wages, across the entire economy.

And once we have attracted investment, our tax system must also encourage its more effective use – something we have not been doing well in recent years, to the detriment of national productivity.

We need to think about whether we can design our taxes smarter, so that we continue to get a fair return on our natural resource wealth, but also promote a vibrant, broad and diversified economy.

Conclusion

These three objectives of fairness, simplicity and competitiveness are all important if we are to take advantage of our opportunities.

We need to ensure we are not unfairly locking people out of work, that we are not spending excessive time and resources doing our tax instead of doing something of value, and we need to maximise the investment we can bring to Australia.

The three objectives won't be easy to obtain, but I believe we can make great progress towards them.

And I'm not alone in thinking so. The level of engagement with the Tax Review across all parts of the community shows that there's an appetite for ideas about how to improve what we've got.

It's such an encouraging sign to see that the Review has received over 1400 formal submissions and letters, canvassing a wide range of issues, and held more than 180 meetings with business, industry and community sector stakeholders.

The Review has also talked to the States and Territories, government departments and agencies, and listened to national and international tax specialists at its tax and transfer policy conference held earlier this year.

And I want to take this opportunity to thank everyone who has participated, particularly the five eminent Review Panel members and the dedicated members of the Review Secretariat who supported them. I'm genuinely looking forward to receiving their report.

Some people will be wary of changing our tax system. That's only natural. But I want to reassure the Australian people that despite our eagerness to make the system better, we understand the onus is on us to put forward a persuasive argument for change, that people will need to see the benefits, and we'll need to have proper debate. We also plan to consult widely on the specifics of proposals to ensure we get the detail right.

Tax reform will require everybody in the Australian community, governments, individuals and businesses, to pull together. We need to recapture the spirit of the '80s and early '90s, when many meaningful reforms were achieved because we were all prepared to consider some short-term pain, in return for long‑term gain.

And, we need to maintain the momentum of the past 18 months, a period that saw our country pull together so magnificently, in the national economic interest.

We are indeed now on the road to recovery.

While it won't be as dramatic as the white knuckle ride of the last year, the journey to the next destination – long-term prosperity – will be equally difficult and important.

To get there we'll need a good map. That's what the Review will give us.

But a map is only the start. It's my intention to steer the Australian people as far along the road as possible. Because thorough reform of Australia's tax and transfer system is one of the best ways we can convert the successes of the last 12 months into something more enduring.

Thanks for having me and I look forward to your questions.