The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Peter Costello

Peter Costello

Treasurer

11 March 1996 - 3 December 2007

Transcript of 12/04/2006

Press Conference

Committee Room 2R1
Parliament House, Canberra

Wednesday, 12 April 2006
2.50 pm

SUBJECTS: Tax, Victorian underworld, fuel

TREASURER:

Thank you ladies and gentlemen, today I am releasing the report of the International Comparison of Australia's taxes which has been prepared by Dick Warburton, the Chairman of the Board of Tax and Peter Hendy of the Australian Chamber of Commerce and Industry. This is a very useful report and it goes to about 400 pages and it is more exhaustive than anything that has even been done before in benchmarking Australia's taxation system. As I have said previously, because different countries take the weight of taxation in different ways income tax, indirect tax, business tax, value added taxes, excises, property taxes the only way to really compare overall levels of taxation is by accumulating them all and comparing them as proportions of GDP.

The Report that has been done by Messrs Warburton and Hendy, finds that Australia's overall tax to GDP ratio is 31.6, per cent and that Australia is a low taxed country by comparison with the developed economies of the world. In fact, Australia's tax burden is the eighth lowest in the OECD.

The Report finds that Australia's mix between direct and indirect tax is in line with other OECD countries but the composition varies. We have a lower reliance on value added tax or sales tax and a higher reliance on property and transactional taxes, the stamp duties and property taxes largely imposed by the States.

Australia is one of only eight OECD countries that does not levy wealth, estate, inheritance, gift or death duties. Some of the countries that have lower tax burdens than Australia, most notably Japan and the United States have very large budget deficits. What that tells you is that one of the ways they have reduced their tax ratio to GDP is by borrowing. That is they are not raising enough revenue to meet expenditure needs in this generation and reducing the tax burden in this generation at the expense of subsequent generations. As you know the Australian Budget is in balance and as the report finds Australia is one of the few OECD countries that actually has a balanced budget.

Australia is by comparison with the developed world a low expenditure country. We have the third lowest government expenditure as a proportion of GDP. So, in comparison to the United States for example, we spend less than the United States but we tax more because we are financing that expenditure. They spend more but tax less because they are running a budget deficit and sending the bill to future generations, and for reasons which you have heard me on for many occasions, I do not believe that sending bills to future generations, particularly in the context of an ageing population is a wise policy.

Now, when you actually come to compare taxes you have also got to be very careful of classifications. Some countries describe income taxes as income tax, some describe it part as income tax and social security contribution, in our country we describe some parts as income tax and another part as Medicare levy, but you have to really look at overall taxation to compare taxation on income, wages and indeed on indirect taxes as well.

Australia's top marginal tax rate is 48.5 per cent, the OECD average as found by the report is 46.7 per cent, about 1.7 per cent lower. The threshold for Australia's top tax rate is slightly lower than the OECD average but very close to it after the changes which are going to take place on the 1 st of July of this year and that is seen by Chart 5 on page 21.

In relation to business taxes the statutory rate of Australia's company tax is about average to the OECD. We take a little more than average from company and business taxation than is the OECD average. There could be two reasons for that, one is that the profit share in Australia is higher than in most of the OECD, that is our companies are more profitable, the second is our company tax base is broader particularly in relation to deductions and in relation to things like depreciation. So, on the business tax side although our rate is about average the take is higher probably because the base is a little broader and also profitability is stronger.

As the authors say in their report, Australia's reliance on property and transaction taxes which are virtually all levied by State and Territory and local governments is relatively high compared to the OECD. Australia's reliance on property taxes is in line with the OECD ten, that is a sub-set which the authors pulled out of the 30 countries of the OECD, but we have the highest tax burden on financial and capital transactions.

So, what does the report show us? The report shows us that Australia is a lower spending country than practically all of the developed world, we are one of the lower taxing countries in the developed world, we run budget balances off that taxation base, we take a little more weight on the business taxation system than we do on the income tax system, that we have low value added taxes but high property and transaction taxes and as consequence of that property and transactional taxes are high but gift duties, estate duties and death duties are non-existent.

I want to thank the authors of the report for the very considerable work that they put into this report, I think it is important to read it in its totality and to read it with all of the qualifications and caveats that are put in relation to it, this will provide a very strong basis for on-going tax reform because it identifies those areas where we are strong and those areas where we should direct our attention to improving, and the Government's continuing commitment to improve Australia's taxation system will take the findings of this report into account.

JOURNALIST:

So Treasurer, is it the States that need the tax reform rather than the Commonwealth?

TREASURER:

Well, we have laid down already a programme to abolish many transactional taxes. That is the agreement I got from the States at the Ministerial Meeting a week or so ago. Stamp duties on leases, stamp duties on mortgages, stamp duties on hiring agreements these have all been identified by the Government for abolition, we have made progress on many transactional taxes but there is further work to be done and we have to continue to work on that.

JOURNALIST:

Treasurer, given your comments on the top marginal rate on what the report says, is there anything in here that has changed your mind that the 47 per cent rate should remain and only the thresholds change when the Government (inaudible) changes?

TREASURER:

In the recent budgets what we have done is we have increased the thresholds for the top marginal tax rate and I think as you can see from the report itself that was the area that needed to be addressed.

JOURNALIST:

(inaudible) rate, you seem pretty locked into keeping that number but just changing the threshold.

TREASURER:

Well I am telling you what the Government's policy has been. The Government's policy has been to increase that threshold because as you can see from Chart 5 on the Executive Summary the threshold was considerably

JOURNALIST:

We haven't got the report.

TREASURER:

Oh, okay, I'm sorry. Well, please, somebody distribute the report, I am sorry. It is also up on a website you will be pleased to know, available on a website and it should be this afternoon, we have many, many copies here, sorry. I will just wait for those to be distributed.

JOURNALIST:

So where was that Treasurer, that chart?

TREASURER:

Let me go to the Executive Summary, page Roman Numeral 21, Chart 5. The red line is the average top marginal tax rate of the OECD which is 46.7 per cent, Australia as you know has a top marginal tax rate of 48.5, you can see that Australia is just above that red line and in terms of its threshold, apart from its threshold for that top rate being higher than countries like Ireland and the UK, it was pretty low compared to the 30 countries of the OECD. These were the changes we introduced in last year's Budget pushed that threshold to a little over two-times the average wage and improved us against all countries really, but we overtook Germany and the Netherlands and New Zealand, Norway etcetera. Now that is the reform that we put in place in last year's Budget which means that the threshold for the top rate in Australia is near the average, a little under, and the rate is near the average, a little over.

JOURNALIST:

Treasurer, you said that this report provides very strong basis for on-going tax reform and evident by State areas, which Federal areas of tax reform does is provide a very strong basis for tax reform?

TREASURER:

I think we have got to make sure we stay in front of the pack in all areas business areas, income tax areas the only area I will be ruling out is the value-added tax area. This report finds that we still have comparatively low reliance on value-added tax, imagine where we were before we introduced the 10 per cent GST, but I am ruling out absolutely any increase in the GST.

JOURNALIST:

(inaudible) the report says tax on superannuation is too difficult to benchmark, but the superannuation industry says it claims that (inaudible) the highest super taxes in the world?

TREASURER:

Well you have to be very careful about this because very few countries in the world have extensive superannuation systems. We, and I am going from my own experience at international finance meetings, Chile and ourselves probably have the most extensive superannuation systems, there aren't all that many countries to benchmark yourself against in superannuation because we have such an extensive system. But the superannuation regime in Australia is very concessional. It is very concessional and one of the reasons why it has a large attractiveness, the idea that superannuation system is not concessional is completely wrong. If you take income into superannuation rather than face a top marginal tax rate of 48.5 per cent it is 15 per cent. The earnings on the superannuation rather than being at the top rate of 48.5 per cent is 15 per cent and at the exit of course you get a credit for the contributions. Now, superannuation taxes in Australia are highly concessional, in fact in the Taxation Expenditure Statement which we release every year, the largest tax concession in the Australian taxation system is superannuation.

JOURNALIST:

Treasurer, do you rule out any wealth tax, (inaudible) tax, death duties or anything of that sort?

TREASURER:

Yes, I'll rule that out absolutely. Australia is one of the few countries in the world that does not have death duties and we won't be having any. And I point this out, there are people that will extol to you the benefits of America's tax system. America has death duties. Britain has death duties. We certainly won't be following American and British experience down that path. Sorry.

JOURNALIST:

The Government seems to have been quite confused and confusing in the messages it has been sending out about whether there should be more tax reform or whether all that's rather passé. Why are we getting such mixed messages?

TREASURER:

I don't think we are, Michelle. I don't think there have been any mixed messages at all. You know, I think there's been a lot of media commentary but the position of the Government is, we've introduced a much broader indirect tax base, probably still low by Australian standards but imagine where we would have been if we hadn't have done it. We have very considerably cut capital gains taxes, still probably by developed world standards a bit above average but imagine where we would have been if we hadn't had done it. We have moved thresholds out for top marginal rates. Imagine where we would have been if we hadn't have done it. We have cut company tax to a statutory rate, which compares well, but imagine where we would have been if we hadn't have done it. So we have made progress in all of these areas. The tax burden to GDP has been kept contained and what we want to do is we want to continue to build in all of these areas. To continue to reform, to keep Australia's business taxes competitive. To continue the reform to keep our income taxes competitive and this process keeps on going on. But what I think you'll see from this report is that there are not glaring areas with the possibility of property and transactional taxes where we're overweight. It is a question of capitalising on the progress that has been made and continuing it.

JOURNALIST:

Saying that you want tax cuts not tax reform, both you and the Prime Minister have said this on a number of occasions in recent months.

TREASURER:

Well, what's the difference?

JOURNALIST:

What's the difference between tax cuts and tax reform?

TREASURER:

Yes. Yes.

JOURNALIST:

Do you see no difference?

TREASURER:

Well, you seem to be having trouble answering the question. What's the difference?

JOURNALIST:

Well, I would have thought reform

TREASURER:

I don't think when people say by tax reform, what they're saying is they want higher taxes, I don't think they're saying that. I think they're saying we want tax reforms which will cut taxes, keep them low and keep us competitive. That's what I think they're saying.

JOURNALIST:

Treasurer, are you saying

TREASURER:

Unless you want to say I want a tax reform which will introduce death duties. I don't think anyone's saying that.

JOURNALIST:

By some restructuring of whatever sort.

TREASURER:

Yes, restructuring to keep business tax low and income tax low.

JOURNALIST:

Treasurer, from July this year, you're going to encourage single mothers into the workforce. This report shows that they are a group that is the most punished by the current tax system.

TREASURER:

By what?

JOURNALIST:

That they are among some of the groups most punished by the current tax system. Is there any change afoot in that area?

TREASURER:

No, the Australian taxation system has a very generous safety net that looks after people that are single parents, and I think it stands up well with most of the developed world. Now there's one thing that is different about the Australian welfare system and that is, it is income tested. It is targeted. And that is a good thing. If you want to have an untargeted universal welfare system you'll get a much bigger spend to GDP and a much bigger tax to GDP. That's a good thing. And I don't think anybody in Australia would want to move from a targeted welfare system to a universal welfare system.

JOURNALIST:

But is it a good thing if you are deterring people from going back to work because they can get money more easily by staying on welfare?

TREASURER:

Well, you've got to be very careful here. You say it's deterring people from going back to work because it's looking after them. You think they should get less? Do you think single mothers should be getting less than they currently are now? Because that's the implication. I don't think single mothers are doing it rich in Australia, personally.

JOURNALIST:

Treasurer, do you think there is a case for widening the corporate tax burden a little bit given that it we are slightly higher than the OECD average? And, secondly, do you think there is a case to make this sort of report an ongoing process in the same way that you've done with the Intergenerational Report?

TREASURER:

Well, I think there probably is something in doing this on an ongoing basis. Yes, I do. I think they'll be useful. Yes, well I'm coming to part A of the question after having answered part B. The answer to part B was yes. The answer in relation to part A is, obviously we've got to keep our eye on that. As I said to you our company tax rate, which I reduced from 36 per cent to 30 per cent is standing up well. The business take is a bit higher. Now part of that could be, and you've got to be very careful here, the profit share. Nothing surer than if company profits turn down, company tax would turn down and company tax to GDP would turn down. Nothing surer than that. But it could be a cyclical thing. But it could also be that in terms of concessions which are available in other countries, there are more anomalies and more concessions. So you've got to keep your eye on that as well. Then you've got to ask yourself this question. Do we really want a business taxation system that has more concessions or would it be better to do it by keeping the base broad and reducing the rate. Now, the reason I'm going through all of these things is to show that there are arguments every way in these debates, the only way that one can really say anything sensible I think is by keeping all of the pieces of the pie in your framework at once. And the most meaningful comparison, is that comparison that takes everything into account and compares it with everything that's in each other country.

Sorry, Mr Colbatch, sir.

JOURNALIST:

Does this report

TREASURER:

I'll come back to you, I'll back down to the right hand side in a moment. Yes, sir.

JOURNALIST:

You mentioned that those two reasons, those were the two reasons why our corporate tax take is higher. Can you give a split or does the Report give a split of how much is due to higher profits and how much is due to a broader base.

TREASURER:

I don't think it does with any degree of specificity, I'm sorry, and that's why I can't give it to you. It does observe that some of the concessions are more generous in other countries but it can't tell you how much is due to concessions and how much is due to profits. And I do ask you to bear in mind that profits are extremely strong in the Australian economy at the moment. Our profit share to GDP is at all time record levels so there has got to be a component for that in there. Yes, sorry.

JOURNALIST:

Treasurer, you say in here, the Report says in here that you are just getting your cost, getting your tax on the compliance costs, so, you know, 2 to 10 per cent of revenue yield, are Australians paying far too much just to have their taxes done and, secondly, isn't this report telling us what we already knew?

TREASURER:

Well, I think it's the most extensive international report that's ever been done in Australia and as far as I can tell, and I'll be corrected, probably the most extensive done in any country of the OECD. I'm not aware of any other country that's attempted to do this. So here we are, we're certainly a national first and could well be an international first. So it's well worth doing, don't you think?

JOURNALIST:

After 10 years of tax changes to thresholds, rates and tax reform, structurally like the GST, are you now saying that this is as good as it gets on tax reform?

TREASURER:

Oh no, I think, you know there's an old phrase, Dennis, two things certain in life, death and taxes. And long after you and I have gone, and we're both survivors, there will still be taxes in the Australian economy and mark my words, they'll still be arguing about how to apply them. There's no super-fix, you see, if there were, we wouldn't need to reinvent the wheel, would we. We would just go to Nirvana and enact its tax system here. But we're not quite sure where Nirvana is. And we are going to have struggle with this in Australia but so too will the Americans and the British and the Canadians and the New Zealanders and the French and the Germans and the Swiss and everybody else. I'll tell you something, many of those countries would eye us. One of the things that the Americans are now looking at doing is a broad base value added tax. Never been able to do it. So there are a lot of countries that think we are further down the path than them but are we at the end of the path? No. No way. Whilst there's life, there's more to be done.

Catherine, Catherine.

JOURNALIST:

(inaudible) taxation and given that we are slightly higher than the OECD average, is it a problem for the Government in terms of considering changes to the rate of corporate taxation or as you say, concessions or other ways the Government could look at doing this. Is there a difficulty the Government has to consider between the corporate tax rate and the top rate of personal income tax and to what extent would that be a factor in the Government's decision making?

TREASURER:

Well, you know, you'll find one of the advantages of doing these reports is you do get some perspective and can I take you to page 27, Roman 27, Chart 12. The light blue bar is the top personal rate of all those countries, and the dark blue is the corporate rate. Now, you have often heard it said well, one of the problems with the Australian taxation system is they are not the same'. But I invite you to look at the graph there and see how many countries do harmonise their top corporate rate and their top marginal rate. There is only one and that is the Slovak Republic. It is not the United States and it is not Britain and in fact there are some countries there, when you look at it, that have much larger disharmonies than Australia. Have a look at Ireland, you have heard people talk of the Celtic miracle. One of the advantages of Ireland has been extremely low company tax rate. I think it is about 10 per cent or 12 per cent. Extremely low. But Ireland has quite high marginal individual income tax rates. And so Ireland which is sometimes held up as the Celtic miracle has an enormous disparity between the two. Much greater than Australia. Just an interesting graph, isn't it, to inform debate. What should we learn from that? Should we say well Ireland has been successful so what we need is more disparity? No, I do not think we should say that. Or the Slovak Republic is a good place and it has got less disparity? What you learn from these sorts of things is various pieces of the jigsaw and you have got to take them all into account and it is only when you take everything into account, in every country and compare it that you get real live comparisons.

JOURNALIST:

Can Australia sustain a top marginal rate of 48.5 per cent, given that it is above the OECD average and given that you consistently say we have to continue to reform to maintain our international position?

TREASURER:

Well look, this is an interesting report and it shows that we are a little over the average and obviously that is something that we will have to bear in mind.

JOURNALIST:

The two basic conclusions here is that 1) Australia is a low tax country and that direct taxation on individuals is low by comparison in the OECD as well. With the Budget upcoming does this report snuff out hopes of a tax cut in the upcoming Budget?

TREASURER:

Look, obviously I am not going to announce now what we will do in the Budget, I am not going rule in things and I hope you will understand why I do that. I do it every year because the speculation of this that and the other does not really help put these things together. What this will do, it will (inaudible) the debate and inform our Cabinet. The reason I am releasing this today is that I had the first opportunity to brief our Cabinet in a meeting which we have been having today and it has probably just finished. I wanted to brief the Cabinet on this before releasing it publicly. Now I know that I have been criticised for sitting on this report for a week but the Cabinet is entitled to be briefed before they see it in the press. There is no secret about this. This was done to inform public debate and I hope people will read it with an open mind. And I make the point that a lot of this material has been available publicly but it has been put together in the most comprehensive way possible by two independent people and I hope it informs the debate. It is just interesting reading. Now, once we go through reading it we realise some areas we are doing better than others, well, let us try to work on the other areas.

JOURNALIST:

(inaudible) rate, and also that is for shares held between one and two years and then for shares held for more than 10 years, we are the second highest top CGT rate. Is that of great concern given that you are trying to prioritise wealth creation, I suppose?

TREASURER:

Well see, one of the things that other countries do that Australia does not, is that they step down their Capital Gains Tax rates according to the period that you have held the capital asset, so that the rate you get after holding it for five years is lower than the rate you had after holding it for one. The rate you get after holding it for 10 is lower again. Australia only has two rates of capital gains tax: full marginal tax rate if you have held it less than 12 months and half marginal tax rate if you have held it more than 12 months. Now, that is a reform we introduced. Before that it was full marginal rate regardless of how long you have held it on a post-85 asset when the Capital Gains Tax came in. Now let me make this point, it shows that for long or held assets we are still at the higher edge. But I have heard people say that the Capital Gains Tax discount is a concession which should be removed. And if you look at that, if we remove that concession, we go right out of whack with the rest of the world. So, how do I read that graph? A vindication of that decision, back in 2000, to cut Capital Gains Tax, a warning not to reverse it, and if anything, a bit of an instruction that one of the things you could consider would be different treatment for longer held assets. That is the way I would read that.

JOURNALIST:

Treasurer, you have made some strong comments today about what is effectively the use of taxation as a weapon in the fight against organised crime in Victoria. Can you tell us anymore, are there further targets for the Tax Office or yourself, and Victorian Government has suggested today that you are attacking the Victorian Police for not being effective enough in this area?

TREASURER:

Look, in Melbourne I think over 20 people have been murdered one way or another in organised gang warfare, which as far as we can tell has broken out between criminal syndicates who want the right to sell drugs and destroy children's lives. This is not a party game. This is not a scene from The Godfather. These are people who are making money from destroying children's lives, who make so much money out of it that they are prepared to kill for the distribution rights. And as far as we can tell, kill witnesses who might give evidence against them, and as far as we can tell, go missing during their trials. Now, if you think that is a good state of affairs, I do not. You know, this is gangland warfare for control of the drug trade. Now, what has got to be done? Well, obviously people who are responsible for murder ought to be found guilty and put in jail and people who make amphetamines ought to be found guilty and put in jail and that is the way to deal with it. But if on the way through, if that cannot be done, and the tax law can be used as an adjunct to take some of their ill-gotten gains off them, that will be done. Just because your income comes from illegal source does not mean that it is not taxable. It is taxable and it can also be confiscated. And it is regrettable that it ever gets to that stage because we would hope that they would not make the income in the first place. And in the second place we would hope they would be convicted and be in jail. But, in the third place at least they can return some of their ill-gotten profits by way of tax.

JOURNALIST:

What is your view of the Prime Minister appearing before the Cole Commission tomorrow and what is your view of the post-box defence?

TREASURER:

Well the Prime Minister is appearing tomorrow because as he said throughout the Cole Royal Commission if Mr Cole wanted him to come and give evidence, or any of his Ministers to come and give evidence, they would be perfectly happy to do so. And true to his word he has been asked to go and he will go and I think he has made abundantly clear his position in relation to all of this. Nobody in the Government is hiding. To see Ministers of the Crown going to the witness box and submit themselves to cross examination is, I think, an indication as to the fact that the Government is being fully transparent. Commissioner Cole will have heard from three very senior Ministers in relation to their knowledge of the facts and he will bring down his report and we will await the conclusions with interest.

JOURNALIST:

Just on childcare, you say that the Report finds that Australian childcare costs are relatively low when you measure them by how much of an extra dollar is kept when someone is returning to work, but implicitly that seems to rule out those families that make a choice that the cost of childcare would just be prohibited and so one parent does not go back to work.

TREASURER:

Sorry, just say that a bit louder.

JOURNALIST:

Well, implicitly by saying that by measuring childcare costs against the dollars the percentage of the dollar kept when you return to work that does not seem to take account of those families that say childcare costs are just too prohibitive, one parent will stay at home until the children enter school. In your view, is there a case for further taxpayer assistance to help families get that second parent back into the workforce, if that is what they want to do?

TREASURER:

Well, we have the Childcare Benefit which is generally paid to the childcare centre and is taken as a deduction off the fees. We are introducing a Childcare Rebate which will rebate 30 per cent of the costs after you have already received the Childcare Benefit. We had a massive increase in Outside School Hours care recently. Now, I know it is hard for families juggling work and child minding, but the new Benefit, particularly the Childcare Rebate I think is going to make a big difference and it means that the assistance for childcare, when that is fully implemented from 1 July, will be greater than previously. Now, you can always say that more can be done, I guess more can always be done but more is being done than ever before. That is the way I put it.

JOURNALIST:

(inaudible) price rises, and do you think $1.50

TREASURER:

It is never going to finish if this keeps up!

JOURNALIST:

$1.50 at the bowser, is that a realistic possibility?

TREASURER:

I hope not. I hope we do not get anywhere near that. Now make no mistake, world oil prices which are at record levels and petrol prices which are at punishing levels and in noone's interest, one of the things you will see in this report by the way, is Australia has a very low excise on petrol prices. But unfortunately we do not control the world oil price. Very last question.

JOURNALIST:

Are you concerned the world oil price is $69.00 a barrel will flow through to inflation?

TREASURER:

I hope not. We are living through our third oil shock and the last two ended really badly for the world and for Australia so let us be vigilant to make sure the same thing does not happen here. Thank you all very much for your time.