15 July 2015

Address at the PwC Tax Reform Forum, Melbourne

Note

Check against delivery

Introduction

Good afternoon everyone, and thanks Tom (Seymour) for that kind introduction.

It's great to be here today to continue this important conversation about tax reform in Australia.

As you all know, I started this conversation with the Australian people back in March when I launched the tax discussion paper and stated the Government's desire for a better tax system that delivers taxes that are lower, simpler and fairer.

This is the first step towards a Tax White Paper that the government will take to the Australian people at the next election.

It's a conversation I want all Australians, wholeheartedly, to participate in. That's because this is an issue that goes to the very heart of our nation; it affects almost every aspect of our lives, and the generations that follow.

And we've now reached a crucial point. The initial discussion period is largely at an end, and we're ready to shift to the options paper stage.

So as we approach this, I want to give you an insight into the process to date; share with you some of the challenges that our Tax White Paper must address; and outline the Government's principles in approaching the task of tax reform.

The challenge ahead

Before I go into the feedback we have already received from the community, it's important to first briefly set out the challenges we face if we are to continue enjoying strong economic growth — and, with it, ever-improving living standards.

Without setting out that challenge, there cannot be a meaningful debate about reform.

The recent Intergenerational Report provides us with a good reference point.

It shows that, as Australia's population ages, we will become increasingly reliant on productivity growth to increase our overall living standards.

Increased productivity can only happen through change. Change that will boost our capacity for growth: in trade; in new technologies; in creating the right conditions for our businesses to grow.

This is how Australia will remain an enviable place to live; how we will help people avoid the trap of unemployment; and how governments will have the means by which to help those in most need.

And we must embrace this change with the same gusto and resilience as we have in the past.

We're capable of this. We've done it before, and we can do it again.

And that's because we understand the benefits that will flow from positive change.

The structural reforms, including the tax reforms, of the '80s and '90s helped drive impressive growth in incomes.

Income growth over this period was broad based, with low and middle income households experiencing strong growth in incomes. The disposable income of the typical Australian household increased from $505 in 1995 to $790 in 2012 – a 56 per cent increase in just 17 years.

Australians have benefited from those reforms to our economy. We have benefited through increased returns on capital, along with declining unemployment and rising wage growth.

There is no finishing line for economic reform. It is simply about keeping up with and perhaps even getting ahead of broader societal change.

Of course some governments try to resist change. It never ends well.

The unfolding modern Greek tragedy that has dominated the media over the last few months is a timely lesson.

The failure of the Greek government, and Greek society more generally, to undertake necessary structural reform from privatisation and pension reform through to taxation reform has left the Greek economy in a desperate position.

Five years in recession and an economy now more than 25% smaller than its peak is a lesson for all.

Most tellingly those people who will suffer the most from now essential and immediate reforms will be the poorest and most vulnerable in the Greek community who rely the most on unfunded Government support.

This is patently unfair.

So timely and measured reform ensures that our quality of life and our living standards continue to improve over time.

A better way

Australians recognise this and I have been encouraged by the contributions from the community to the tax discussion paper.

We have received more than 800 submissions (including two from PwC). All public submissions are available on our website www.bettertax.gov.au.

We have seen the emergence of a consensus.

There's an understanding of the need for change. No submission has argued for the status quo – that the existing taxation system is fair or future ready.

Australians want a tax system that is simpler, more certain and competitive. They believe any reform must include state taxes, which are some of the most inefficient in the country.

Views are mixed when it comes to negative gearing and capital gains tax, but there is strong support for the retention of our system of dividend imputation.

As everyone in this room would know, there has also been a lot of talk about superannuation tax concessions. Some believe that the solution to the nation's ills is to slug those who are taking responsibility for their retirement with higher taxes on superannuation.

This government absolutely rejects that view. As we promised prior to the last election, we will not engage adverse or unexpected changes to superannuation in our first term of government. Nor do we have plans to increase superannuation taxes into the future.

What we need is stability in the system.

Superannuation policy is incredibly complex. Its tax treatment even more complicated.

So adding to the complexity by laying on new additional changes is daft.

In the last six years of Labor there were 12 adverse and unexpected changes to superannuation. This followed Kevin Rudd's 2007 pledge not to change superannuation one jot or one tittle.

Stability in tax policy is important, and even more important where individuals rely on the long term stability of the rules around retirement savings.

What self-funded retirees and part pensioners need now, more than ever ,is stability not more tinkering with the system.

During a period of low global interest rates, which can have a significant impact on superannuation balances – plus the volatility in the world economy – why would a government want to increase taxes on super?

Superannuation is not the government's money; it is the money that belongs to the Australian people – and the Australian people deserve better than to have governments continually mucking around with the rules or treating their savings as a piggy bank.

Finally, there is a strong view that our corporate tax rate is uncompetitive, and that our personal income tax rates are seeing some of our best and brightest move to lower taxed countries.[1]

Encouraging innovation

I would like to expand on that last point because it reflects one of the key justifications for taxation reform.

Both skilled labour and their employers are becoming more and more mobile. Workers choose to move between countries for many reasons: for greater remuneration; to deepen their skills; and to broaden their perspectives and networks.

Our tax policies alone will not determine how much of the global talent pool is attracted to Australia, but our tax rates should not be set at levels that push the talented away.

Lower taxes provide a great conduit for new investment and entrepreneurship. Talent will always gravitate towards wherever the reward is greatest.

That is as it should be. And this must be at the forefront of our minds as we chart a path towards tax reform — and, with it, an innovative, high-wage economy.

Of course, Australia's largest source of tax revenue is personal income tax. It raises about $170 billion per year. On average, of all tax collected across the OECD, around 34 per cent comes from personal and company taxes. In contrast, the Australian Government collects over 70 per cent from those revenue sources - or 60 per cent if you take into account state revenue.

Our top income tax rate is 47 cents in the dollar. By way of contrast, New Zealand's top income tax rate is just 33 per cent.

Our top income tax bracket applies on incomes greater than $180,000 – only a little more than twice the average full time wage.

Our personal income tax system is also highly progressive. For example, in 2012, the top ten per cent of individual taxpayers paid nearly half the personal income tax collected by the Government.

That is an over-reliance and dependence on a narrow base to support our social infrastructure.

We need to make settings that are right for all Australians. We must have a tax mix that can pay for the services the community expects, without penalising enterprise and hard work.

A high top personal income tax rate also drives people to engage in complex and costly planning to minimise tax.

Imagine what we could do as a nation if people invested that time and effort into more productive activities such as investing in innovation or expanding market access.

We need to consider the sustainability of our heavy reliance on company tax[2], given we live in a world where mobile capital is the norm. We raise about $68 billion in company tax a year. Of this, twelve companies pay about a third. This means that changes in company structures – or a sudden change in the business environment – can lead to dramatic changes in the revenue we receive from company tax.

To illustrate the point, companies such as Kodak can be left behind as a result of technological disruption. Australia's largest single taxpayer – BHP – has had its market capitalisation and profit halved, highlighting the potential implications for our corporate tax revenue.

Lower company tax makes investing in Australia more attractive for all companies, large or small. The trade-off is simple – a lower company tax rate means more investment and higher per capita national income. A more competitive business tax environment would drive innovation. And, eventually, it would lead to increased employment and wages.

This Government has already made a start with the small business tax cut.

In the Budget, we announced a reduction in the company tax rate for small businesses from 30 to 28.5 per cent — its lowest in almost 50 years.

But we should see this as a starting point; a point on which to build so that we can continue to drive growth.

Fundamentally, the Tax White Paper is about how we collect tax, not how much tax we collect.

The tax system must not be viewed as simply a funding mechanism, especially for ever increasing public expenditures. The structure and arrangements of our tax system must operate as effectively and efficiently as possible to reduce the overall tax burden on the community and to promote stronger economic growth.

Of course we also need to think carefully about the other end of the personal income tax system. Lower income secondary earners are presently discouraged from workforce participation by high effective marginal tax rates, caused by the interaction of the tax and transfer systems.

Now, as Treasurer, I know that Australians overwhelmingly want everyone to do their bit and everyone to have the opportunity to prosper. We are a country with a strong social conscience; we believe in giving everyone the chance to have a 'fair go'.

So we need to make sure we strike a fair balance; one that shares the tax burden while encouraging the sort of innovative Australia we all want to see.

We need to ensure that we live within our means and that we can continue to fund the community services and support that our society expects now and into the future. Ultimately, any increase in government spending will result in an increased tax burden.

A tax system that supports economic growth will ultimately deliver the revenue needed to fund social programs. It will also deliver employment opportunities and increased living standards for everyday Australians. This is the essential starting point when designing a tax system for Australia's future, not simply seeking higher collections from a stagnant or eroding revenue base.

Higher taxes, especially when combined with higher government debt and deficits, limit economic growth and curtail our standards of living, placing at greater risk the most vulnerable in our society.

Change worth pursuing

Now, these are starting points for what will need to be a thorough exploration of all the ideas put on the table.

We need to achieve meaningful reform that prepares us for the future.

Furthermore, as we enter this next stage, I acknowledge the task will be substantial. Reform, particularly of the tax system, has never been easy.

But as I have said, tax reform has played an important role in Australia's economic transformation in the past 30 years. And we cannot face the challenges of the next 30 or 40 years without further reform.

For any change to succeed, it must be based on a grand deal between Government and the community.

Governments need to engage openly and constructively on the issues, and citizens need to have confidence in the ability of their government to do what is right and fair.

Indeed, as the authors of PwC's submissions wrote,

People must trust that comprehensive tax reform will support the needs of Australians.

On this point, I am absolutely committed to making sure that Australians understand that this Government will engage in reform that benefits the country – reform that spurs growth, lifts our living standards and provides every Australian with an opportunity to get ahead.

This is not about short-term fixes and yet more band-aid solutions for our tax system. Nor is it Henry mark II or about turning the tax system on its head with a brand new tax.

We also need to accept that reform takes time. For example, the UK Government has cut its main corporate tax rate from 28 per cent in 2010 to a proposed 18 per cent in 2020 – so not in one year or even in one term but over a decade.

Our principles for reform

The tax reform we will pursue will be based upon six key principles. I want to outline these for you now:

First, it must promote a stronger economy building jobs, growth and opportunity.

A good tax system raises the revenue needed to finance necessary government activities, whilst still boosting and promoting the economic growth and innovation that underpins a strong modern economy.

A stronger economy provides our society with more jobs and higher incomes, as well as the opportunity and conditions for entrepreneurship and innovation.

Importantly, a strong economy also provides us with the additional wealth that supports the social infrastructure for the disadvantaged in our community.

We need to encourage people to invest and create additional wealth. Australia relies on the private sector and private sector investment to drive growth and opportunity.

This is especially important during the transition in the Australian economy from mining construction to a broader based driver of growth.

To make sure our economy is strong and robust, our tax system must encourage confidence in the private sector, so that individuals and businesses believe in future prospects of profit.

In doing so, we must recognise there are some key differences between income earned from labour and income earned from capital. Labour income is generally more stable and predictable than income from capital.

On the other hand, capital investment is highly mobile and involves risk, which means that returns are not guaranteed.

In recognising that they are different, we must also accept that their tax treatment ought not be identical. Our tax treatment of capital is and should be different in order to provide the economic incentive to get our private sector creating jobs and boosting wealth.

I would also make the point that funds used to invest can be derived from after tax earnings. So as renowned US economist Scott Sumner has written in the Wall Street Journal,

capital-gains levies represent another bite out of an investor's money.[3]

We must recognise the importance of capital investment in building wealth.

Our tax reform package will also build upon our Budget measures such as the $20,000 instant asset write off for small business. These measures are boosting the productive capacity of small business and will produce greater jobs and wealth for the millions of Australians who work in small business.

Second, any reform must be fit for purpose in the modern economy.

As I've said on many occasions, we have a tax system with 1950s rules that simply don't fit with the modern, globalised economy.

Facebook is now the biggest media company in the world and doesn't employ a journalist.

Uber is the biggest taxi company in the world and doesn't own one car.

Airbnb is the largest hotel chain in the world and doesn't own one hotel room.

And Alibaba is the most diverse retailer in the world and doesn't have one traditional shopfront.

We've taken some initial steps in modernising our tax system to account for this disruption to traditional industries. With the positive support of the states and territories, we are moving to ensure that the GST applies to digital products and services. The states are also looking at the issue of the GST low value threshold for imported goods.

But beyond these issues, we need to make sure our tax system is set up for the next 40 years, not just playing catch up with new industries as they develop.

One of the lessons of this digital disruption is that our tax system should not favour one type of economic activity or punish another, because what these businesses have shown is that digital disruption is real. It simply won't work if governments try to tax or legislate them out of existence.

The tax system is there to raise revenue to fund services, not to pick winners and losers in the way Labor's mining tax and carbon tax did.

Third, tax changes must encourage workforce participation and ensure families control their own money.

As I outlined before, higher tax rates provide a disincentive to economic activity. For individuals the risk is that our best and brightest leave the country for what they see as better opportunities abroad.

As has been well documented, more and more Australians are now being pushed into higher tax brackets as a result of the impact of inflation on their wages.

Bracket creep will mean that the average full time wage – currently around $77,000 – will soon sit in the second top income tax bracket of 37 cents in the dollar.

This is just not good enough. We must address Labor's legacy of higher taxes on Australian families. We've abolished the carbon tax, saving Australian families on average around $550 per year. But there is much more that can be done, starting with addressing bracket creep.

I believe that citizens know how best to spend their money, not governments. We must address bracket creep because it is better to leave money in the pocket of the taxpayer and resist the temptation for the government, using taxpayers' money, to provide financial support back to individuals and families.

The churning of taxpayers' money through the tax and transfer system is often a less efficient mechanism for funding essential support for families and the community. We should further encourage personal choice and individual responsibility through lower tax rates and lower government expenditure.

Fourth, generally, you should not be taxed until you have earned the income.

In this area, we've gone a long way to fixing another of Labor's chaotic tax disasters, being the employee share scheme mess.

Under the new arrangements from 1 July this year, we'll defer the taxation point for employee share scheme options for all companies and offer an additional concession for shares and options for employees of eligible start-ups.

This is a great way to incentivise the employees of a company while allowing the employer to invest more cash into growing the business.

But while these changes will make a big difference, there is still more to be done and the Government will continue to look at ways to make improvements.

Fifth, reform must encourage innovation and opportunity, and reward for effort.

We need to continue to make it easier for entrepreneurs to get new businesses up and running. The next Cochlear, the next Google or the next Facebook might already be an idea in the mind of a bright young Australian.

But this isn't much good if we don't have the right tax setting to encourage bright young Australians to commercialise their ideas.

We've made a reasonable start. In this year's Budget, we announced that start-up businesses would be able to deduct professional expenses immediately instead of over a period of five years. This builds on the small business company tax cut and the unincorporated small business tax discount.

We've done all of this because the small businesses of today are the big businesses of tomorrow.

These are the sorts of the things we need to build upon as part of any tax reform.

We need to encourage innovation. We need to encourage new enterprises. And we must ensure that those who are behind them are being adequately rewarded for their intuition and not punished for it through restrictive tax or regulatory environments.

This will be a key area of focus for the government in the Tax White Paper process.

Sixth, as best as possible, the revenue raising capacity of each tier of government should be aligned to responsibilities of funding and service delivery.

Our current federal system clearly fails this objective. Because of the high concentration of revenue raising capacity at the Federal level, vertical fiscal imbalance is higher in Australia than in other Federations.

Such issues will be considered in more detail in the Federation White Paper, but of course such issues are not divorced from tax. Not only do the states and territories raise considerably less revenue than they spend, around a third of their tax is from inefficient taxes: stamp duties on real and intangible property, insurance duties and so forth. In fact 23% of all state government revenue comes from the GST alone.

Many submissions have called for the abolition of these taxes and a broadening of the GST base, or an increase to the rate, or both.

But when it comes to the GST, let me be very clear: no change will be considered without the unanimous agreement of state and territory governments and bipartisan support in the Federal Parliament.

It's also worth reminding everyone that before we go further down the track of reform of federal financial relations, there are still a number of states that have failed to abolish some taxes that were agreed to be abolished following the introduction of the GST.

With all of the Premiers and Chief Ministers meeting with the Prime Minister next week at the Leaders' Retreat, there is a real opportunity for a constructive discussion about reforming our Federation.

This must include the states taking responsibility for their own budgets in order to ensure they can afford their ever increasing expenditure – such as the costs of their public hospital systems as our population ages into the future.

Thankfully, we have started to see some taxation reform at a state level. The state government in South Australia has engaged in tax reform. As has the ACT government. And the former South Australian and Victorian governments moved to a broad based land tax to wholly replace inefficient insurance based fire services levies in 1999 and 2013 respectively.

Surely it is not beyond the capacity of us as a country to have a sensible, mature debate about long term tax reform more generally.

So ladies and gentlemen, these are our reference points. And these principles are why Australians can have confidence that any change will be right and fair, and will benefit our nation as a whole.

Closing remarks

Australians are willing to embrace tax reform that is good for the economy and fair for all the community.

In the coming months, I'll be working with my colleagues to chart the best course — guided by the Government's principles — to create a better tax system based on the best needs of Australia's rapidly changing economy.

Our goal for taxation reform is unchanged. We want lower, simpler and fairer taxes.

We have already made some good progress in the first 22 months in Government. Abolishing the carbon tax and abolishing the mining tax.

We have also resolved the future of 96 announced but unlegislated tax changes dating back more than a decade. But there is still much more work to be done.

Even with our Budgetary pressures we are collecting less tax today as a result of policy changes than would have been the case if Labor was re-elected. So we are delivering on our goal of lower, simpler and fairer.

Finally, let me thank you all for being here today, and to PwC for not only your comprehensive submissions to the discussion paper but for your continued leadership on tax reform.

As a Government, we cannot deliver tax reform on our own; we need voices like yours contributing to the debate, so thank you.

I wish you all the best for the remainder of this Forum.

[1] For example, see AiGroup, Submission to re:think Tax Discussion Paper.

[2] Australia's corporate tax rate has remained unchanged at 30 per cent since early 2000 while Canada, Singapore and the UK have lowered their corporate tax rates in recent years (to 26.5 per cent, 17 per cent and 20 per cent respectively).

[3] 'Is It Fair to Tax Capital Gains at Lower Rates Than Earned Income?', Wall Street Journal, 1 March 2015 <http://www.wsj.com/articles/how-should-capital-gains-be-taxed-1425271052>