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Select Committee on a New Tax System
- Committee front matter
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Mr C. Murphy
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ACTING CHAIR (Senator Ferguson)
Content WindowSelect Committee on a New Tax System - 05/03/99 - (HIMS reference or advice of duty)
CHAIR —I welcome the witnesses from Anglicare Australia. We do appreciate your making yourselves available at a time earlier than previously scheduled, and I would like to express our appreciation for that. The normal process is that we invite you to address your written submission and then be available to answer questions from the committee. I ask whoever is going to lead to introduce himself and his colleague.
Bishop Curnow —I am the Chairman of Anglicare Australia and Professor Nevile is the economic adviser to Anglicare Australia. I want to begin by very quickly giving you a brief introduction to Anglicare Australia and then presenting to you some comments.
Anglicare Australia is a peak body representing 62 Anglican welfare agencies across Australia. They are in just about every part of the nation from southern Tasmania to the Northern Territory; from Western Australia to right along the east coast. So we believe we have a very good understanding of what is happening in many communities around Australia and the views of many people around Australia, particularly where people are concerned with people in need.
We want, particularly, to make a case this afternoon, to say why we are concerned about some aspects of the GST. We are not against the GST per se in its whole entity; we particularly are concerned about the imposition of the GST on food. We have a number of concerns in that area which I would like to present to you, and Professor Nevile will speak to it as well.
CHAIR —When you say that you are not against the GST, does one assume from that that you are for it or that you are neutral?
Bishop Curnow —That is a very perceptive question, actually.
Senator FERGUSON —Or are there a variety of views amongst the bishops?
Bishop Curnow —I think it would be fair to say that there are a variety of views. There is a consensus that the taxation system needs reform; there is a diversity of views on whether or not the GST has all the answers. But, our membership is at a consensus point where we do see the GST on food as an issue that we want to take up.
There are a number of arguments I would present to you. Obviously, you have seen some of our material. We have a concern about the whole equity of the use of the GST on food. The Australian Bureau of Statistics calculates that the outlay on food is 30.3 per cent of income for Australian households in the lowest 20 per cent of incomes but only 6.1 per cent for those in the highest 20 per cent of incomes. In other words, I think we say in our documentation that the imposition of a GST on the poor in terms of food is four times greater than for people on high incomes. In fact, the figures that we now have suggest that it
is five times greater with regard to the effect. So we have a huge concern about that, and we are not convinced that the compensation packages the government talks about will, in the long term, seek to overcome or take account of this imposition.
We also believe that there are other ways in which the income that may be lost from taking the GST off food could be made up, and there are a number of ways that we have suggested. We are in fact not against a higher income tax on higher income people.
Another issue we are concerned with is the effect of the GST in terms of the FBT and compliance cost arrangements on the agencies themselves and the effect that this could have on services. One Anglicare aged care provider of accommodation services, which has 26 facilities in the greater Melbourne area amounting to 700 beds, estimates that the increased costs will result in a loss of 14.3 beds or 11.49 full-time jobs. This is where we, on the one hand, would agree with the government that there have been some abuses of the FBT system, although all our members support a 30 per cent cap on the total remuneration package and salary ceiling. But we believe that the way in which the GST and the compliance costs relating to it will impact is that it will have the effect that services will be affected. The result is that our organisations will have nothing else other than that they will have to reduce the service, and that will affect jobs as well as the people we are working with. I will stop at this point and let Professor Nevile take over.
Prof. Nevile —I am sure that in the economics profession there is agreement that taxing food has a very disastrous effect on the less well-off in our society. The only disagreement is whether it is better to not tax food or to tax food and compensate the less well-off. So the argument in the profession is really about whether compensation is likely to work.
Anglicare Australia's position is that it is very dangerous to rely on compensation, because the poor may easily miss out. There are very good and strong reasons for believing this. First of all, compensation packages are inherently fragile—that is, they are not likely to remain intact for very long. They require highly visible government expenditure, and in modern Western economies there is considerable pressure on the government to reduce expenditure as much as possible.
This in itself is likely to lead any government to allow inflation to erode the value of the compensation package. Compensation to the working poor is provided in the government's plan by income tax cuts. With inflation, these income tax cuts will be eroded through bracket creep. It is most unlikely that the government will index taxation. In fact I think you could say that there is a zero probability—the Fraser government tried it but did not like the results, and it did not last for very long—so the working poor are going to automatically get their compensation eroded through bracket creep.
In today's political climate the compensation to people on pensions and benefits may not be eroded so easily by inflation, but instead it may be vulnerable in another way. For example, Australian pensions are indexed to the CPI—that is a basic thing which I do not think any government would change—but there is an overriding condition that they will not fall below one-quarter of male average weekly ordinary time earnings. If pensions rise for this reason, this rise will absorb part or all of the compensation package. So the fragility of
compensation packages is the most important reason why we do not think compensation is the answer.
Secondly, even the original compensation package is likely to be inadequate. There is obviously pressure on the government—fiscal pressure, not political pressure—to make the compensation package as small as is politically feasible, and that means to restrict the coverage as much as possible. We can see these tendencies in the proposed compensation package. The figures that the government quotes have an inflation effect of the GST of 1.9 per cent. It is well known that this excludes tobacco—and I do not have any comment on that one way or the other; it is a separate argument—but it also includes the effect of a first home owner's subsidy which will be paid as part of the total package, if states will agree to pay this, which does have a significant effect on the size. It is hard to believe that pensioners who do not own their own home are likely to become first home owners, so the first home owner's package is not going to help them at all. If you add in these two, you get up to 2.5 per cent rather than 1.9 per cent.
Far more importantly than that the government, in deciding how much compensation is necessary, has worked on a method of calculation that assumes that everybody spends the same proportion of their income on all the different commodities, or goods, or services. Bishop Curnow has already pointed out that in our submission we said that the poor spend four times as much as the rich proportionately. That was a conservative estimate in the sense that I wanted to make quite sure we did not make a mistake the other way so that Mr Costello could say, `You are wrong. It is not this; it is something less than that.'
The latest figure we have now seen, that somebody else has calculated, is more like five times as much than four times as much. Certainly, the poor spend a great deal more than the rich on food. Therefore, if tax on food is increased, it will affect the poor and the inflationary effect will be much greater on the poor than on the rich. This is just one of a number of examples. Replacing a wholesale sales tax with a GST will increase public transport prices, but reduce car prices—at least car prices on non-luxury cars. There are various examples one can give.
If you make corrections for all these differences in consumption patterns, the inflationary impact of a GST on low income people is about 3[half ] per cent. It varies, depending on the circumstances of the person: whether they are married or single; whether they have dependent children; whether they are in public housing, and so on. Three point five per cent is about the middle of the range. Of course, these calculations assume that no business anywhere takes advantage of the changeover to put its prices up somewhat. In fact, even despite Allan Fels, I think there will be some effect of this sort.
The compensation package is likely to be inadequate and there are some people who will not get any compensation. For example, the government has got some compensation—you may argue whether it is adequate—for self-funded retirees of pensionable age. Consider the case of a man who has been made redundant at, say, 55. He has got savings, or has got a redundancy payment, so he does have a small private income because of his capital. He is not eligible for anything—it used to be called unemployment benefits and now has a fancy name—because of this capital and his small income. He cannot get another job so he has to retire, in effect, but he does not get any compensation at all either for the effects of the GST
on his living costs or on the value of his savings on which he is basically living. That is just one example. Compensation packages are almost certainly going to omit a few people—or a large number of people. This is inevitable, because to make it so wide that nobody was possibly omitted, would be very expensive and therefore not feasible.
There is a third very good reason not to rely on compensation packages. The government has taken very seriously in its tax package the problem of what, in the profession, are called poverty traps. If you are a relatively poor person, say you get a fair amount of social security benefits and you are in the range where these are withdrawn as you get a higher income, then the combined effect of the increase in income tax that you pay because you are earning more and the withdrawal of the social security benefit can lead to—and in many cases does lead to—very high effective marginal tax rates. Eighty per cent is not uncommon and there are some cases of over 100 per cent. People in this income range keep a very small proportion of each additional dollar they earn because of the combined effect of extra income tax and the reduction in the income tested benefit that they receive.
One of the good points about the government's package is that it has tried to address this to some extent. The bigger the compensation package, the harder it is to remove this problem. If food is not subject to tax, the compensation package can be reduced. I think Anglicare is about the only group that have actually made this point, as far as I know, but it is a valid point. If you do not tax food, it is possible to reduce the compensation package. Therefore, the total cost of not taxing food will not be as great as the figure that is always quoted, which is just the tax revenue forgone. Additionally, it will make it easier to solve this poverty tax problem. That is only one reason. I would not like to just finish with that because I think the more important reasons are the fragility and inadequacy of any compensation package, and I think that is inevitable. Thank you.
CHAIR —I have gone through your submission, which raises a number of very interesting and quite useful matters for our consideration. What are you asking us to do?
Prof. Nevile —We are asking you not to tax food—in technical terms, not to have input taxes on food or taxes on the output, or, in economic jargon, for it to be zero rated so that there is no GST on food. We believe that it is possible to separate food from restaurant meals. This is done in a number of countries without undue problems. So, when we say that food should not be taxed, this does not mean that we have a view that restaurant meals should not be taxed. We think it is possible to separate them. This again would reduce the cost of not taxing food.
We believe that the tax revenue lost because of food not being taxed should be made up in some other way. Our preferred option would be to possibly reduce the income tax cuts or remove tax loopholes or schemes that enable people to minimise their tax to make up the revenue lost. ACOSS produced a list of possible things, way back last August. They would more than make up the cost of not taxing food if restaurant meals were excluded.
If for some reason the government felt it could not do that and it also felt it could not reduce the income tax cuts, the final option would be to increase the rate of GST. This is our third best option. It is not one we are advocating, but it would be better than taxing food.
We calculate that this would mean a tax rate of 11 per cent rather than 10 per cent, in very round numbers.
CHAIR —I have a couple of questions. On the food matter, if Senator Harradine were here he would ask you, `Why stop at food? That is a necessity of life, particularly for people in low income areas. Why not look at clothing and shelter?' In particular, being a Tasmanian, he would say, `Why not look at heating in winter and other things that are necessary to have a reasonable, but not excessive, quality of life? Why just food, why not the others?'
Prof. Nevile —The Anglican Church is called the via media, which is a nice way of saying it is a compromising institution. Picking out food is because food is by far the most important, by far the largest item of expenditure of low income people. The second largest item of expenditure is housing, but there are already some mechanisms in place to help low income people with housing. They are not as good as they were some years ago, because of cost cutting measures; nevertheless, they still exist.
Senator CONROY —Do they suffer the same disparity that you are talking about with public transport? Rents are going up in public housing, despite the fact that the housing sector, as a whole, is coming down because of savings in interest rates and those sorts of things. There is a disproportionate impact there as well.
Prof. Nevile —Generally in public housing the rents are fixed at a set percentage of income, depending a bit on the status. I am a bit out of date on this—I knew all about it five years ago when I did an inquiry into it—but generally speaking they are fixed at between 20 and 25 per cent. This is another interesting point. If public housing people are given a four per cent increase in their pension to compensate for the GST, roughly between a fifth and a quarter of that will be taken away immediately in increased rent for public housing, by the formula, which means they will get less than three per cent. That is another reason why some people will not get adequate compensation.
But, to come back to answer your question quickly—I am sorry—we concentrate on food because food is by far the most important item just in terms of percentage of income spent on it. Also, I personally have been influenced by some modelling done by Professor Creedy at Melbourne University many years ago, probably a decade ago, which looked at it very carefully and showed that you got a very big gain in equity if food was not taxed. After that it tended to be much smaller.
Bishop Curnow —There is a practical reason as well, in that Anglicare Australia's resources are pretty small and I think the political reality that we chose was to focus on food. There are other agencies in the welfare sector, such as Ecumenical Housing, particularly in Victoria, that have decided to take up the housing issue. ACOSS have decided to take up a wider spectrum of issues, but we have decided to address food as our focus.
CHAIR —Do you support and back the groups that are looking at other elements?
Bishop Curnow —Yes. And we are involved with a lot of other networks, so we have tended to let those networks speak for us on other elements of the GST and we have tended to stick with this.
CHAIR —So to the question of what you are asking us to do, is it the right answer to take out food but, because of support for other groups that are specialising in other costs that impact on low income earners, to have regard to and amend the bills with respect to those issues as well?
Bishop Curnow —That would be a reasonable understanding.
CHAIR —In a way, your submission is a sort of a wake-up call to this committee from the coalface of welfare and social policy delivery. Anglicare turns over $300 million, I think your submission says, in welfare and aged care.
Bishop Curnow —Yes.
CHAIR —The voluntary welfare sector, if I have got it right, meets 60 per cent of all the care and responsibility to an annual budget of about $9 billion, which I think is what your submission refers to. These are not trifling figures; these are quite large figures. And you make a very strong case for progressive taxation. In your submission, you endorse the principle of higher tax for higher income people—a progressive form of tax, rather than a regressive or flat tax. That is a feature of what you say.
We have had evidence—most notoriously, given the media yesterday, from bodies like the Insurance Council of Australia—that there is a $2.5 billion unintended consequence that the government has not taken account of but which, if they are not given relief for it, consumers of their product, many of whom may be low income earners, will have to pay. They will simply pass on the cost. Are you aware of that and other areas where evidence has been brought come forward that the government has underestimated the transitional costs of their package and costs to consumers or others, particularly low income earners, may be a lot higher than is allowed for?
Prof. Nevile —We are certainly aware of a number of areas where the government has underestimated the cost. The particular one of insurance we have not considered.
Senator FERGUSON —I am not surprised, because it was first raised with us yesterday. We could hardly expect you to know about it.
Senator CONROY —It was a front-page story.
CHAIR —All of that is true. I agree with Senator Ferguson that it is a bit hard for everyone to know about it. This is an unfolding story. The more evidence we get, the more detail and greater specificity we have and the greater cause for concern. There is probably an argument for taking greater care, because the outstanding feature of low income people, as I understand it—not being one myself—is that they have no space in their household budget to assume higher costs, and many of them are, in fact, dissavers.
Prof. Nevile —That last statement is certainly true. To take the bottom 20 per cent of households: they dissave on average by about 20 per cent of their income.
CHAIR —So they are not able to absorb higher costs?
Bishop Curnow —They are constantly in debt.
CHAIR —In your conclusion you say:
Without further amendments to the draft legislation, aged care services and Anglicare agencies will be liable for new taxes, increased wages bills, major compliance costs and possible industrial tensions. Currently, welfare agencies are responding to high and increasing demands for their services coupled with increased costs and cut backs in Government funding for essential social services.
You reach a somewhat bleak conclusion about your own budgets, in terms of maintaining the delivery of the services and supports you currently provide. Your conclusion is that, if this tax comes in, you will have fewer funds to meet your needs in the future. Caught in such a budgetary situation, your alternatives seem to me to be to the following. Firstly, acquiring more income might be one course, if you can raise charges, which does not seem to be a very likely thing, so that does not seem to be a real option in your case. Another course would be to sack staff and reduce your wage costs. Another course would be to reduce your services.
Bishop Curnow —I think those two would go together, since the main costs of services are wage costs.
CHAIR —Do I assume, therefore, given that you believe you will have fewer funds, that there will be redundancies among your staff and a reduction in services that you deliver?
Bishop Curnow —Yes, and in my initial presentation I cited just one example from an agency in Melbourne which estimates that the increase in costs to them will result in the loss of 14 beds and 11.5 full-time positions. So we do see a very significant impact upon our agencies and their ability to deliver services.
CHAIR —Now, as you say, this comes at a time when demand is increasing. So, at a time of greater need you deliver fewer services.
Bishop Curnow —Yes.
CHAIR —What happens to the people who miss out in those circumstances, where an agency such as yours—and other agencies similarly affected like yours—cannot meet the need? What happens to those people?
—That is a good question. What will happen is that those people will just be added to what you might call the residue of the poverty trap or the welfare statistics. Any of us who are working at the coalface are only too well aware that there are already people out there who fall through the existing range of services, because there is just no means of providing them. So what happens is that the percentage of Australians who you would call poor just gets bigger. The gap between the rich and the poor widens.
CHAIR —So, if you were the last stop before people fall right through the net, are you in a position to indicate how many people you would expect would suffer further, in the event of these changes being made?
Prof. Nevile —I don't think we can give you a precise figure on that.
CHAIR —Okay. You also say in your conclusion that you, along with other church and community organisations, welcome the government's commitment to broaden and strengthen the public revenue base to maintain adequate social services. In the conduct of this inquiry, this committee unanimously awarded a contract to Monash University to do some modelling for us, so that we could have access to independently modelled outcomes for the macro economy. Are you aware that Professor Dixon, who did that work for this inquiry, is of the view that under the current system more revenue is generated to public revenues than would be the case if the system were changed as the government proposes?
Prof. Nevile —Yes, I know that that is the result of that modelling. I am not sure, but I do not think it is a very large or significant amount. Correct me if I am wrong.
CHAIR —I think that is right.
Prof. Nevile — They are comparable.
CHAIR —But his modelling shows that the argument that the system is broken and, therefore, you need a new tax that will generate higher revenues is a fallacy.
Senator FERGUSON —He is the only one that thinks so.
Prof. Nevile —I would think that his modelling—
Senator CONROY —Get Treasury to model it then.
CHAIR —Order! Order!
Prof. Nevile —I know Professor Dixon well, and I would call him a friend, although we disagree on a lot of economic matters; nevertheless—
CHAIR —It seems most economists do.
Prof. Nevile —Nevertheless, I would think that his model is correct in the static sense. In the sense that, taking the situation as it is now, the two are comparable, and it may well be true that the existing system gives a little bit more than the new system. That is not very surprising. In fact, we know that the budget surplus will go down, other things being equal, which suggests that the existing system gives a bit more than the new system. But, in the longer run—and by longer run I am talking about five to 10 years—I think the GST will make revenue more buoyant than the existing wholesale sales tax and the other indirect taxes that are being removed.
—Have you got modelling to back that up?
Prof. Nevile —No, I have not got modelling to back that up.
Senator CONROY —Or is this just your gut feeling?
Prof. Nevile —It is more than a gut feeling. I would not call it modelling, but it is based on looking at trends in the different items that are being taxed and that sort of thing. It is not sophisticated modelling; it is back of an envelope stuff.
CHAIR —We get into a terrible argument in logic at this point, I think. My recollection is that the Dixon model looked at eight years out, but that it is against an assumption that nothing changes.
Prof. Nevile —Exactly.
CHAIR —At the beginning, you said that you were in favour of improving the current system. I think everyone in Australia is. One of the problems with this debate is that what we have before us is labelled by the government as `reform', when that is a matter of judgment and not a matter of fact. The point about the Dixon modelling is, to the extent that welfare agencies are concerned about revenue to meet future welfare bills—a legitimate concern, I might say, and one rightly raised—the Dixon modelling shows that, even on a static, no-change basis, up to eight years out, as I recall, the outcome looks to be better with the current system. The point is that that is not a reason not to reform the current system: there needs to be change, but perhaps not to the extent that we are now looking at. Finally, Professor, you are familiar with the tax credits system, are you not?
Prof. Nevile —Yes.
CHAIR —One of the arguments that I probably have with a welfarist point of view which says, `We need a GST to generate more funds for the future' is that, while that to some extent minimises poverty traps, it does not eliminate them. Is it right that a tax credit system, properly structured, is more likely to eliminate poverty traps and, therefore, to encourage people to work and away from welfare?
Prof. Nevile —Tax credit can certainly help in eliminating poverty traps. In judging any tax credit system, I think you have to consider two questions. The first question is: do we want to reinvent an old distinction in English social history between the `deserving' and the `undeserving' poor. Tax credits help those who can find a job. They do not help those who cannot. That is the first point. The second point is, I think, you just have to look at the cost—
CHAIR —Before we go on to the second point, the first point is quite an important point, and it is a very important distinction to have before us. Is it more likely to help people find work?
Prof. Nevile —It will not help people find work. What it will do is remove a disincentive to look for work.
—Yes. Thank you.
Prof. Nevile —It certainly will remove a disincentive to look for work. This can be important. It is really very hard to know how strong this disincentive is. When I was doing the Industry Commission inquiry into public housing, I was often surprised by witnesses who came and said they went and got a job, although, by the time they had paid more in their public housing and paid to go to work and buy some clothes for work, they were significantly worse off than if they had not got the job. So there are a number of people who despite their disincentives still look for work, but there are obviously others who do not. So that is that point.
The second point is that I think you have got to look at the cost of the tax credit. You have to look at just how much it is and at what else that money could be spent on if it were not being used for this purpose. To do that, you have to have a specific scheme. It is not a question you can answer in general terms. It depends on the design of the tax credit scheme.
Senator FERGUSON —I will just ask about a matter of procedure to begin with. You have had a bit over 20 minutes of questioning: will we be able to have 20 minutes, as well as the Democrats' questioning, and still fit in with our time frame this afternoon? I need to know, because I need to know how many questions I can ask.
CHAIR —I was not aware of how much time we had, but we are going to share the questioning fairly.
Senator FERGUSON —That is what I wondered, because it will put us over our allotted time. The question of poverty traps and trying to eliminate them was raised. Senator Andrew Murray of the Australian Democrats, who unfortunately cannot be here today, congratulated the government a couple weeks ago at a press conference for being the first government to actually try to do something about the existing poverty traps created by the current taxation system. Do you agree that our tax reform package does in many respects attempt to eliminate, to a certain degree, the poverty traps that exist in the current system?
Prof. Nevile —As I understand it—and I think my understanding is correct—the government's current proposals reduce the cut-off rate from 50 per cent to 40 per cent, if my memory is correct. They certainly reduce it, and they also make some other concessions which will help reduce poverty traps. So they are certainly moving in the right direction.
Senator CONROY —But not on the unemployed. There is no change to the tapering in the—
Senator FERGUSON —Senator Conroy, I think we listened carefully while Senator Cook asked questions. If you want to interject, I would suggest that we might—
CHAIR —You rein him into order, Senator.
Senator FERGUSON —I am trying to: we listened very carefully while you questioned these people, and I think the same courtesy could be provided by Senator Conroy.
—Nevertheless, Senator Conroy was correct to correct me. I overlooked that point he made.
Senator FERGUSON —He was not actually correct to correct you, because he did not have the call.
Senator CONROY —You have the call, so in fact you—
CHAIR —Order! It is Friday afternoon. We have had a long, weary week. Let us try to finish the week with some dignity.
Senator FERGUSON —How would you define food, Professor Nevile?
Prof. Nevile —What I am saying is that we would rather food not be taxed, even if that included restaurant meals. But, if I was given my druthers, I would define food in the commonsense way, except to exclude meals eaten in restaurants. I know that this is a grey area, and in any tax system you have to have grey areas, but that seems to me a straightforward and commonsense definition.
Senator FERGUSON —What about a McDonald's restaurant?
Prof. Nevile —I would have the very simple definition which worked for a long time when I was in England: if you ate it in McDonald's, it was a restaurant; if you took it outside the door, it was food.
Senator FERGUSON —So McDonald's would have to have a system which says that, if you buy a hamburger and eat it outside, it is tax free; if you buy a hamburger and eat it inside, it is taxed.
Prof. Nevile —What McDonald's would do is ask the person, `Is this takeaway or eat here?'
Bishop Curnow —Which they already do. A lot of restaurants already have the system of making a difference in price between eating in the restaurant and taking it away.
Senator FERGUSON —And a lot do not.
Prof. Nevile —That is true. But the restaurant's responsibility would be to say, `Are you eating it in here or taking it away?' If they said, `We are eating it in here,' they would be charged tax. If they took it outside the door, and sneaked back in again, I don't suppose McDonald's would be unduly worried. I don't suppose it is their responsibility to police that particular aspect.
Senator FERGUSON —I use a Shell service station quite often driving home at night. I have been known to order a hamburger to take away and then to sit down at the table and eat it, because there is no difference in the price anyway.
Senator CONROY —Tax avoider!
—So I am not quite sure whether you would say that I was having a restaurant meal or a takeaway meal.
Prof. Nevile —For many years in England, if you took your fish and chips outside the door, you did not pay the GST, and if you ate them inside the door, you did. I never heard of the tax collector, the police, the restaurant or the customers getting unduly upset by this arrangement.
Senator FERGUSON —All it does really is complicate the system though, doesn't it? This is the very thing that we are trying to avoid.
Prof. Nevile —It certainly makes the system more complicated. It certainly means that small businesses have to allow for one extra thing. I accept that point. I would argue that uniformity of taxes does not have any great virtue, except that the simplicity that comes with uniformity helps small business. And, indeed, the whole GST is going to be bad for small business, in the sense that their compliance costs are going to go up. The government has recognised this by making some concessions to small business. If it is concerned about the compliance costs, it is much easier to design a system of greater compensations for small business than it is for an adequate compensation system for the less well-off in our society.
Senator FERGUSON —That is a debatable question: all of the modellers that appeared before us suggested that the best way to deliver compensation or equity to low income earners and welfare recipients was through the social security system and not by exempting food.
Senator CONROY —That is not quite right. One modeller suggested you do not do it.
Senator FERGUSON —One modeller suggested that we did not adopt a package at all, but he said that, if the package was adopted, he would not exempt food.
Prof. Nevile —With respect, Senator, the modellers are feeding assumptions into their models which are economic, and they are not feeding in any sorts of political assumptions such as the one I mentioned before—that the compensation will not be eroded by bracket creep. They are assuming that the present system continues in real terms. If you look at the models, you will find that is the case. They are assuming the compensation package remains entirely intact and is not diminished in any way in the future. If you had a cast-iron guarantee that that would be the case, the situation might be different. But, being realistic in political economy, this is just not so. There is no way the tax system is going to be indexed, for example.
Senator FERGUSON —On the issue of bracket creep, under the proposals in this tax reform package the very people that you are talking about will probably be on the same marginal rate of income tax all their working life, so why is bracket creep going to be a problem? The tax rate is 30 per cent on incomes up to $50,000. If you are talking about low income people—
Prof. Nevile —Refresh my mind, but doesn't the 30 per cent start at about $30,000?
Senator FERGUSON —It starts at $20,000.
—It starts at $20,000, I apologise.
Senator FERGUSON —It starts at $20,000, and there is a chance that someone who starts work at $20,000 and remains a low income earner will be on that 30 per cent rate if not for all of his working life, certainly for a fair proportion of his working life. And once you get to $50,000, you are hardly talking about low income people.
Prof. Nevile —I take that point, and I agree that bracket creep does not greatly affect people over $50,000. However, technically, bracket creep will affect people in the $20,000 to $50,000 range, for the simple reason that the value of the tax-free part of their income will be a diminishing proportion of their income. So in that way bracket creep will affect them. Indeed, it affects people on $100,000 but, obviously, it is much less important to them at that point.
Senator FERGUSON —I did not say it would eliminate bracket creep; I said it would do more to eliminate bracket creep than any other marginal tax rate scheme that we have had in the past, because there will only be one move. There will be the move once you go over $20,000, but for the next $30,000 people will remain on exactly the same marginal rate of income tax. Can you tell me any government that has done more to eliminate bracket creep than to have a $30,000—
Prof. Nevile —Mr Fraser did for one year.
Senator FERGUSON —For one year. The Labor Party have never done it.
Prof. Nevile —You may well be right. But it will still be true that the bottom $6,000, and the range from $6,000 to $20,000, which will be a lower range of tax, will be a diminishing proportion of income in real terms, even if your income in real terms remains constant. That is the only point I am really trying to make.
Senator FERGUSON —I will not labour the point, but when you have two lower rates—you have 17 and then 30—the effect on bracket creep, while not eliminated, has much less effect than the current marginal tax rates in place.
Prof. Nevile —That may well be true.
Senator O'CHEE —If Anglicare's preferred position is to tax meals in what you define to be restaurants but not to tax other food, where does that leave a fish and chip shop? Is that a restaurant?
Bishop Curnow —Going back to what Professor Nevile said, if you went on the condition that they use in many American states as well as in England—as you would be aware there are often local state taxes in many American states—you decide along the line of whether you dine in or dine out. As far as I am aware, looking around, most fish and chip shops completely cater for a dine-out customer. In that sense it would not apply.
Senator O'CHEE —Does the UK still use the take it away or eat it there distinction?
—I do not know the answer to that, because I have not been there for nine years, but for a long time they had that distinction. I am sure they still distinguish between
restaurant meals and food in the form of groceries, fresh food, vegetables and so on, because the OECD reports make that point.
Senator O'CHEE —But they no longer use that distinction, do they?
Prof. Nevile — I do not know the answer to that. I am not sure of the precise distinction they have decided to use. If you remember, I said that this is my druthers; I did not say it was Anglicare's druthers.
Senator O'CHEE —During the last sitting week, the Senate was treated to details of how the UK now tries to deal with this issue: they look at whether food is served at ambient temperature, and all sorts of problems arise from that. That is because they moved away from the mechanism that you are proposing that we should adopt. Surely, there must have been some reason for moving away from it?
Bishop Curnow —You tell us. Why do you think that was?
Senator O'CHEE —For the very simple reason that it was so complex administratively. It was difficult to deal with. It just did not work. Surely, if it had worked, they would have kept it?
Prof. Nevile —I would debate that. We are talking speculatively about things that neither of us really have hard facts on. We do not know why they changed the system. I do know that in many American local government areas where there are retail sales taxes from which food is exempt, that distinction is made pure and simple. If you eat it within the walls of the place serving it, it is a restaurant meal; if you take it outside the door and eat it, it is food. That is true of a large number of local government areas in America.
Senator O'CHEE —But Professor Nevile, your argument was that we should go down the UK route, which they have now abandoned.
Prof. Nevile —That was the UK route. They may have abandoned it for many reasons, including political pressure from constituencies in a certain area. I have no idea why they abandoned it. In any case, I should stress that I did say this is what I would prefer; I did not say it was an official Anglicare position.
Senator O'CHEE —So what would Anglicare prefer?
Bishop Curnow —I do not think Anglicare have gone into this in terms of the detail you are asking for, saying, `By what system should we make a discernment between what you would classify as food in a restaurant and what you would classify as food outside a restaurant?' In trying to at least introduce what we saw as some fairness into the government's proposal, we were trying to address the issue of equity in the way this tax lies as an impost against the poor. And that, basically, is still what we want to keep coming back to: the argument that the effect of this tax falls five times more heavily upon low income earners than upon high income earners. I think that the arguments you are coming up with—and I take it they are real issues—are details taking us off the main stage.
Senator O'CHEE —My problem, Your Grace, is that these issues, as Senator Cook would say to you, are the very issues that the Senate has to tackle. These issues of detail which you consider to be unimportant are, in fact, important when it comes to legislating for a tax system. If you want to advocate a departure from what the government has done, you should at least do us the courtesy of giving us a guideline.
Bishop Curnow —We are not advocating a departure from what the government has done. This is about what the government is proposing. I am not saying that it is not an important matter; I am simply saying that, given our resources and the focus we have put into it, we have not put a lot of effort into working out how you would discern between restaurant food and food other than restaurant food. Perhaps, given the point you are making, we need to.
Senator O'CHEE —Let us leave the restaurant food issue.
Prof. Nevile —Could I just make one more point on that, Senator?
Senator O'CHEE —Certainly.
Prof. Nevile —I agree that wherever you draw the line there are going to be some fuzzy things and some people will feel dissatisfied. Nevertheless, I have here an official OECD report which shows that virtually all OECD countries with a GST tax food at a different rate from the general rate. So they have some mechanism for drawing the line. They may all have different mechanisms—the report does not say—but the vast majority of OECD countries treat food differently. Surely, Australia can benefit from their experience and find out what mechanisms are used and pick the best one.
Senator O'CHEE —Let's just address the issue of food generally because that is what you wish to do.
Prof. Nevile —Yes.
Senator O'CHEE —You are aware, for example, that many leading economists dispute the suggestion that food should be free of GST. Professor Neil Warren said that there is another reason why concessional rates for food need to be avoided. This relates to concern about whether the full benefits of the concession are actually passed on to the consumer. He states that, if there are two sectors and one is taxed and another is untaxed, consumers will substitute the untaxed good for the taxed good. Professor Dixon said that in the long run exempting food has a negligible but negative impact on economic welfare under either labour market assumption. We can go through other economists—Ann Harding, David Johnson, Geoff Carmody and Chris Murphy, for example—who were all against this.
Prof. Nevile —I know these economists. I supervised Neil Warren's PhD and I know him extremely well. I know the way he thinks. All I can say is what I have said before: these people are assuming that the compensation package that is put in place will remain there unchanged and will not be diminished in any way from now to perpetuity. I do not believe that will happen.
Senator O'CHEE —They are all talking about the effect on the economic welfare of Australia. They are talking about what it does to the economy.
Prof. Nevile —Let me take the case you mentioned first, Neil Warren, because I know extremely well what Neil is saying. He is saying that people who are not poor, who are either moderate income earners or very well-off people, spend more—in an absolute amount—on food than do very poor people, and that is true. Therefore, if you tax food and compensate the poor people for all the tax they have paid on food, you will still have surplus tax revenue. That is certainly true. There is no doubt about that. The only question is whether you will continue to compensate the poor people adequately for the tax they have paid on food. Neil does not address that question. He just assumes you will.
Senator O'CHEE —Your analysis also makes some assumptions that are probably not correct.
Prof. Nevile —I hope they are correct.
Senator O'CHEE —For example, you say—
Senator CONROY —Don't feel threatened by Senator O'Chee's analysis.
Senator O'CHEE —I certainly wouldn't feel threatened by yours.
Prof. Nevile —What assumption do you want to discuss?
Senator O'CHEE —For example, you talk about the compensation for welfare recipients not being sufficient. But ACOSS found that on average every low income welfare group had their cost of living rise, under their most dire assumption set, by less than the level of compensation. These are people who are welfare recipients and, therefore, their welfare receipts are indexed.
Prof. Nevile —Yes. ACOSS said two things. One was that, if you took each of the welfare recipient groups, for example—and excuse me if I use the old-fashioned terms—old age pensioners, unemployment benefit recipients and so on, on average their costs would rise less than the compensation. They also made the point that within each group there would be some people whose costs rose more than that and who were not compensated. They made that point quite explicitly. So that is the first point about ACOSS.
Senator O'CHEE —Are we supposed to run around Australia and invalidate a package because we can find one person in a particular group whose costs may rise by more than the proposed compensation? Surely, as an economist you have got to accept the fact that, when you model a group of people, there is a value in modelling the average?
—Can I just say three things? The first is a cheap debating point about the man who drowned in a river with an average depth of three inches. The second, more serious one is that it is not just one person; there are substantial numbers of people in all these groups. In addition, there are people who are not welfare recipients who get compensation of some sort or another which may or may not be adequate. It is certainly true
that there are groups who will not be compensated adequately. I have pointed out one explicit group which gets no compensation at all because its members are not welfare recipients. It is also true that many people in public housing will not be adequately compensated, given ACOSS did not allow for certain facts in its modelling. Quite apart from that, I would like to finish—although I should not—with a political point: the Treasurer has said many times, very loudly, that there is not one person who will not receive adequate compensation.
CHAIR —I think St Vincent de Paul tutored us on averages when they gave the example of a 70-year-old turning up with a 10-year-old to a meeting. If they are the only two in the hall, the average age of the meeting is 40. We would make a startling mistake if we pitched our policies at 40-year-olds to impress that audience.
Senator BARTLETT —I want to press the issue of compensation versus exempting food slightly further, just to make sure that I have got your argument clear. Bishop Curnow, you are basically arguing, I think, that compensation is either fragile or unreliable, and we are unable to guarantee it will last. You believe that exempting food would minimise that danger. Is the lack of confidence in the reliability and dependability of compensation due to future pressures on government spending or to bracket creep? Why don't the public broadly—and yourselves—have confidence that compensation will last?
Bishop Curnow —I think that one answer one can give to that—and perhaps Professor Nevile will speak to the two that you have raised—is that where there has been compensation for food in other countries with a GST, those compensation packages for food have been eroded within a short time. New Zealand is an example. Although the government keeps giving the public an assurance that they are going to make sure the compensation is in fact ahead of any impact, I do not think that anybody is convinced.
Prof. Nevile —I think it is a fact of life that there will be very strong pressures on any government. It is very hard to believe that governments will be able to completely resist these pressures. If you look at the history of Australia, there is plenty of reason to support that.
Senator CONROY —Would you advise us not to introduce a GST?
Senator FERGUSON —Even in the Senate, where the government never has a majority.
Senator BARTLETT —Unless you rig the voting system and change it, like you are trying to do.
Prof. Nevile —Part of the problem is that you can do this sort of thing without changing the law. Bracket creep is a very obvious example, and maybe not the most important example. Nevertheless, bracket creep occurs because the law is not changed, not because the law is changed. Who gets what is not just a matter of the law; it is also a matter of administrative procedures and regulations which may or may not have to go before the Senate.
Senator BARTLETT —We have heard some evidence from economists through this and other committee hearings, arguing that taking food out of the tax net will increase compliance costs and, therefore, be economically disruptive. In a broad sense, is it good economics to tax food?
Prof. Nevile —Taking food out will increase compliance costs for small businesses. I think for large businesses they have already got such sophisticated accounting mechanisms that that is not an argument. I think the whole argument is about small business. Yes, it will increase compliance costs for small businesses, as the whole GST will substantially increase compliance costs for small businesses. There is no question about that.
The only answer I can give to that is that I believe it would be easier to do more to help small businesses with the transition than it would be to devise a foolproof compliance system for the less well-off.
Senator BARTLETT —In relation to that argument about a uniform rate and those flow-on issues of simplicity, and business obviously sees this as essential, predominantly because of the simplicity argument, you mentioned differential rates on food earlier on: in terms of other countries you are aware of around the world that have GST or similar tax, do they all have flat rates or do most of them have differential rates?
Prof. Nevile —I have something here which is put out by the OECD covering all its members. The only country in the world with a flat rate is Japan—it was a three per cent rate, and it went up to four per cent, and I am not sure whether it is still four per cent or five per cent. I am sorry. But it is a very low rate. Apart from Japan, with its very low rate of GST, there is no country that has a flat rate.
And it is not just food: to give you one example, Ireland has a zero rate for 10 categories, and it has a lower than normal rate for another 32 categories. So there are 42 categories in Ireland that pay less than the standard rate. That is the first one on the page I opened. It was perhaps a bit unfair to pick on Ireland, because that is an extreme case. Nevertheless, all countries have more than one rate.
Senator BARTLETT —So it is not even just a matter of 10 per cent or nothing?
Prof. Nevile —No.
Senator BARTLETT —It is quite possible to have a range of rates without the sky falling in and—
Prof. Nevile —Yes, that is certainly true. This is an official OECD publication which gives you the coverage of the different VAT rates in the OECD.
Senator BARTLETT —You mentioned briefly on page 4, I think, of your submission, Anglicare Tasmania and some of the work they have done on the Tasmanian situation, focusing particularly on food. Why is Tasmania different, and why is food so important there?
Bishop Curnow —One of the issues that Anglicare Tasmania is raising, particularly in reference to food, is that, although the CPI measures food across Australia, there are substantial variations at the regional level. The national average does not necessarily reflect what is happening in various states. For instance, the cost of food in Tasmania is greater than in other parts of Australia, because of Tasmania's isolation and the necessary transport costs involved. On the other hand, if you go and buy food in many places in Melbourne and Sydney with much larger and more competitive markets, costs could even be lower than the average of the CPI. That is why they have drawn particular attention to Tasmania. The point they are making is that there are many parts of Australia where the CPI is not a good measure of what is happening.
Senator BARTLETT —There are a lot of other issues that I would like to go into in relation to the operation of welfare agencies, but because of time and because I think some of them have been covered by other committees, I will confine myself to the specific issue of food. Just bringing it back to that, because it seems to be your main focus, do you believe—without saying that all the rest is optional—that food is a fundamental issue in terms of a change that needs to be made?
Bishop Curnow —As I said to Senator Cook, we have concerns about other areas with regard to the GST, and particularly their impact upon low income people. But Anglicare Australia is really wanting to make food the area about which we are not prepared to negotiate at all. We want it not part of the GST.
CHAIR —I have had a request for one question from Senator Conroy, in which case there will be one question from Senator Ferguson, and that will conclude this session. Senator Conroy, your one question.
Senator CONROY —My question was actually almost identical to Senator Bartlett's, except that your answer now leads me to about 10 million others. I am struggling now to understand when you say you are supporting the calls for exemptions from other organisations. Could you identify what they were?
Bishop Curnow —We are certainly concerned about rent for low income people as one of the areas.
Senator CONROY —So you want to see it exempted?
Bishop Curnow —Yes.
Prof. Nevile —If I could go a bit further with that, since it is something I feel strongly about and know a lot about from a previous incarnation, the present intention of the government is to impose a GST on rent paid in caravan parks, boarding houses and similar sorts of things on the grounds that it is too hard to distinguish between tourists and permanent residents. Some of the poorest groups in Australian society live in boarding houses and caravan parks. That is one thing that we have not focused on at all but which nevertheless Anglicare believes is extremely important and is very sympathetic to the groups that—
Senator CONROY —Is it negotiable or not negotiable?
Bishop Curnow —We would say not negotiable, but we have decided not to make that part of our campaign. It might sound strange, but we—
Senator CONROY —It is just that I am interested to know whether, when you appear on TV tonight, you are going to be saying, `These are the ones,' or you are just going to be saying food.
Bishop Curnow —No, we would add rent.
Prof. Nevile —I think we would argue that food is the one we want to present a case about, but we are very sympathetic to the groups that are arguing that rent should also not be negotiable.
Senator FERGUSON —It has developed into two questions now. What you are really arguing for is higher taxes, aren't you?
Senator CONROY —But lower business tax is all right?
Senator FERGUSON —That is his fifth—I have got another one.
Prof. Nevile —What we are arguing for at the moment is not higher taxes. We are working within a revenue neutrality. Given that we are already cutting the surplus by, what is it, $7 billion, in that sense it is lower taxes. But at the moment we are arguing within that assumption, though it is also true—a clue to real thoughts, as some people used to say—that we believe in the long run this will mean that taxes will be an increased proportion of income.
Senator FERGUSON —Don't you believe the official employment figures as they are put out?
Prof. Nevile —Sorry? I am not—
Senator FERGUSON —The reason I ask the question is that you talk in your submission about an entrenched level of 10 per cent unemployment. I cannot remember an entrenched level of 10 per cent unemployment since we had a Labor government.
Prof. Nevile —An entrenched level of 10 per cent unemployment—I did not write that, but I am—
Senator FERGUSON —No, I know you did not write it.
Prof. Nevile —I am sure what the person meant was an average level of unemployment over the whole cycle, good and bad times alike. That has been true, unfortunately, for the 1990s.
—Not since 1996 it has not.
Prof. Nevile —No, because we have been in a boom. If we—
Senator FERGUSON —We cannot talk about an entrenched 10 per cent unemployment rate because in fact it is not.
Prof. Nevile —Okay, well maybe—
Senator FERGUSON —The current unemployment level is 7.5 per cent.
Prof. Nevile —Sure.
Bishop Curnow —Obviously, in a boom you are going to have less. That is the average.
Senator FERGUSON —No.
Prof. Nevile —It is the average.
CHAIR —It is the measured level.
Senator FERGUSON —No. The level of unemployment is 7.5 per cent. Sure, there is 10 per cent in some particular towns, but there is also six per cent in some.
Prof. Nevile —There are two things that can be said. I think that the person who wrote that—and this is what I assumed when I read it—meant that, taking good times with bad, on average, unemployment is now at 10 per cent. And I would argue that is the case.
There is another way of looking at it which can also be argued: that when measured unemployment is 7[half ] per cent, there is also a substantial amount of hidden unemployment. But if you took that figure it would have to be higher than 10 per cent, so I think that was not what was meant.
Senator FERGUSON —I would hope not, because I would debate that issue with you. In fact, for you to say that there is an entrenched level of 10 per cent unemployment is something that we would not accept. In fact, I am doubtful, if the unemployment level was at 7.5 per cent, whether the previous government would accept that either.
Prof. Nevile —I am sure any government would like to put the best possible gloss on the figure and take the lower figure, if it were possible for it to do so.
Senator FERGUSON —It is the accurate figure.
CHAIR —I think it is the figure as measured by the bureau in their surveys. Thank you, Bishop Andrew Curnow and Professor John Nevile from Anglicare, for the assistance you have rendered the inquiry this afternoon and for appearing here and giving of your time.
Bishop Curnow —Thank you.