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Wednesday, 24 November 1999
Page: 12502


Mr KELVIN THOMSON (12:40 PM) —We live in a time when the capacity of sovereign nations and elected governments to protect labour rights and to maintain social welfare has been very much eroded. Interestingly, the well-known hedge fund operator George Soros has drawn attention to this in his writings:

The capacity of the state to look after the welfare of its citizens has been severely impaired by the globalisation of the capitalist system, which allows capital to escape taxation much more easily than labour.

The writer Guy Standing makes the same point, noting that governments are being pressured to reduce taxes on capital and erode labour security at the same time as they are being forced to offer increasing subsidies to capital.

What does this mean for the new business tax legislation before us, the first stage of the government's business tax changes? We should be supportive of changes which simplify business taxation and taxation generally. I absolutely accept that business taxation is far too complex; I absolutely accept that taxation generally is far too complex—not helped one iota by the government's GST and its 1,000 subsequent amendments to its GST legislation. While we should be supportive of measures to remove the incentives to tax driven behaviour, so that business makes decisions based on their economic merits and not for tax reasons—I think the government has to some extent been endeavouring to achieve this—nevertheless we must jealously stand as gatekeepers guarding the door against any further attempts by the government to widen the gap between rich and poor by insisting on the principle of revenue neutrality, that is, that this tax package pays for itself.

We cannot afford to see further cuts in essential community services in order that business pay less tax, in order that it can give even larger and more generous salaries to chief executive officers. A recent survey showed that the CEOs of the top 100 companies in Australia managed to score an additional 22 per cent in income during the past 12 months, leaving them with a $1.5 million average yearly salary even without taking into account share and stock options.

Labor has no intention of contributing to an increase in the gap between rich and poor. We are well aware and mindful of the concerns which have been expressed regarding the revenue neutrality, and therefore the equity, of the package. If it fails them now we cannot be expected to support it. If it fails them in the future then the government's changes will clearly have to be revisited. Let me outline to the House some of these concerns so that no-one here is in any doubt that Labor is mindful of them. Tim Colebatch said in the Age recently:

If the critics are right, the tax changes could weaken Australia's economic growth by discouraging the developments that maximise growth. And if Treasury's revenue estimates prove optimistic, ordinary Australians will feel the pain through cuts to government services and/or higher taxes.

Mr Colebatch expressed the view that Labor and the Democrats, rather than competing for the coalition's favours as negotiating partners, should see their common interest in working together to ensure that the tax package will pay for itself. I cannot speak for the Democrats, but Labor certainly has been working to ensure that this package will pay for itself. That has been the heart and soul of our position.

Mr Colebatch further says that the public interest in this debate is to ensure that tax cuts do not corrode the revenue base we need to finance community services. Once again we agree: that has been exactly what we have been doing and will continue to do. Mr Colebatch points out that the Treasury has noted that the favourable treatment of capital gains and retained earnings will create incentives for tax dodging at a revenue cost that may mount steadily. He claims that, while the government's package contains measures to ensure that only losses arising from commercial business activities can be deducted from other income, it also includes, according to him, some nine loopholes which between them allow virtually all such losses to walk through the net. So they are serious concerns.

Indeed, so too are the concerns expressed by a number of economists—Fred Argy, Bernie Fraser, Professor John Freebairn, Dr Michael Keating and Professor John Neville—in a letter to the Australian Financial Review earlier in November. They expressed concern that the changes to capital gains tax could worsen the existing distortion in favour of income from capital gains relative to other income. They pointed out that:

If Australia suffers from a shortage of "seed capital", there are other devices available to governments which are better targeted and which do not create new distortions in the process.

They also expressed the concern that, if we had a widening of the scope for tax avoidance and minimisation, this would:

further erode the long-term revenue base. This will affect the nation's capacity in the years ahead to provide education, health, welfare and public services—which are essential both to ensure a fair society and to sustain future economic growth.

They did say, too:

Some of the proposed changes to CGT have merit. They may make the system simpler for small business, help unlock assets . . .

They also said that:

But such improvements can be made without undermining the integrity of the whole tax system.

We are also aware of an attack by the academic John Quiggin on revenue neutrality. He says that the claim for revenue neutrality rests on two main points. First, it is argued, based on US experience, that a reduction in the rate of capital gains tax will lead more people to realise capital gains and, therefore, to increasing revenues and, secondly, that revenue savings from a variety of anti-avoidance measures have been included in the package. In addressing those, Professor Quiggin says that an increase in realisations affects only the timing of tax payments—that is to say, a cut in the tax rate may bring forward tax revenue that would otherwise have been received in the future, but it does not generate any additional revenue in the long term. Secondly, in relation to these anti-avoidance measures, he says that this is a dubious accounting procedure because new tax avoidance devices are being invented all the time so a substantial amount of anti-avoidance legislation is necessary simply to prevent erosion of the tax base. He says that there is no evidence to suggest that the anti-avoidance legislation in this package goes beyond the level of routine maintenance and that, indeed, the proposed changes will themselves open up massive opportunities for tax avoidance.

We also saw the Age commentator Kenneth Davidson saying that capital gains tax changes would, like GST changes, work powerfully in the direction of creating an unequal society. He points out that net capital gains totalled some $3 billion in 1996-97, that those gains were distributed between seven per cent of taxpayers, that three-quarters of the gains were distributed to taxpayers on above average incomes and that, overwhelmingly, capital gains were derived from property, some 31 per cent, or partnerships and trusts, some 50 per cent.

We also heard Trevor Boucher, the tax commissioner who implemented the 1985 introduction of capital gains tax, saying that halving the capital gains tax rate would entice tax avoiders `like bees to a honey pot', and that these changes would favour the top end of town.

We bore those concerns in mind when this issue was being considered recently in the course of a Senate inquiry. That Senate inquiry had a very short time frame—it was made very short at the insistence of Senator Murray—but it discovered that there is a large hole in the government's figures for stage 1. That hole of some $1.5 billion arises primarily because of unrealistic assumptions about behaviour associated with the capital gains tax, the so-called unlocking effect, and also because of the enormous threat of revenue leakage arising from the capital gains tax proposals because the government has not taken the step of bringing in anti-avoidance provisions to deal with the threat of schemes that seek to convert income into capital gains. That is an issue that we will be pursuing, both in the House of Representatives and subsequently in the Senate.

It is worth pointing out by way of background to this legislation that the Ralph committee, in its report back in February entitled A platform for consultation, costed a 20 per cent reduction in the capital gains tax against the abolition of averaging and indexation. It came out with a slightly positive revenue figure from that trade-off. Yet a few months later the Ralph committee came up with a proposal to cut the capital gains tax not by 20 per cent but by 50 per cent for individuals and by one-third for the superannuation funds, but was able to say that this much larger change also paid for itself.

They did this by making certain assumptions, the first being that there would be a huge unlocking effect, assuming that over $500 million a year would be paid in extra tax in the first few years after the change because of increased incentive to realise capital gains. We do not dispute that there will be some unlocking effect; there is no doubt about that. But these claims do seem to us to be unrealistic. They rely on United States experience. Yet the Senate inquiry heard evidence from capital gains tax specialists who suggested these claims were nonsense. All the non-government members of the Senate inquiry found that the government's revenue figures in this area were very optimistic.

I think it is also worth noting that capital gains tax has been a very effective source of revenue for the Commonwealth. The Australian Financial Review reported in October that some $16.7 billion in net capital gains was realised in 1997-98 and that collections had jumped $1.4 billion in the past year, so we saw something like a 60 per cent increase on the $2.3 billion paid in 1996-97. Individuals realised an extra $1.5 billion in taxable capital gains generating an additional $500 million in capital gains tax. The report attributed strong gains in shares to substantial growth in collections of capital gains tax.

You really have to ask in this respect precisely where the government thinks the problem is, just what extra activity the government feels needs to be unlocked or just what activity the present regime is stifling when you see such substantial revenue figures being generated through the capital gains tax regime.

We are concerned about the issue of avoidance, and the measures that we will be putting forward in the course of this parliamentary debate reflect that concern. We are concerned to keep the government honest in relation to its proposal that this package would be revenue neutral—a guarantee that it has provided. It has guaranteed this package would pay for itself. We are concerned to ensure that that is indeed the case and that is the way we would be approaching this debate both here and in the Senate.

Our position is that the package must be revenue neutral and that the parties ought to acknowledge that the detail so far announced has failed the revenue neutrality test and that we can assess this only when the full detail of the entire package has been settled. If the government thinks that it is going to slide this through without indicating to the parliament and indeed to the Australian community the full detail of its business tax propositions, it is in for a nasty surprise.

This is a very complex piece of legislation. I do not really have time to cover it all but, essentially, the other aspects of the legislation involve reduction in the company tax rate from 36 per cent to 34 per cent for the year 2000-01 and to 30 per cent for the year 2000-02; reform to the depreciation system, including replacing accelerated depreciation with effective life depreciation; the introduction of a nominal system of capital gains tax to replace the previous system, which was an inflation adjusted system; and a number of measures which are designed to and which we hope will reduce tax avoidance opportunities.

We have indicated we will not be opposing this legislation. We will however be seeking to keep the government honest in terms of its commitment to revenue neutrality, a most important element in ensuring that this package is indeed equitable and does not impact adversely on services and quality of life for ordinary Australians.