Senator GEORGE CAMPBELL (10:36 AM) —In addressing Appropriation (Parliamentary Departments) Bill (No. 2) 1998-99 and the associated bills, I want to focus my remarks on the goods and services tax and some of the implications of that tax for the country and for our budget. The coalition has made many statements over the past few months about the benefits of a goods and services tax in Australia. The current government has made many claims about the unfairness of the current tax system, particularly in relation to tax avoidance and compliance costs.

The facts of life are that, in the vast majority of submissions that have been received by the Senate select committee on the goods and services tax, people have drawn attention to the unfairness of a goods and services tax, particularly as it applies to those on low incomes. We have seen as late as yesterday a press release headed `Unprecedented church, community alliance calls for tax changes.' It says, in part:

An historically broad alliance of church, charitable, community and consumer organisations today released a joint statement rejecting the Government's Tax Package and calling for major changes to improve its fairness and protect those on low incomes.

Speaking at the release of the joint statement, ACOSS President, Michael Raper, said:

Never before has such a large number of Australia's major church, charity, welfare, community and consumer representatives come together to declare the Government's GST unacceptable in its current form.

We all believe that substantial and continuing tax reform is essential. In fact, I would have thought that tax reform was a continuum. If you look back at the Hansard reports of this parliament over the past 100 years, you will see it littered with debates about changes to the tax system. The nature of the tax system has always been under review by the parliament and has been subject to change over the history of our federation. But the Labor Party does not believe that tax reform equals a GST. The difference between Labor and the Liberal-National coalition is that Labor believes tax reform must be fair and must benefit all Australians. It must not be reform that disadvantages those who can least afford it or that costs jobs by disadvantaging business.

The cornerstone of the coalition tax reform package is a GST, and one of the substantial reasons for the tax reform package, according to the Prime Minister, John Howard, is to fight tax evasion to stop those people who are not paying their fair share. I am questioning the degree of the black economy. At Senate estimates we have had estimates made of what it is, ranging from $3 billion up to $18 billion. The reality is that Treasury does not know, nor does this government, the extent or the size of the black economy in Australia.

The coalition have repeatedly claimed that a GST will fight tax evasion and that it is a simpler and less cumbersome tax alternative than the current arrangements. The GST will not deliver the sort of tax reform that Australia is asking for or the tax reforms that the coalition is promising. All of the facts about a GST in relation to tax evasion and compliance costs show us that a GST is detrimental. In fact, in many of the countries that have recently introduced a GST, tax evasion has become significantly worse. I can give a number of examples, starting with the example of Canada.

In Canada, the arguments for the introduction of GST were very similar to those now being espoused by the Prime Minister, Treasurer and other coalition members. For example, the Canadian Finance Department argued that a GST would significantly reduce tax evasion and, at the time, all the rational economic models supported this proposition by showing that a GST would not lead to an increase in tax evasion. The GST was later introduced at a low rate of seven per cent to replace a hidden sales tax. Does this sound familiar? What have been the results of this tax evasion in Canada, and can we learn from their mistakes?

A renowned conservative think tank in Canada, the Fraser Institute, has recently completed a study titled The underground economy: global evidence of its size and impact. In its report, the Fraser Institute shows that the GST is the primary catalyst for growth in the underground economy in Canada. The report makes several clear points to support this fact by comprehensively analysing the state of the economy in Canada after the introduction of its GST in 1991. Firstly, there was a growth in tax evasion of around two per cent of GDP from early 1991 to the end of 1993. This equated to around $14 billion of unreported GDP, which meant lost taxation revenue of some $6 billion to all levels of government in Canada. As in Australia today, many predictions were made by the government in Canada about the revenue that would be received from a GST and that it would enable the replacement of existing hidden taxes as well as income tax cuts.

The facts in Canada show that in 1993-94 there was a shortfall of revenue from the GST in the budget of $1 billion relative to the predicted income of the 1991-92 budget. The Fraser Institute report shows that most of this shortfall can be attributed to evasion of the GST. In Canada, the problems associated with this loss of revenue through a GST have had a significant impact on the capabilities of government. Decreased tax revenue obviously means that the government is forced to either spend less or borrow more. If borrowing is increased, a larger proportion of taxes people pay today goes to servicing debt incurred in the past to pay for services consumed in the past. Tax rate increases are inevitable as the only solution to this problem.

In Australia, I think it is fair to say, we can expect a similar result to Canada, where the GST is not all it is supposed to be and inevitably the rate of GST continually rises to combat falling government revenue. If tax is increased by government without adequate benefits to offset it, the public perception is that the tax is unfair and will further encourage tax evasion. In other countries, such as the United Kingdom and the Netherlands, they have found similar results to those of Canada.

In a publication called VAT Experiences of Some European Countries, R. Hemming and J.A. Kay from the Institute for Fiscal Studies point out:

It would not be at all surprising to find that a tax as complex as VAT was fairly easy to evade. However, it has been suggested that the invoice method of operating the tax provides a built-in policing mechanism. This built-in policing is illusory even on transactions between registered traders . . . A comprehensive system to check compliance would require tracing all the VAT invoices issued by traders . . . and matching the totals of these to that traders declared output, a task which is clearly impossible.

In the Netherlands, as far back as 1976, Sijbren Cnossen, from Erasmus University in Rotterdam, completed a review of a comprehensive government report on tax evasion. The Cnossen review points out:

A recent government report on tax throws light on the extent of tax evasion. For the report some 77,000 field audits that were made in 1976 (20% of the number of taxpayers at that time) were reviewed. The audits resulted in the imposition of 45,000 additional assessments (6 out of 10 audits) and the recovery of $0.31 Billion revenue, or almost 2% of total receipts for that year. Furthermore it was discovered that one fourth of all cases consisted of petty fraud involving $1000 tax or less.

This demonstrates clearly a shifting of the tax burden from government to private enterprise. The compliance costs under a GST will significantly increase as the burden of tax collection is shifted from government to private enterprise, and particularly to small and medium enterprises. The Centre for Independent Studies in 1996-97, in its publication Policy , explains tax compliance succinctly under an article entitled `The Hidden Costs of a GST—An International Experience'. The centre states:

There are in broad terms, three main types of costs associated with tax compliance. Firstly, the costs of running the Australian Taxation Office and other revenue authorities termed administrative costs. Second, there are the costs of taxpayers in complying with tax rules, and third the wider economic costs associated with the ways taxes can distort business and consumer behaviour. The increased compliance costs faced by an average business according to the Centre are as follows:

. . . . . . . . .

No doubt the highest compliance costs will be suffered by those who previously did not participate in the sales tax system but who would be required to participate in the GST system because of its breadth."

Many people, in small businesses in particular, are wondering what exactly the compliance costs of a GST are, and what they will have to do to comply. The government has not been publicising the things that the average business would have to do to comply with a GST. I believe that this is because no small business would support a GST if it fully understood the work that will be involved in collecting this tax for the government. Some of the typical compliance costs that the Centre for Independent Studies has exposed are:

There will be an added compliance cost in the form of completion of a periodic return and either a payment to the revenue or a claim for a refund. If there is a refund it will have to be checked and banked. At the point of recovery of GST on supplies made by the business there will be an extra invoicing function to reflect the GST, if Australia adopts an `add on' rather than `add in' system. There would be an extra initial cost of ensuring the business's stationery complies with requirements such as showing a registration number and proper current address. There would naturally be an initial compliance cost in registering the business in the first place. At the point of acquisition of supplies by business, on which it wishes to claim a credit for the GST paid, there will be an extra function of recording the GST that has been paid so that it can be offset against a GST recovered by the business . . . The compliance costs would increase where the nature of the business involved some refinement or other (depending on the model adopted) to the standard GST template, such as imputing a deemed GST on the cost of second hand goods as trading stock by second hand dealers, accounting for GST incurred as an agent for another business, dealings within group companies and so on. All these refinements would involve small but repetitive extra compliance activities not necessarily encompassed by existing accounting methods.

According to Sandford and Hasseldine, in the publication Compliance Costs of Business Taxes in New Zealand , the costs of all of this work have been estimated at $NZ453 million, or 7.3 per cent of GST net revenue in that country. More importantly, Sandford also notes in his research:

If administrative costs are allowed for, there must be a high probability that the combined administrative and compliance costs would exceed revenue.

If Australia is to use its closest neighbour as a working example of a GST in practice, then every business in Australia will be faced with the enormously complicated, repetitive and expensive task of collecting a GST for the coalition government. Is it any wonder there is so much tax avoidance in those countries with a GST? Perhaps the high level of avoidance in those countries is because people cannot understand the complexity of the GST, let alone afford to comply with it.

The approach that has been taken by the government in this tax debate has been one of secrecy and unfounded propositions. Many of the assertions that have been made by the Treasurer and the Prime Minister cannot be supported by fact. One clear example of that is the continued reference to the compensation package and the continued claim that the compensation package contained in the tax proposition will more than adequately compensate low income Australians for the impact of a GST. We have seen that myth exploded in the past couple of weeks by Mr Geoff Carmody, one of the architects of Fightback back in 1993 and certainly not an avid supporter of this side of the parliament. Mr Carmody clearly warns that the compensation package that has been put in place by this coalition government would be eroded within a matter of two to three years and that pensioners and low income earners will be substantially worse off at the end of that period if a GST is introduced.

This tax reform package that is being heralded by the current government as a saviour for all of our ills in this country is in fact nothing more than a representation of the ideological bent of the people who are promoting it. It will do nothing to create jobs in this country. It will do nothing to resolve the problems of unemployment in regional and rural Australia. That has been clearly demonstrated by the modelling done by the Prime Minister's preferred modeller, Chris Murphy, and by Professor Dixon of Monash. There is no substantial employment gain as a result of this tax reform, and none can be demonstrated. But it is ideologically driven and it has been clearly demonstrated that it will substantially benefit the top 20 per cent of income earners in this country, to the detriment of the vast majority of taxpayers.

It will not substantially improve the position of our industries. It will not make them substantially more competitive than they are now because, as Professor Dixon pointed out, it will in fact create a bias in the structure of our economy towards the mining sector—something that we have been trying to redress since the mid-1980s. Through a variety of reforms and policy decisions, the previous Labor government tried to shift the balance in our economy away from a reliance on the mining and rural sectors to a much more diversified, mixed economy with manufacturing as a key focus—particularly elaborately transformed manufacturers—as part of our drive to increase our exports. That work of 10 years, the sacrifice that many workers in this country made over that period in terms of wages forgone in order to allow the investment to take place in that area, will be reversed as a result of the introduction of the GST. Those sacrifices, in the end, will be for nothing because the end gain will not be there.

This package demonstrates the absolute arrogance of this Prime Minister and this government and their absolute belief that they can govern for a very small segment of the Australian community. They have not demonstrated in the period they have been in office—from March 1996—that they are a government for all of us. They have had a very distinct bias in the policies they have presented, even to the extent where their industrial relations minister, Peter Reith, has openly claimed that they are there to represent the interests of business. At the end of the day, that is what they are about. (Time expired)