Senator LEES —My question is to the Assistant Treasurer, Senator Kemp. I ask the minister if he is aware that nearly half the funding for the capital gains tax cuts assumes that lower tax rates lead to higher tax collections, as advocated by the conservative right in the United States? In embracing the Ralph report figures as government figures, isn't the minister also embracing the radical supply side theory pushed by economist Alan Reynolds in his report for the Australian Stock Exchange, upon which in turn Ralph relies? I also ask the minister: if the Reynolds report is wrong, as key officials in most United States agencies believe, including the US Treasury and the Congressional Research Service, doesn't this create a serious $500 million black hole in the government's funding of the capital gains tax cuts?

Senator KEMP (Assistant Treasurer) —I will make a number of points in relation to the question by Senator Lees. The first point is that currently Australia taxes capital gains relatively harshly compared with many other countries. As you indicated in your question, the Ralph report estimates that the proposed CGT reforms will be revenue positive, notwithstanding the reduction in the CGT rate. The overseas experience supports the conclusion that a lower CGT rate increases realisations. I think, as I pointed out in relation to other questions I have received over the last week, that among other things it reduces the lock-in effect—that is, the reluctance of people to sell because of the tax—it encourages capital formation and it makes Australia more competitive. A relatively strong short-term positive revenue response is expected to follow the lowering of the CGT rate. In the first two years, the review estimated a 50 per cent increase in the rate of realisations as investors realigned portfolios due to the CGT rate cut. Revenue gains from these increased sales more than offset revenue losses from the lower rate.

The Ralph estimates are not inconsistent with the findings reported in a study commissioned by the ASX. As you will be aware, the ASX conducted a study of capital gains tax options for Australia.

Senator Cook —It is like Dracula being in charge of the blood bank. It is outrageous.

Senator KEMP —It was undertaken by Alan Reynolds, a senior fellow and a director of economic research at the Hudson Institute. I was quite interested to hear Senator Cook refer to the Stock Exchange as the blood bank. This was the party that decided that it needed to get a bit closer to business.

Senator Lees —Madam President, I raise a point of order. Can I bring the good senator back to the question. I did not ask about the Labor Party's policy or the Labor Party's questions. We are specifically looking at the very report he is quoting from. Could he please answer my question.

The PRESIDENT —Senator Kemp, I remind you of the question.

Senator KEMP —True, Senator Lees. I was distracted. The Ralph committee did not rely on the ASX study to draw its conclusions. The ASX study translated official US estimates to the Australian context and concluded that a lowering of the top CGT rate would have a revenue elasticity of minus 1.65 to minus 2.24. The estimates in the Ralph report are not inconsistent with those in the ASX study.

There is an extensive discussion of the estimates that have been calculated in the Ralph report, and I would refer senators who wish to pursue this matter to that section of the Ralph report. I think it deals with quite a range of these issues, and I think it is well worth a read. We have used the figures which were prepared by the Ralph review, and we believe they are the best available estimates. The Ralph review relied on a number of sources of advice, and the government has accepted their figures.

Senator LEES —Madam President, I ask a supplementary question. Minister, isn't it the case that Ralph has largely relied on that Reynolds report? Specifically, I ask the minister to confirm that Treasury has in fact assessed the Reynolds paper on capital gains tax, that Treasury has questioned its arguments and that Treasury has cautioned against relying on it for revenue estimates. Finally, I ask the minister: can he please make available to the Senate Treasury's advice on funding of the capital gains tax changes?

Senator KEMP (Assistant Treasurer) —As I said, the government has accepted the figures in the Ralph report. The Ralph report conducted an extensive study in this area, and the government has been prepared to accept these figures.

Senator Lees —Madam President, on a point of order. My specific question is: can we please see the work that Treasury has done? Can the Senate have a copy of Treasury's work on this particular report?

Senator KEMP —Treasury prepares work for the government, as I said. However, if you have particular concerns, I will refer your question to the Treasurer.

Senator Conroy —What about Treasury—do they work for a living any more?

The PRESIDENT —Order! Senator Conroy, you have been interjecting persistently this afternoon.