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Tuesday, 8 December 1998
Page: 1631


Mr COX (9:13 PM) —It is a relatively simple matter to design a new tax system and theorise that it is superior to the existing one. However, achieving real reform is an entirely different matter. Making any significant change to the tax system involves, of necessity, a substantial redistribution of income. In this case, the government has, as its objective, pushing a larger share of the tax burden down onto low and middle income families while at the same time giving massive tax cuts to people on the highest incomes. Because that is so fundamentally unfair, Labor opposes the government's tax package. I have already dealt with the issue of fairness at some length in a previous debate and will not revisit it now. The Howard government have spent more than 18 months designing a tax package they claim is vital to Australia's economic future. Yet what they have produced will offer only small benefits and do great damage.

While it was being developed, the Prime Minister and the Treasurer used the prospect of this tax package to deflect serious questions about the government's economic management. Whatever the problem, the government has implied that the GST will fix it: lack of competitiveness of our exports—the GST will fix it; complexity of the existing tax system—the GST will fix it; tax evasion—the GST will fix it; low national savings and the current account deficit—the GST will fix it; unemployment—the GST will fix it; and state-federal financial relations—the GST will fix it.

The GST will not fix it. The main benefit claimed is that the GST offers the opportunity to remove the wholesale sales tax which is embedded in our exports and so improve Australia's international competitiveness. I was involved in the last GST debate when Fightback was launched in 1991. One of my memories is the exaggerated claim of cascading wholesale sales taxes adding billions of dollars to the cost of Australia's export industries. But when Treasury did the modelling using PRISMOD—the same model they are using now—they found that the wholesale sales tax embedded in Australian exports totalled only $800 million.

Reducing the cost of Australian exports is a worthwhile objective, but on analysis of the costs and benefits of this tax package I think you would look to other remedies. The government was, until last Wednesday, very silent on the costs to business of complying with the GST. They will be substantial. The number of taxing points for the current wholesale sales tax is around 75,000, and the government now admits that will increase to 1.4 million with the GST.

The government admits in its regulation impact statement that the total gross cost to business of complying with the GST will be $1.9 billion a year. In itself, that is a compelling reason to reject the GST. That is based on an annual average compliance cost of $1,195 per firm, which is somewhat less than implied by the estimates put out by various peak accounting bodies. However, the Treasury argues that, after the removal of other taxes such as wholesale sales tax, state taxes and cash flow benefits from the remission of GST and amounts recouped by business through tax deductions, the net cost will be only $130 per firm. That, they argue, reduces the total burden to $210 million.

The real comparison is not the dubious estimates for reduction in compliance costs resulting from the elimination of a number of state taxes, because the burden of complying with them is trivial on all but a very small number of businesses; the real comparison is the costs of compliance of the GST versus the wholesale sales tax. That comparison, if you uncritically accept the figures contained in the government's regulatory impact statement, is: GST, $1.91 billion per year; wholesale sales tax, only $830 million.

If I am interpreting the comparison table accurately, the government is arguing that $420 million of the gross compliance costs for the GST are tax deductible, so the compliance cost of the GST to business is that much less. The comparison then is $1.49 billion for the GST and $830 million for wholesale sales tax. That is a $660 million increase in compliance costs to be borne by Australian businesses as a result of the GST. Irrespective of whether a significant part of the compliance costs for the GST is borne by taxpayers through a tax deduction, the fact remains that the GST implies a $1.9 billion administrative burden on the Australian economy.

Then there are the Australian Taxation Office's costs to administer the GST. According to the government's regulation impact statement, these will total about $1.3 billion over the four financial years to 2002-03 when the ongoing cost is expected to be over $290 million. That means the total administrative burden associated with the GST—on the government's own figures—will exceed $2.2 billion a year. Prime Minister Howard was right on 12 March 1981 when, as Treasurer, he told the House:

A multi-stage VAT was rejected fairly quickly because it would have imposed an enormous paper work burden on both taxpayers and collecting authorities.

Now he has changed his mind and wants to put a $2.2 billion deadweight on the Australian economy. That will far outweigh any modest benefits to our international competitiveness as a result of removing the wholesale sales tax embedded in exports.

When the government introduced 16 bills to implement the tax package the pretence that the GST was simple and would not produce anomalies was finally shattered. Already anomalies are appearing in areas as diverse as the GST liability on marriage services, medicines and private tuition for school children. That is the inevitable price of exemptions. Inevitably, the burdens of paperwork rulings and judgments will grow with the GST as they will with any other part of the tax system.

The tax office has no choice but to try and protect the revenue base that the parliament gives it. The GST will be no different from any other tax. It will be constantly under attack from those with access to the expertise and resources to try and avoid it. On 4 December this year in the Financial Review, John Hewson condemned the government's failure to achieve its own simplification objective. He said:

The New Tax System for a new century has been treated as an adjunct to the existing enormous, inefficient body of tax legislation, rather than what the punter might have expected as a simplified tax act. It's great for accountants and lawyers, but the punters hate it.

I would not agree with Hewson's ideas about what is good tax policy now any more than I did in 1991, but he has certainly belled the cat in that this tax package has failed the simplification objective.

That a GST would end tax evasion is the most spurious claim made by this govern ment. The argument that evasion will be reduced is based on the assumption that the unscrupulous will be obsessed by the opportunity to claim a GST rebate on their inputs. That the unscrupulous will be moved to behave in this way is unlikely given that, unless their activities are inherently unprofitable, paying the GST will cost them more than the rebate they will receive on their inputs. The Prime Minister, Mr Howard, put it clearly himself in this place on 25 February 1981 when, as Treasurer, he said:

A value added tax is applied widely in Europe but is very cumbersome and costly and may not be as self-policing as many protagonists argue. In reality, a value added tax was never a serious option before the Government.

As overseas experience demonstrates, the evasion of a GST becomes a national sport. There is a double incentive to evade GST, and that is the opportunity at the same time to also evade income tax. The government is buying support for its tax package with large tax cuts for high income earners and in so doing proposes to substantially loosen fiscal policy.

The surplus that the Prime Minister said was so important in his first two budgets that he had to cut funding for public hospitals, pensioner dental care, state schools and higher education is now being squandered to pay for tax cuts to the affluent. That translates into lower national savings, more pressure on the current account deficit and consequently a reduced capacity to sustain employment growth. The financial markets have so far been prepared to tolerate this fiscal loosening. As one senior market economist put to me last week, they see it as a down payment on getting the kind of tax system that the financial institutions want. What he did not say was that, if that fiscal loosening helps make an already precarious current account deficit unstable, tolerance today will not moderate a sell down of our dollar tomorrow.

In terms of international experience, the expectations for revenue generated from a GST have often been overstated because of two factors—evasion and the tendency for consumers to switch their spending to exempt goods. The tax package throws light on the lack of priority this government places on employment. If payroll tax was ever an issue for this government in terms of its detrimental effect on employment, that has been given a lower priority than wiping out other state taxes like FID, BAD and stamp duty which have far smaller implications for jobs growth. Of course to fix things like payroll tax would have required a much higher GST than the Prime Minister was prepared to contemplate.

Since a GST is a tax on added value and most added value is the product of labour, this country will, with the GST, now have two taxes on jobs. No wonder John Hewson feels that the Howard proposals are not up to the mark that his Fightback package set in 1991. He had proposed the abolition of payroll tax but that required a 15 per cent GST.

The tax package takes state-federal financial relations in the wrong direction. The states have frequently said they are concerned about vertical fiscal imbalance. I believe it is more the case that they have latched onto this as a convenient argument to claim a right to access a Commonwealth revenue stream which provides real growth. In the past their objective has been a fixed share of income tax revenues. Now the Prime Minister is handing them the money raised from the GST in exchange for their financial assistance grants. He is also handing them the keys to increased GST rates. The states have been offered a weak transition arrangement stating only that the Commonwealth has no intention of decreasing specific purpose payments. In reality that will be the next phase in this transformation of state-federal financial relations.