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Tuesday, 8 December 1998
Page: 1640

Mr ROSS CAMERON (9:53 PM) —What I propose to do over the next 10 minutes is to return to first principles and seek to explain, in simple language that any of my constituents in Parramatta could understand, why we need a new tax system. I found that fair-minded Australians, when faced with the facts, minus the political jargon, the rhetoric, are very sympathetic and responsive to the need for a major reform of our tax system.

If we go back to first principles, the question we must ask is: what is the purpose of a tax system? What is the job that it is called upon to discharge? The success or failure of a tax system must be gauged against the ability of the system to discharge the job that it has been called upon to do. I would suggest three things that a tax system must do in order to be regarded as successful. The first is that it has got to be capable of generating the revenue required to fund the legitimate provision of public goods and services over the long run. That long run view is particularly important. It is not enough if it can do the job today or if it could do the job 10 years ago. We have to ask ourselves: will it be able to do the job in a decade or a generation from today?

The second thing it must do is achieve its first objective, just stated, with the minimum impact on the positive behaviours we need to encourage, such as the desire to work, save and invest, while at the same time it ought to discourage those behaviours which, from a policy standpoint, we need as a nation to discourage. I would suggest that principal among those is the desire to spend and consume, particularly in view of Australia's great deficit of national savings, both public and private. I will return to that point a little later.

The third thing it must do is that it must be adapted to the actual circumstances of the community which it serves, particularly the patterns of economic activity and the demographic changes which will determine what services people will require from government both today and over the decades ahead.

That is what the tax system has got to do if we are going to regard it as successful. That is what it has got to do if we are going to stand up in this place and either defend it or provide a critique of it. It is against that background that I want to outline over the next few minutes what is wrong with the current tax system, why it needs to be reformed and why the new system will achieve the three objectives I have just outlined.

The first point to understand is that every tax has an influence on people's behaviour. Tax is not somehow neutral. Every time you introduce a tax it changes the way people behave. For example, let us take smoking. If you wish to discourage people from smoking, you raise the tax on cigarettes and there is a point at which people's demand for cigarettes is reduced because they recognise they have to pay so much to buy a packet. In the same way, if you look at the consumption of petrol, the fact that we tax petrol highly discourages people from driving and that may have positive environmental consequences. By the same token, if you leave a good, service or activity untaxed, it acts as a licence to participate more fully in that good, service or activity.

The difficulty with our current system is that it does two things: it taxes primarily goods and it taxes work or income. It leaves untaxed consumption. The question is: why is that a problem? I come to the second point, which is that the tax system must be adapted to the actual circumstances in which we find ourselves as a nation. So people are entitled to ask: what are those circumstances that are driving the desire for change in this government which is looking forward to the next generation?

Those circumstances are, firstly, a rapid demographic change. That demographic change is influenced by two key factors: the birth rate and life expectancy. In Australia today, we are following a pattern which is consistent with developed nations around the world, that is, we are having fewer and fewer children. At the turn of the century, the average Australian family was producing six children. Today, the average Australian family is made up of mum, dad and 1.8 children. That ratio is declining; by 2010, the figure will be 1.7. So we have fewer and fewer children and, from a clinical standpoint, that means that over the long run we have fewer and fewer taxpayers. We have fewer and fewer people who are generating the revenue which is required to resource the provision of public services.

At the same time, we are living much longer. At the beginning of this century, the average Australian was living to the age of 60; today, the average Australian is living to the age of 80. Actuaries and geneticists tell us that that figure will continue to rise and that the actual life expectancy of an Australian will rise by another 10 to 15 years over the course of the next century.

Mr Deputy Speaker, it may surprise you to know that one woman in three born in Australia today will live to the age of 100. By the end of the next century, it will be fairly routine for long livers to live to the age of 110. The average life expectancy will be over 90. What it will mean, in terms of the consumption of that tax dollar, is that we will spend 20 years in youth, adolescence and education; from 20 to 55—35 years—in the work force generating tax revenue; and then we can look forward to 35 years of retirement. So what that means is 35 years in the work force generating tax dollars and 55 years consuming the tax dollar. That tells us that we have a huge challenge in terms of how we fund retirement income in this country over the next century. That is the challenge of the tax system. That is why national savings is so critical, why we have to lift the rate of national savings. We know, beyond a shadow of a doubt, that the demand on tax dollars will continue to rise.

So the question is: how does the current system respond to those challenges? The non-demographic factor I want to refer to is the rapid growth in the size of services as a proportion of the total economy. Until the middle of this century, we were an economy that focused primarily on the production and exchange of goods. The wholesale sales tax system is premised on an economy which is focused around the production and sale of goods. But what we have seen is the rapid increase in the provision and purchase of services. That sector is growing at a rapid rate and at the moment it is left entirely untaxed. So when we revisit the question of how we provide this much needed revenue to fund, in particular, retirement income but also the health costs of an ageing population, we recognise the fact that there is this vast area of the Australian economy which exists at the moment in an entirely untaxed state.

The other reason why this is important is that as we seek to lift national savings, what we have to do is change the signals in the structure of the economy which affect people's behaviour. That means we have to change taxes. For example, there is a point at which, if you continue to tax income at ever increasing levels, up to, say, 50c in the dollar, you wind up discouraging people from working. Every member of this House will have had constituents come to them and say, `Why should I work Thursday nights or Saturdays? Why should I work overtime? Why should I put in the extra effort if I know that I have to give 50c in every dollar to Peter Costello?' That is a powerful disincentive for Australians to earn income. The very thing we have to be encouraging Australians to do is to earn income and to save, which is the one thing that our current system discourages them from doing. So we have got to change the signals.

What our new tax system will do is reduce the level of tax on income, thereby providing incentive to work. By then introducing a 10 per cent across-the-board tax on the consumption of services, we also provide a disincentive for people to spend and to consume. Those two things operating side by side will send a powerful message to the Australian people which is consistent with the needs and the challenges that we know we will have over the next century.

The previous speaker got up and ridiculed this system on the basis that it lacked compassion, that it was really the product of KPMG. I support this new tax system on compassion ate, humanitarian grounds, because my argument is—and I think the vast bulk of fair-minded Australians will understand it—if we leave this system unchanged, the only available alternative is to consistently raise the level of income tax. If we do that, we will kill the goose which lays the golden egg; we will bring the Australian economy to a grinding halt. If we have locked in the current entitlement to a pension at 25 per cent of average weekly male earnings and we just project out the demographic changes which we know are going to take place over the next century, we would have to raise personal income tax rates to over 60 per cent on average weekly earnings by the middle of next century in order to fund retirement income.

That is simply intolerable. The people who will hurt the most if we leave this system unchanged are the poor. The people who will hurt the most are those currently on fixed incomes in retirement because the funds will simply not be there to meet their requirements over the course of the next generation and the next century. So I am appealing to all of those who are fair minded, I am appealing to those who are concerned about this country's future, I am appealing to those who recognise the actual circumstances we face, rather than the ongoing stream of rhetoric which is pouring forth from the opposition. I am urging all honourable members to get behind what is a far-reaching, compassionate and humanitarian reform which provides a foundation for this country to thrive into the next century.