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Monday, 8 October 1984
Page: 1366

Senator GILES —Is the Minister for Resources and Energy aware of a paper on tax, social security and incentive measures, written by Caroline Boyd, James Jordan and Michael Porter of the Centre of Policy Studies and supported by the Deputy Leader of the Opposition, Mr Howard? This paper's outstanding contribution to Liberal policy is its advocacy of a flat rate income tax of 30 per cent. Will the Minister inform the Senate of whether the Government supports a flat rate tax?

Senator WALSH —I am aware of the paper to which Senator Giles has referred, prepared by, as I think she stated, the Centre of Policy Studies. I do not think the people concerned with the Centre of Policy Studies would object if I described them as an ultraconservative group. That paper was obtained by me and, I understand, by other members of the Government this morning but, evidently, was available to the discredited former Treasurer yesterday. I do not know whether from that one should draw the conclusion that there was some collusion between the authors of the paper and the discredited former Treasurer.

Senator Durack —What about the discredited present Minister?

Senator WALSH —I am certainly not aware of the present Treasurer being discredited in any way whatsoever. I am aware of Senator Durack being discredited by the fact that for five years, as the first law officer of the Commonwealth of Australia, he allowed to gather dust in the bottom drawer a recommendation for the prosecution of tax evaders. I am aware of that. I am certainly not aware though of the present Treasurer being in any way discredited .

Mr President, I return to the substance of the question. I will try not to be distracted by any further foolish interjections. The paper proposed a 30 per cent flat rate of tax with a $4,000 tax free income threshold. In fact, if such a policy were applied there would be a revenue deficiency of the order of $4 billion. The paper goes on to suggest that consumption taxes should be increased -presumably to cover that revenue deficit. I guess it is a matter of opinion as to whether that ought to be done or not. It should be noted for the record that if that course of action was chosen the consumer price index would increase by something between 5 and 6 per cent. I think it is irresponsible for anyone to propose a change in the tax system which would increase the CPI to that extent without at least addressing the question of what the effects would be on the wage indexation and the incomes policy for as long as increases in indirect taxes continue to be incorporated into the consumer price index and, therefore, under existing policy, into wage indexation arrangements. Of course, this would have the reverse effect to the very beneficial effects of the Medicare policy which have led to a reduction in the consumer price index and therefore stability in award wages for a period of 12 months between April 1984 and April 1985. I have not read the whole paper but so far as I know the authors did not address that question of the CPI and subsequent wage index ation, inflation and interest rate effects.

The rationale for the recommendation to move to indirect taxation is based on a couple of pretty naive assertions, one of which is that the avoidance and evasion of income tax is a function of the marginal tax rate or the size of the marginal tax rate. Of course, the most tax evasion and avoidance is conducted by higher income groups. In fact, the marginal tax rate in Australia for some years has been very much lower-some 6 per cent lower-than it had been for virtually all of the 1950s and the 1960s. The rapid increase in tax evasion and avoidance which occurred under the discredited former Government, assisted in no small measure of course by Senator Durack's refusal to take any action on recommendations for prosecution of tax evaders, was a function not of increasing marginal tax rates, because in fact the maximum marginal tax rates came down in that period, but of the negligence of the Government then in power and the bizarre decisions of the High Court of Australia which in those days, under the tutelage of Sir Garfield Barwick, almost always came down on the side of the tax evaders and avoiders.

The second naive assumption in the recommended move into consumption taxes is the assumption that consumption taxes will not be evaded. Certainly some types of consumption tax are difficult to evade but consumption taxes or consumption based upon or associated with the cash economy is, by definition, unrecorded consumption and unrecorded transactions. Therefore of course it would be just as easy-indeed, easier-to evade a consumption tax on unrecorded transactions conducted via the cash economy as it is to evade income tax.

Finally, there are references in the paper to incentives to work, to stimulate employment and that high marginal tax rates are a deterrent to employment and production and so on. That seems to be a resurrection of the supply side economic theories of Professor Arthur Laffer, which I think even the Reagan Administration has now abandoned. Finally, the paper has concentrated on marginal tax rates and not on average tax rates. I have here a table showing the average tax rates under the tax schedule that will be in existence up to 1 November and the new schedule that will replace that existing schedule on 1 November 1984. At all ranges of income up to $40,000 the average rate of taxation paid is reduced and the greatest reductions in the average rate of tax which will be paid are at the lower end of the income scale. They progressively taper off as one moves to $40,000.