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Economics Legislation Committee
06/06/2018

DALEY, Mr John, Chief Executive Officer, Grattan Institute

Committee met at 09:03

CHAIR ( Senator Hume ): Good morning. I declare open this hearing of the Senate Economics Legislation Committee for the inquiry into the provisions of the Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018. The Senate referred this inquiry to the committee on 10 May 2018 for report by 18 June 2018. The committee has received 18 submissions, which are available on the committee's website.

This is a public hearing, and a Hansard transcript of the proceedings is being made—although the committee may determine or agree to a request to have evidence heard in camera. I remind all witnesses that, in giving evidence to the committee, they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken, and the committee will determine whether it will insist on an answer. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may also be made at any other time. I would ask photographers and cameramen to follow the established media guidelines and instructions of the committee secretariat. Please ensure that senators' and witnesses' laptops and personal papers are not filmed. I also point out that questions on notice are due by the close of business next Wednesday, 13 June 2018.

I now welcome the representative from the Grattan Institute. Thank you, Mr Daley, for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so. Is there anything you would like to add about the capacity in which you appear today?

Mr Daley : I appear on behalf of Danielle Wood, John Daley and Hugh Parsonage and our submission to the Senate. I'm the Chief Executive of the Grattan Institute and Danielle and Hugh are other staff of the institute. I appreciate the opportunity to address the committee which has before it the largest tax cuts proposed in any budget in Australia's history. In my opening remarks I'd like to focus on two issues: fairness and the economic effect of income tax cuts.

In terms of fairness, when income tax scales change, its inherently about redistribution. Any change to tax rates is by definition a decision about who should bear less or more of the tax burden, and because of bracket creep any decision not to change tax scales is inherently also a decision to shift the tax burden. At the very least, we should be honest about this redistribution. Unfortunately, much of the discussion about the tax plan proposed in this legislation has used arguments that conceal the level of redistribution in both directions. I'm not going to express a view about what is the right level of redistribution, but I do believe that that choice should be made in the light of day rather than in the shadows and that the choice should also be made free of a number of myths about income tax that have bedevilled this debate.

The simplest analysis of redistribution is in table 3.1 on page 7 of our submission. That shows that overall bracket creep over the next 10 years will move over two per cent of the tax burden from the top to the middle. Bracket creep will not increase the tax burden on the top; it will primarily increase the tax burden on the middle. After the tax plan, almost three per cent of the tax burden will be moved from the top to the middle. To understand this in more detail I'd like to direct the committee to figure 3.2 on page 8 of our submission. This graph shows how average tax rates would change for people across the income distribution. If you look at that graph, the orange line on the top shows you the change in average tax rates as a result of bracket creep over the next eight years—this is figure 3.2 on page 8. As you can see, it divides it across the distribution by percentile of taxpayers. If you look at the 40th percentile of taxpayers you can see that their average tax rate will increase by around six percentage points over the 10 years. These are the true middle-income earners, and they earn about $36,000 a year. For taxpayers between the 70th and 100th percentile, bracket creep is typically only going to average about four percentage points or, for some of them, only about three percentage points. So that's myth one: bracket creep does not hurt high-income earners more; it hurts middle-income earners most, because they have the biggest gap between their average tax rate and their marginal tax rate.

The middle brown line of figure 3.2 shows how average tax rates will change, given bracket creep and the tax plan. That shows that over the next 10 years, assuming the tax plan is implemented, average tax rates will increase for middle-income earners by around four or five percentage points, but will barely move for those in the top 10 per cent of income earners. So the net impact of the tax plan is it will give back all of bracket creep, pretty much, to those in the top 10 per cent but nothing like all of bracket creep to those who are further down the distribution.

The bottom red line shows the difference between the orange and brown lines. It isolates the long term impact of the tax plan. That shows that the tax plan reduces average tax rates by about one percentage point for everyone between the 20th and 66th percentile but reduces tax rates by two to three percentage points for high-income earners between the 80th and 99th percentile. Much of the other modelling that's before this committee is consistent with those conclusions—ANU, NATSEM, The Australia Institute and so on.

The only modelling I am aware of that is not consistent with this analysis is by Deloitte, which is cited in the submissions of the Business Council of Australia, the Centre for Independent Studies and the IPA—although those organisations do not appear to have done their own modelling. The Deloitte analysis claims that the tax plan will redistribute about two per cent of the tax burden from the bottom to the top. We've tried to reproduce the Deloitte analysis and, unfortunately, we just can't reconcile the numbers. We've taken into account that Deloitte looked at 2024-25 rather than 2027-28. We've taken into account that they looked at all adults rather than just everyone who files a tax return. But, when we do that analysis, we still find that the bracket creep and the tax plan redistribute about two per cent of the tax burden from the top 20 per cent of adults to the next 20 per cent of adults. Bear in mind that the remaining 60 per cent of adults basically don't pay any tax because most of them aren't working; a lot of them are retired.

So, unfortunately, instead of looking at whether the tax changes are progressive or not—i.e. redistribute the tax burden either up or down—a lot of the focus has been on how many taxpayers are going to be moving into a particular high tax bracket. Charitably, that's because it's easier to do the analysis; less charitably, it's because it conceals what's going on. That brings me to myth two: the tax system is not hitting the top just because more people are in a high tax bracket. Bracket creep means that the proportion of taxpayers in a high tax bracket increases over time. So, of course, the proportion of tax paid by people in that bracket will increase; there are more people in it. But at the same time the proportion of tax paid by those in the top 10 per cent falls, because of the way that bracket creep works.

On the other hand, are some of these tax cuts unfair because they're bigger for high-income earners? This is myth three: tax cuts are not inherently unfair just because they are bigger for high-income earners than low-income earners. A moderately progressive tax change that redistributes the tax burden from the middle to the top would still give more to high-income earners in absolute dollars as a percentage of the budget cost and as a percentage of post-tax income. Those on higher incomes pay a higher proportion of the tax take. So pretty much any tax change, including a highly progressive tax change, will tend to give them a bigger tax cut, at least in absolute dollars. Those who claim that tax cuts that give more to the top in absolute dollars are unfair need to explain why they think it's inherently fair that, if you take that logic to its ultimate conclusion, a very small number of people should pay all of the income tax.

Let me go briefly to the economic impact of the tax plan. Although it's not covered in our written submission, we have been across the literature. Many of the submissions, such as those from EY, the Business Council of Australia and the Centre for Independent Studies, assert that a high marginal tax rate for top income earners has a big economic cost because it discourages people from staying in Australia, depriving Australia of their talent. This is myth four: Australia's high top marginal tax rates do not materially affect decisions to work more or to live in Australia. There is an ocean of literature on this, and it all comes to the same conclusion internationally.

Let's look at a nice piece of evidence very recently. The AfrAsia Bank Global Wealth Migration Review, released recently, looked at the migration of millionaires around the world. It found that, in the last year, 10,000 millionaires moved to Australia and almost none left. That is the highest net migration of millionaires to any country last year in absolute terms, let alone correcting for population. This is in a year where, as lots of submissions point out, Australia's top marginal tax rate was relatively high and cut in at a relatively low income. Singapore, with its very famous 15 per cent tax rate, only attracted a thousand millionaires.

If you want tax cuts with a big economic payback—and that's not the only reason for tax cuts—then you would focus the tax cuts on middle-income earners, remembering that the accurate definition of middle-income earners is those earning about $45,000, not those earning $80,000. That's because, for middle income earners, their decision to work is much more sensitive to effective marginal tax rates after taking into account the withdrawal of welfare benefits and the net cost of child care, as is laid out in the submission by Miranda Stewart and Emily Millane, and, I might add, is consistent with the analysis that the Treasury has provided in its submission. EMTRs—effective marginal tax rates—are typically much higher for middle-income earners than high-income households, because of our highly means-tested welfare system. Incentives for high-income earners tend to matter less, because they're probably going to work full-time anyhow.

In conclusion, this committee's got a choice. Senators can retreat into their party trenches and cite misleading statistics that suit their preference for more or less redistribution without being open that that's what is really going on here. You can talk about some of the myths I've outlined. Or we can be more honest. We can be clear that bracket creep hurts middle-income earners, i.e. those on $45,000 a year, more than those on high incomes. Even though more people are going to be in higher marginal tax brackets, high-income earners will be bearing less, not more, of the tax burden. On the other hand, tax cuts are not inherently unfair just because they give more to those on high incomes than low incomes. Cutting top marginal tax rates in Australia will not materially affect economic outcomes but a tax cut focused on middle-income earners probably will have more of an effect on the economy. The key facts are that bracket creep will reduce the progressivity of the tax system over the next 10 years, and the tax plan doesn't materially unwind it. Having agreed on that fact base—and I think there's pretty broad consensus on those facts—senators can argue openly about whether reducing the extra burden on high-income earners but increasing the tax paid by middle-income earners is fair. That's a question on which minds will legitimately differ. Thank you.

CHAIR: Thank you, Mr Daley. For the benefit of senators, we've got Mr Daley for about 25 minutes. I am very conscious that there are five senators here with questions to ask. I do want to stick to the agenda because it is a very busy agenda today. Mr Daley, and all other witnesses following, could you keep your answers as succinct as possible, and could senators keep their questions to within four or five minutes, because I think we should give everybody a chance to ask as many questions as they need to. Mr Daley, I'm going to kick off. I noticed your submission said that Grattan is not reaching a conclusion that the government's Personal Income Tax Plan is unfair, and that there are a number of ways to assess fairness. That's right, isn't it?

Mr Daley : Yes, that's correct.

CHAIR: And I notice your submission says that to assess fairness you need to look at progressivity, which goes to the proportion of tax paid by those with relatively high incomes; yes?

Mr Daley : Yes.

CHAIR: And I noticed that your recent analysis said that the government's Personal Income Tax Planwon't change progressivity much. You said:

Once fully implemented, the Tax Plan won't have much impact on the progressivity of the tax system.

Mr Daley : That's true. But what it glides over is that in the meantime bracket creep will have affected the progressivity of the tax system a lot. Because the Treasury will be committed to those tax cuts, it will have very little room to make further tax cuts to unwind that bracket creep that's hurting the middle.

CHAIR: That said, under the government's plan, the personal income tax system will continue to be progressive; yes?

Mr Daley : It'll be progressive overall. But it will be less progressive than it is at the moment.

CHAIR: It certainly won't be regressive, will it?

Mr Daley : It won't be regressive overall, no. It will be less progressive than it is at the moment.

CHAIR: As a matter of interest, what is the relative progressivity of the Australian tax system compared to OECD countries?

Mr Daley : In short, it's a relatively progressive tax system. I would direct the committee to an outstandingly good article published by Peter Whiteford in Inside Story in the last week, which is entitled, 'Is Australia's tax and welfare system too progressive?' I note that Professor Whiteford is one of the international experts on comparisons of tax and welfare systems. He worked at the OECD for a long time and is one of the leading international authorities on this. He said it's true that the Australian tax system is very progressive but it has to be seen in the context of our relatively distinctive welfare system. In particular, low-income earners in Australia pay relatively little tax. That is because we have a relatively flat social welfare system that means tests social welfare payments a lot instead of taxing them. That means testing is, in effect, analogous to taxing those payments.

Although the tax system doesn't take much from people on lower incomes, the means testing of welfare benefits effectively does take quite a lot from them. Secondly, a lot of the international analysis doesn't take into account that Australia does not have any material social security contributions, whereas those are typically about eight per cent of GDP in OECD countries. So, when you put all of that together, does Australia have a particularly progressive tax and welfare system? The answer is no. We're kind of in the middle of the pack.

CHAIR: Your analysis tells us that left unchanged the bracket creep will make the system less progressive over time. Is that correct?

Mr Daley : Yes.

CHAIR: The government is clearly trying to tackle bracket creep. Surely that would make the system more progressive in the future than it would be if there was no change?

Mr Daley : That depends on the tax cuts that are planned. The tax cuts planned by the government in fact do not improve the progressivity of the system.

CHAIR: But they do address bracket creep?

Mr Daley : Primarily they address bracket creep for those in the top 15 per cent. They don't do all that much for those between the 20th and 65th percentile, as you can see from the red line on figure 3.2.

CHAIR: I'm going to hand over to the deputy chair in a moment, but you came up with an interesting statistic before about the number of millionaires that were coming to Australia. Do you have any evidence of where those millionaires are coming from?

Mr Daley : It is in that report. I don't have it in front of me. I think quite a lot of them are coming from China.

CHAIR: Yes, I would imagine so. So they're probably not coming from the tax system, are they? They might be coming for the political system.

Mr Daley : That's exactly right, and that's why changing the tax system won't change the movement or otherwise of millionaires and therefore won't have much of an impact on the economy.

CHAIR: I don't actually think that it would. So you would suggest that they are coming here because of a much better tax system?

Mr Daley : But some people are claiming that the high marginal tax rate leads to Australia having significantly fewer higher income earners than it would otherwise, and I'm just suggesting the evidence is otherwise.

CHAIR: I think we're trying to conflate two arguments together there.

Senator KETTER: In terms of the impact on the fiscal position, given the projections we've got on economic growth and wage growth in the budget papers, do you think it is prudent to legislate for income tax when the government is refusing to release costings and has acknowledged that the medium-term outcomes are hard to predict?

Mr Daley : I think there are two issues there. Firstly, is it prudent to legislate for any tax cut without a clear indication of at least roughly what will be the impact in 10 years? I think the answer to that is no. It's perfectly legitimate for the government to put uncertainties around all of those things and say, 'Look, we don't know for sure, and obviously the further you go out, the more uncertain it is,' but I think when you are committing yourself to a tax cut in six or seven years' time, it is perfectly reasonable, indeed imperative, for the parliament to understand what will be the annual impact of that cut while also understanding that there are uncertainties.

Secondly, is it prudent to legislate that far in the future? As our submission makes clear, we don't think so. Six or seven years is a very long time and, economically, the chances of a significant economic downturn over the next six or seven years are pretty large—that's the law of averages historically. And as we saw, particularly with the Paul Keating l-a-w tax cuts and with the more recent tax cuts from 2007, if you legislate for tax cuts that are future dated and then the world changes, you can be left in a budgetary position that is not really one that you would choose and politically it tends to be very hard to unwind the tax cuts that have already been legislated.

So, no, we do not think that is a prudent way of proceeding. We think it's totally reasonable to indicate that this is what government would intend to do in the future. Obviously, it's perfectly reasonable to legislate for a year or two in the future, but to commit the budget to substantial tax cuts six or seven years in the future, given the inherent uncertainties of the economy over the interim, does seem to us to be an imprudent step.

Senator KETTER: What's the practical impact? If there is a recession or a downturn, what might happen to our fiscal position if the full package is passed without any questions asked?

Mr Daley : Inherently, the full package is going to cost the budget, on our estimates, a little over $22 billion in 2027-28. This is based on the Parliamentary Budget Office estimates that have been tabled today. It will be about $24 billion in the following year. That's going to be around one percentage point of GDP; that's more than big enough to care. It does mean that the Commonwealth budget will inherently have less flexibility in a significant downturn. And it's also an issue that Australia is going to probably go into the next economic downturn with much less of a buffer than it went into the last one. In 2008 Australia essentially had no net government debt, so it could afford to substantially change its fiscal position. We will be going into the next downturn, on the current numbers, with substantially less of a buffer, with substantially more both net and gross debt, and this tax cut effectively means that it will be a lot longer before we start posting material surpluses that mean that we can start winding back that debt position.

Senator KETTER: Okay, so without that buffer in the next four to six years, what does that do to the government's options in practical terms?

Mr Daley : It means the government effectively has fewer options if there is a downturn. It has less fiscal firepower, as many would put it, less opportunity in the downturn to deliver a short-term tax cut or welfare payment—a short-term boost to infrastructure or other forms of fiscal stimulus—that would be aimed, in that circumstance, at promoting employment to ensure that you don't get the short run unemployment that then becomes long-term unemployment, which tends to be the really big problem of economic downturns. That's what you're trying to avoid—that is, a big jump in unemployment in a downturn. Traditionally, what Australia has done, and what we did do in 2008, was a big budgetary shift that was largely successful in avoiding a substantial jump in unemployment.

Senator KETTER: That firepower is used to save jobs, for example, isn't it?

Mr Daley : It's used to save jobs in the short run so as to prevent unemployment going up in the short run. One of the things we know about unemployment is it tends to be sticky: people who lose their jobs in the short run, in the middle of a recession, often find it very difficult to get jobs in the longer run, and so you get a permanent drop, or at least a long-term drop, in potential economic output and, therefore, the resources available to the community.

Senator KETTER: Grattan has also published an article 'Five ways the Treasurer could boost the budget bottom line'.

Mr Daley : Yes.

Senator KETTER: Looking at that article, it appears you don't score the government very highly when it comes to managing the budget in a fiscally responsible way.

Mr Daley : Where we are at the moment, which is probably best described as a 'just balanced budget' at the end of the forwards, is a relatively precarious budgetary situation given Australia's overall economic position. We have just been through the largest mining boom in history. Most of the economic outcomes are looking relatively rosy. It's hard not to believe that this is, if you like, the top half of the economic cycle. And if you're going to be a Keynesian on the way down, with lots of fiscal stimulus at the point that there is a recession or other economic downturn, then you do have to be a Keynesian on the way up, posting material surpluses at this point in the cycle. I note that governments of both colours have failed to do so through a relatively benign economic period since about 2010.

Senator KETTER: Can I just confirm that it's your understanding that the top 20 per cent of taxpayers get about 60 per cent of the total benefits from this package?

Mr Daley : That is correct, but it needs to be put in the context that they currently pay almost 60 per cent of the tax, and so a tax cut that was neutral—that is, that didn't make the system more or less progressive—would, by definition, give them a tax cut that was precisely proportionate to the current amount of tax that they paid. This package doesn't quite do that. In particular, as I explained, bracket creep means that the burden is being redistributed from the top to the bottom or, more accurately, to the middle.

Senator KETTER: But in terms of the impact of tax cuts, is there any indication that providing tax cuts to high-income earners means any change to their willingness to work, for example?

Mr Daley : As the Treasury submission points out, as the Henry review has found and as I said: there is a very large amount of literature that says tax cuts to those on high incomes—that's roughly $80,000 up in an Australian context—won't have much impact on decisions to work. Where it will have a big impact is on those who face high effective marginal tax rates, which, of course, includes the withdrawal of welfare benefits. That's typically more around $50,000, because often those people are working part time, so they're working three days a week, and whether they go to four days a week is driven by those marginal tax rates.

The work done by Miranda Stewart and Emily Millane shows that those middle-income earners currently working three days a week—often they are women as second income earners in a household—are often facing effective marginal tax rates of 90 per cent, which means they're taking home 10 per cent of whatever they earn. Not surprisingly, that's not a particularly attractive option. People who complain about high effective marginal tax rates for high-income earners forget that effective marginal tax rates are much higher at the moment for people in the middle.

Senator KETTER: You've indicated that this is the biggest tax cut package in Australia's history. I'm just interested in whether you think there's any credible reason as to why the government should be withholding annual costings.

Mr Daley : No.

Senator KETTER: So, you don't think it can be justified on the basis that they're unreliable, year on year?

Mr Daley : Any prediction about the future is not perfectly reliable. I find it interesting that the numbers that have been released by the Parliamentary Budget Office today are not very far away from the numbers that we have independently generated at Grattan Institute, using the known tax statistics. Actually, income tax is more easy to predict than many other Commonwealth tax bases. Obviously, it is subject to general economic indicators. We in fact do some sensitivity analysis in our paper that shows, paradoxically, that, if the economy grows less quickly than is forecast or if wages grow less quickly than are forecast, bracket creep and the package will be less regressive than the package that is proposed, essentially, because bracket creep will do less to redistribute from the top to the middle.

Senator KETTER: Just going back to your analysis: just take us through your views about what will happen if wage growth is lower than expected—what happens in terms of the progressivity of the tax system and the impact on the budget position?

Mr Daley : If wages growth is less than is expected, bracket creep will be smaller. That means that bracket creep will do less to redistribute from the top to the middle. On the other hand, the tax plan will do very, very slightly more to move the burden from the middle to the top. Overall, there will be less redistribution from the top to the middle because it's bracket creep that dominates the analysis.

CHAIR: Senator Ketter, I'm just conscious of time. I know that there are three other senators with questions, and we've only got about eight minutes left with this witness. We'll go to Senator Whish-Wilson who is joining us via telephone conference, then Senator Storer and then back to you Senator McAllister—maybe you can follow up with the opposition. Senator Whish-Wilson, we've only got a couple of minutes; I'm very sorry to limit you.

Senator WHISH-WILSON: I know. I've got lots of questions. It makes it difficult, but I understand the situation we're in here. In your submission, Mr Daley, you talk a lot about fairness. I wanted to look at how sensitive these numbers that we've received are to key assumptions, but I'm not really going to have time to go through them. On page 6 of your submission, you talk about baselines and you say: income tax excludes capital gains and earnings from superannuation. I want to ask you about bigger wealth effects. Is it reasonable to assume that middle- and higher-income earners will use tax gains they have from tax cuts to do things like pay mortgages on their properties?

Mr Daley : That's at least one of the things they will do with it, yes.

Senator WHISH-WILSON: Is there any kind of granular detail about what impacts on investment or consumption we will see in reality from these tax cuts?

Mr Daley : We haven't done that work in detail. As I said, the overall conclusion of the literature is that the biggest impact of tax cuts on the economy is essentially about people's decisions to work, and tax cuts have a bigger impact on the decisions to work of those in the middle than those at the top.

Senator WHISH-WILSON: Actually, on that, just as a matter of interest, I have heard Senator Cormann say several times that, especially in tranche 3, when the 37 per cent tax rate's flat from, essentially, $40,000 to $180,000, a lot of people will want to work harder because they will pay less tax. Is that really a rational response—that people don't work hard now because they don't want to pay more tax? I don't think that's the world I've ever inhabited, but do you really believe that's true?

Mr Daley : No, I don't believe that it's true and, as I said, I think that there's very significant literature, starting with the Henry tax review and in any number of other sources, that suggests that, for high-income earners on over $80,000 and definitely over $100,000, their decision to work more and to work harder is not particularly affected by being on 37c as opposed to 47c.

Senator WHISH-WILSON: To get back to my first question, obviously I'm very interested in what we do in parliament and the impacts on things like inequality. If we haven't done the work on where these tax cuts are actually going to be allocated and we don't have an idea on that, potentially couldn't the benefits of these tax cuts, especially to high- and middle-income earners, go towards things like mortgage repayments, speculative investment bubbles and increased wealth accumulation?

Mr Daley : That is certainly a possibility. It is less likely for those who are in the middle, but I think it's a reasonable bet that quite a lot of the income tax cuts will ultimately wash back through the economy one way or another.

Senator WHISH-WILSON: But, in tackling issues like inequality and fairness, what would be the greatest benefit to the economy or inequality in the country—tax cuts, like we're seeing now, or an increase in services or an increase in Newstart? Do you think these kinds of opportunity costs should be part of the public debate around these tax cuts?

Mr Daley : They should certainly be part of the debate. I don't know that an increase, for example, in Newstart is going to have that much impact on the economy; it will obviously have a very big impact on the distribution of incomes across the Australian community. We've seen a very substantial shift of resources away from those who are unemployed over the last 20 years. As is well known, Newstart has fallen behind all of the other welfare payments; it's fallen materially behind average wages. So those who are unemployed today are a lot further behind everyone else than those who were unemployed 15 or 20 years ago.

Senator WHISH-WILSON: You've been around a long time, John, and you've got some very experienced perspectives on the kinds of things that we're dealing with today. Do you have any concerns, looking at the total package, should it pass, that, based on historical precedence, we are going to see a reduction in services equal to $140 billion in revenue?

Mr Daley : The Commonwealth ultimately has to make its budget work. If it's collecting less revenue, then by definition ultimately it will have to spend less, and the Commonwealth spends the vast majority of its money on services, one way or another. So, yes, it's axiomatic that, if income tax collections are less than they would be otherwise and all other taxes are the same, by definition there will be fewer services. Whether that's a good choice or not really depends on how much you value those services relative to how much you value people having extra money in their pockets. That depends on the quality and efficiency with which those services are delivered, and you'd have to look at each service on its merits.

Senator WHISH-WILSON: That's a reasonable response. It's obviously very subjective. You mention on page 23 of your submission that the first stage of the tax plan makes the system more progressive—this is after a few pages explaining what you mean by progressive—but the final tranche will make it less progressive. On my numbers, via a brief extrapolation from what we got from the PBO, it looked to us, especially when you focus on the greater than $90,000 tax bracket, that the top one-third of income earners being over that $90,000 bracket would clearly benefit at the expense of the bottom two-thirds of workers or income earners across the country. Do you agree with that?

Mr Daley : I would agree with that, but I would note in that context that the top third pays more than half of the tax already.

Senator WHISH-WILSON: Which is what they're supposed to do in a progressive tax system.

Mr Daley : Absolutely. But it also means that a tax change which is neither progressive nor regressive—in other words, it just leaves the distribution of the tax burden the same across taxpayers—by definition will provide more than half the tax cut to those in the top third.

Senator WHISH-WILSON: I do have lots of other questions, Chair, but I understand we're short of time. Thank you, Mr Daley.

Senator STORER: Mr Daley, on page 4 of your submission you cast doubt on the prospects of returning the budget to balance if the economy undershoots the government's economic projections. As a matter of policy principle, is it wise or prudent to commit future parliaments to such massive expenditure so far in the future?

Mr Daley : As I have indicated and as I think our submission indicates, we do not think it is prudent to be providing tax cuts of this magnitude that far in the future—certainly not to be legislating them—when there are so many economic uncertainties between now and then. And there is no need to legislate them. It's not like a national disability insurance scheme where, if you are going to do it, you have to do the whole thing at once and therefore inherently you commit the Treasury to substantial budgetary changes in the future. These are things where, if you want to do a different tax cut in three years time, it's perfectly easy to do that.

Senator STORER: So, for example, if wages do not rise as fast as Treasury projects over the next 10 years is an example of that impact?

Mr Daley : Wages may not rise as fast. The budget may be in substantially less of a surplus than is currently projected. Company tax receipts may be substantially higher or lower than currently projected. Any number of things might happen.

Senator STORER: Recent history—I think you touched upon it—tells us that it is unwise to handcuff future parliaments to significant tax cut commitments. Correct?

Mr Daley : Yes. I agree with that.

Senator STORER: Would it be prudent to legislate the first round of the tax cuts and leave future adjustments to tax rates and thresholds to future parliaments?

Mr Daley : I think there is a question of degree here. It might well be prudent to legislate both the first and the second rounds—bear in mind that you do have to provide at least some lead time to Treasury and the ATO and so on in terms of shifts in the tax system. So, you can make a reasonable argument. I think that this is an appropriate quantity of notice for the second tranche. The third tranche simply does not have to be legislated that far in advance.

Senator STORER: If we legislated just the first round of tax cuts, it would leave room for other spending on health and education, for example, without damaging the task of returning the budget to balance within the time frame that the budget promises?

Mr Daley : That's right. Senator, that then depends on your preferences either for more services or for lower taxes, and I accept that minds legitimately differ on that question.

Senator McALLISTER: Mr Morrison, in introducing this package, said:

The plan will mean that individuals will be able to take on additional work, seek advancement and put the extra hours in, knowing that their extra income and their extra hard work will remain with them and that a higher proportion will not go to the government in higher taxes.

You talked about the impact of tax on the propensity to work already in terms of those higher incomes. I just want you to speak a little more about that dynamic in the middle and the gender impacts of the tax cuts as presented on women's workforce participation?

Mr Daley : We investigated this about five or six years ago in a report called Game-changers. It is consistent with work that was subsequently done by the Productivity Commission. Internationally, the evidence is pretty clear that the biggest single impact on female workforce participation is marginal rates of take-home pay after tax, withdrawal of welfare and costs of child care, including the way that that interacts with the welfare system. Australia, although it has improved a little with changes over the last couple of years, has a system in which second-income earners, who, as you know, are overwhelmingly women, with children in child care, have very low rates of take-home pay once they're working more than about three days a week, depending on their income—certainly if they are middle-income earners.

Senator McALLISTER: My understanding is up to 90 per cent effective rate of taxation at that fourth day?

Mr Daley : Yes. In some cases, depending on the exact scenario, it can actually be more than 100 per cent. In other words, you lose money going to work.

Senator McALLISTER: Which means the assertion that Australian women prefer to work part time may not entirely be a matter of preference.

Mr Daley : I'm sure it's not entirely a matter of preference. I'm sure in some cases it is a preference. Indeed, I have some men at Grattan Institute who very clearly out of preference work part time, and that's terrific. But there is no question that the system provides very substantial disincentives for middle-income women to work more than three days a week, and that must be playing into their experience. One of the really interesting case studies on this is in Canada, where Quebec selectively changed the support for child care. What it found was that participation rates for women in Quebec, as opposed to the other Canadian provinces, suddenly jumped. It may well be that if this is a problem you're really worried about, the best way to attack it is not so much through general income tax cuts, but through looking at the level of support for child care.

Senator McALLISTER: My final question flows very directly from that last remark. This is a $143 billion or $144 billion package. The PBO estimates provided to Senator Ketter indicate that over the life of the package, $91 billion of that is likely to be allocated to men and $52 billion allocated to women. In some ways, that flows naturally from the decision to pass $143 billion through the tax system in this way, but there are opportunities foregone where we could address other problems in the economy using that same allocation of revenue.

Mr Daley : That's absolutely right. You could use this revenue instead, for example, to substantially increase subsidies for child care. We don't assign that to men or women, but in practice it would lead to a much bigger impact on women's lives than on men's lives, and that would be a very different outcome.

Senator McALLISTER: And a different outcome for the economy.

Mr Daley : Almost certainly a different outcome for the economy.

Senator McALLISTER: Thanks, Mr Daley.

CHAIR: Thank you, Mr Daley, for appearing before the committee today. We'll let you go.

Mr Daley : Thank you. If there are any senators who wish to give us any questions on notice, we'd be happy to take them.

CHAIR: I think there'll be a few. I'll just remind you that the questions on notice are due by close of business next Wednesday, 13 June.