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Select Committee on a New Tax System
A new tax system
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Select Committee on a New Tax System
A new tax system
ACTING CHAIR (Senator Ferguson)
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Select Committee on a New Tax System
- Committee front matter
- Committee witnesses
ACTING CHAIR (Senator Ferguson)
- Committee witnesses
- Committee witnesses
Senator GEORGE CAMPBELL
- Committee witnesses
ACTING CHAIR (Senator Ferguson)
- Committee witnesses
Senator GEORGE CAMPBELL
Content WindowSelect Committee on a New Tax System - 04/02/99 - A new tax system
ACTING CHAIR (Senator Ferguson) —I welcome Mr Michael Raper and Mr Peter Davidson. We have your submission, Mr Raper, and I invite you to speak to the committee on your submission and afterwards we will have questions.
Mr Raper —Thank you very much. We appreciate the opportunity to address this Senate committee on the basis of our submission. Could I just clarify that my colleague here on my left, Peter Davidson, is not the Social Policy Adviser as shown on your list but Senior Policy Adviser at ACOSS and is thankfully a bit of our corporate memory on these issues, having been around since the 1985 tax reviews through to 1993 and onwards.
From the outset—and I will come back to this issue—I wish to assure this committee that the story in the Melbourne Age earlier this week was based on a leaked copy of the document—or parts of it; I do not know. I just wish to assure the Senate that we are well aware of the limitations on Senate submissions and we certainly did not leak that submission. I do not know who did. I do not know where it came from, but I wish to assure you that that certainly was not leaked by us. You might understand that because the Age drew different conclusions to our conclusions, and I am sure you would see that. I will come back to that point.
We also, by way of opening, note that we understand the scope of today's submission goes to the questions of modelling. In our view it does not go to all the other issues around this whole complex and comprehensive package. We have put in a submission to the business tax inquiry. We are putting in a submission to the community affairs committee dealing with the issue of the impact on charities. We are putting in a comprehensive submission, for which we have been given a week's extension, dealing with the whole package—the income tax cuts, the federal-state financial relations, the GST and how it all fits together. Therefore our comments today we are addressing particularly to the first part of this inquiry, part A relating to the questions of modelling.
I also need to stress that we do not come here with any unique piece of original research or some sort of comprehensive model that provides a knockout proof or a knockout disproof of anything. We come only with our analysis; with our experience; and with our best endeavours to genuinely unpack this, to genuinely assess the likely impact of the proposed GST on low income earners and whether or not the proposed compensation is, firstly, structured properly and, secondly, adequate. That is what we have come here to try to address in a genuine and objective way, based on our real life experience and on the real life experience of low income earners, pensioners, sole parents and unemployed people. They are the ones we endeavour to give voice to.
The government, as you know, have proposed a package of tax reform. They have claimed in that package that everyone will be better off. That assurance is based on a compensation package and on a number of cameos of different effects for different people all saying that they will be better off. As you know, the compensation and the cameos are based on Treasury modelling of the effects of the changes that are likely to come about from the
GST on household living costs. Modelling, therefore, is very important in our view: it is very important that it be accurate; it is very important that it be objective and not designed to reach some preordained conclusion.
In our view the modelling must pass two key tests. One is that it should overestimate the impact—not underestimate it, not guess it, not average it but overestimate the impact. There are two reasons for that. One is trust. The government have given assurances here. They have given assurances to low income earners for whom $2, $3 and $4 a week mean a lot. Those amounts make a big difference to their budget which they determine on a daily or weekly basis. So there is that trust question. Trust in government, trust in the assurances is very important. It behoves us all to get it right. Secondly, it has to be an overestimate because modelling, as you know, is unreliable. It is based on a number of assumptions—best guesses, best estimates—nevertheless, it is modelling. It is that. It has in-built unreliability.
The second test it should pass is that it should take account of differences, real life experiences: differences between people, different family sizes, different compositions, different types of households, different income levels, different expenditure and savings patterns, and the fact that low income earners spend more than they earn very often. I will come back to that.
On those two tests the Treasury model fails. In the summary on pages 2 and 3 of our submission—and I invite you to turn to those—it is very clear in what way the Treasury model fails. It underestimates the effect of consumption tax changes on the living costs of low income households by comparison with other households, it overestimates the effects on high income households by comparison with other households and it underestimates the average effects overall.
I will come briefly to the Age article to which I said I would return, because perhaps it sharpens the focus of the issue before you and the issue as we present it. It goes to the heart of a number of issues. I would have to score the Age high on numeracy but very low on literacy. They have taken the table on page 8 of our submission—to which I draw your attention—and looked at the last column. They have simply said, `All those figures are under four per cent. The government said four per cent. Whacko, everybody is okay. ACOSS has not proved anything. They have not proved that anyone is worse off.'
For a start, the onus is not on us to prove that. I put it to you that the onus is on the government to satisfy the population generally and low income earners who live on the edge financially from day to day. First up, the onus is on the government to satisfy. Secondly, we would put it to you that these figures show a number of very significant things and prove the points that we have said from one week out from the time that the government brought down its package, when we queried the Treasury modelling and the assumptions that it made.
This chart shows a number of things. One, the Melbourne Institute uses a different CPI figure—2.5 not 1.9. Somebody else is saying that the 1.9 is at least conservative. Secondly, it shows that if you look at the different households and different types of household you get a different effect, and that effect ranges from 2.8 up to 3.6. That is a long way from 1.9. That is very different from 1.9, a significant percentage difference from 1.9—30-odd per cent variation at least in places.
Thirdly, that figure is still an average. If it is an average, then it is conceivable that the effect ranges from somewhere about one per cent to possibly up to five per cent. A three per cent average could have 50 per cent on one and 50 per cent on five. The fact that it is an average must be taken into account, and averages will always suffer. Therefore, you have to make sure that your compensation goes way up to the top end of the likely effect and is not satisfied by sitting on the average.
Fourthly, the government itself acknowledges the need for a buffer zone because of the fact that there are averages, because of the fact that modelling is in itself unreliable. The government's buffer zone is 1.5 per cent. If you put 1.5 per cent on those figures or on that range, you are way out of the area of 1.9 per cent. We cannot put a figure on it. We have not put a figure on it. We have not come before you with a series of cameos and individual files, although our file back at the office is this big with individuals writing in to us giving us their budgets and showing us what they believe the effect is going to be. I do not think that is the issue.
This is a much more serious issue than whether or not somebody can roll out 13 or 50 cameos, or 16, 60, 100 or 600 different individual budgets. We can do that. That is not the issue. The question here is: what is the overall effect? How is this going to affect people—especially low income earners? The Melbourne Institute obviously uses different assumptions and shows, I think, the validity of so doing and the need to do so.
So what do we say needs to be done about this problem? The Treasury model is inadequate, the figures therefore are highly questionable and the government cannot honestly assure low income earners that they are definitely okay. The first thing we believe must be done is to fix the structural flaw at the core of the package, to remove the heavy reliance on compensation that this package demands—that is, to remove food from the GST. There is no justification for food at the heart of this package when this package raises some $6 billion more in GST revenue than the consumption taxes that it replaces. It is that tax mix switch, that massive increase in consumption tax, that is actually at the core of the flaw in this package and is why, under this package, low income earners would need to rely far too heavily on compensation in the first place.
We have only to look across the Tasman to New Zealand. As you know, the New Zealand government introduced a 10 per cent GST in 1986 which included food, and compensation was provided to low income households through both the tax and the social security systems. Two years later, during a severe downturn, as I understand, the GST was raised to 12.5 per cent with no increase in compensation. Two years later, with the economy then in recession, social security payments were cut by between five and 30 per cent.
How could any low income earner rely so heavily upon, or be required to take the risks involved with, a compensation package that is based on questionable modelling and assurances that it will remain there forever, when the example across the Tasman—as close as that, and there is a pattern internationally to that effect—shows that that cannot be relied upon? Our first and primary conclusion is that food has to come out of the package.
The second goes to our recommendations on pages 4 and where we call on this Senate select committee to commission its own modelling. We do not believe that we should rely
on any one model or any one set of modellings. You need to have before you a range of models that examine a range of different assumptions and possibilities, as we do. We are in the same position as you. We do not have the evidence before us to be certain. We cannot say to people who ring ACOSS week in, week out that we can be certain that this compensation is adequate, that the package is going to be okay. We cannot give them that assurance, and I put it to you that neither can you and nor can the government.
We need independent modelling. We therefore call on this select committee to undertake that, as per our recommendation 1. Recommendations 2 and 3, which I will not go into, elaborate on that, and call for Treasury to undertake a sensitivity analysis and for the Australian Bureau of Statistics to undertake research and analysis to improve the HES.
We acknowledge the HES has problems, but it seems as though Treasury is saying to us, `We know that our model has problems.' All the experts know that that model has problems, and Treasury is saying, `We would rather rely on that modelling which we know has problems rather than on other modelling which may have some problems, which is not 100 per cent, which is not as good as we would like it.' We would rather rely at least on other modelling which is a lot better, in our view, than the current Treasury modelling.
ACTING CHAIR —Senator Murray and Senator Gibson have to attend another committee meeting briefly for about half an hour and may or may not be able to ask questions. If they are not back in time, Senator Murray has requested that he put some questions on notice to you.
Mr Raper —That is fine, thank you. Senator Gibson explained that this would be happening.
Senator O'CHEE —Mr Raper, when you first saw the package, you raised certain queries about the way Treasury were going to model this. One of the things you asked was that Treasury release the HES data set that was used, didn't you?
Mr Raper —Yes.
Senator O'CHEE —That has been done. That has been used by the Melbourne Institute in the modelling that is included in your submission. Is that correct?
Mr Davidson —I believe the Melbourne Institute used the HES directly rather than relying on Treasury work. That is my understanding.
Senator O'CHEE —One of your concerns was that you thought that HES was more useful. That has been used by the Melbourne Institute in this modelling. On page 8, a table offers four assumptions across the page. Assumption A is a Treasury assumption of 1.9 per cent. Then you say,`Let's take the Treasury approach but let's say inflation is another half a per cent higher—2.44.' Then you say in assumption C, `Maybe that is not enough. Maybe we need to go further. Let's assume that inflation is higher than what Treasury forecast and we will run it through the HES data set as well.' Is that correct?
Senator O'CHEE —Your final assumption is, `Maybe that is not enough either. Maybe we need to go further. We will assume a higher inflation rate. We will run it through the HES data set and then we will adjust it because we believe that somehow solves dissaving. That is basically what assumption D is. Is that correct?
Mr Raper —Yes.
Senator O'CHEE —On table 8, we have a range of possibilities. Would you say that assumption A—1.9 per cent—is conservative?
Mr Raper —Yes, based on the expert opinions.
Senator O'CHEE —You would accept that the other end of the range is assumption D. It gets progressively worse all the way through. So A is at one end and D is at the other end of a range of assumptions. Is that correct?
Mr Raper —Yes.
Senator O'CHEE —And then what you have done is you have gone through and said, `Let's accept the other extreme, not the Treasury view. Let's accept the most dismal possible projection,' which is D. Then in the fifth column, you have analysed the change in terms of percentage of disposable income, accepting the most dismal set of projections. Is that correct?
Mr Raper —In this range, yes. There are more dismal projections possible.
Senator O'CHEE —Let us go through this, because this is the modelling that you people decided to use. A single age pensioner, under the most dismal range of projections that your modelling could come up with, has a 3.3 per cent increase in disposable income. Is that correct?
Mr Raper —In this table, you are reading the correct figure, yes.
Senator O'CHEE —So that is less than the four per cent compensation?
Mr Raper —Correct.
Senator O'CHEE —An age pensioner couple, similarly at 3.3 per cent, is less than the four per cent compensation.
Mr Raper —To save you the trouble, all of the figures in that right-hand column are less than four per cent.
Senator O'CHEE —So every one of the groups that you have constructed under the most dismal circumstances in your range of projections—you have four ranges here—is less than four per cent?
Mr Raper —Correct. Without agreeing with your premises necessarily—but I will come back to that—essentially, yes, all those figures are under four per cent.
Senator O'CHEE —And that is using the modelling that you put together, or you had put together for you.
Mr Raper —No, let us correct that point: this is Melbourne Institute modelling; it is not our modelling. We do not have the capacity to do modelling. We have the capacity to do analysis.
Senator O'CHEE —You are relying on Melbourne Institute.
Mr Raper —This is Melbourne Institute. Melbourne Institute did the modelling and published the modelling. It did not publish everything in their modelling, but we asked them to provide to us other bits of their modelling that were not published initially, and that constitutes assumptions B, C and D. It is Melbourne Institute modelling, yes.
Senator O'CHEE —It is Melbourne Institute modelling, with assumptions that were not previously published which you have added in, because you accept the fact that that is going to give you the biggest margin of error.
Mr Raper —Certainly not to achieve a preconceived end.
Senator O'CHEE —No, I am not saying that. I am saying that, to give you the biggest margin of error, you have added in all of those factors.
Mr Davidson —That is not correct. The only difference between this data and that which was previously published by the Melbourne Institute is that we asked them to extract the numbers for pensioner and beneficiary groups. This is based on the same data set using Melbourne Institute assumptions—not our assumptions. A, B, C and D are all Melbourne Institute assumptions. It is simply extracting some additional figures relating to particular groups, because their previously published data had income ranges for different family types. So that is all we have done. We did not commission that research. We did not have any input into the assumptions made. We did not rely exclusively on a single piece of research. As Michael indicated earlier, and as we say right up the front of this submission, you cannot rely on a single piece of research.
Senator O'CHEE —So what we have here—
Mr Davidson —Is a piece of research.
Senator O'CHEE —A piece of research, where you have asked them to extrapolate it for given income groups who are predominantly in receipt of government benefits.
Mr Raper —That is right.
—So they put it together for the groups that you asked them to put it together for.
Mr Raper —Yes.
Senator O'CHEE —And in every one of these groups the change is less than four per cent.
Mr Raper —The average change—
Senator O'CHEE —Is less than four per cent.
Mr Raper —Yes, but I stress that it is the average.
Senator O'CHEE —But when we talk about modelling, the whole point is to get a data set which is objective. You have said, `We've got to use something which is objective,' and you have used the word `objective' over and over. Surely, you have asked them to do this because you believe that would give an objective measurement of the impact on these household groups. Is that correct?
Mr Raper —It would give another modelling measurement, yes.
Senator O'CHEE —An objective measurement?
Mr Raper —To the extent that any of these figures are objective.
Senator O'CHEE —This is objective.
Mr Raper —I do not see the particular point but, yes. Nobody is subjectively analysing these figures, if that is what you mean.
Senator O'CHEE —So, if a lobby group were to come to me and say, `Look, we've run the figures by the groups of people that we represent, and here they are,' you could understand why I would say, `Yes, the government is over-compensating these groups of people,' because the compensation is more than the range of impacts that you have been able to model.
Mr Raper —Senator, how do you address the average question that I have raised? This is a range by definition. Intuitively, you must be able to work out that, if it is three per cent, that could be a range from one per cent to five per cent. That is the point about an average. How can you be satisfied with an average if somebody perhaps were on five per cent? And how do you then address the question that the government itself acknowledges the need for a buffer zone in the order of 1.5 per cent? If the figure, therefore, is out at the extreme end of the average, then the 1.5 per cent buffer zone is not there, so this would be inadequate.
Senator O'CHEE —Mr Raper, the 1.5 per cent buffer zone is 1.5 per cent above CPI. You have assumed that CPI is 2.44.
Mr Raper —The Melbourne Institute has come at that figure.
Senator O'CHEE —Okay, the Melbourne Institute. If the assumption is that CPI is 2.44, 1[half ] per cent over that still does not come to four per cent. We are still over-compensating. The simple question I ask you is this: if a lobby group comes to me and says, `Here is the modelling that we are using, and for every one of these household groups the result is less than the amount of compensation,' then it is perfectly reasonable for me to say, `Well, I do not understand why that lobby group would ask for more, given every assumption that they have made falls less than the compensation range.'
Mr Raper —I will give you a number of reasons. A low income earner cannot afford to be $3 out in their weekly budget. They are right to the extreme already. There is already $23 million provided by the Commonwealth government each year in emergency financial assistance. That is estimated to be some 10 per cent of what is given out by St Vincent de Paul, the Salvation Army and other charities throughout the year. That is some $230 million at least just on emergency financial assistance that is going out each year. That is $230 million of dissaving. That shows that low income earners—and our emergency relief survey data shows that these are primarily unemployed people, sole parents—have to live beyond their means, and we already know that age pensioners live beyond their means or, at least, that they dissave because they are drawing down their savings.
Senator O'CHEE —Which is already taken into consideration in assumption D.
Mr Raper —If you take all of that into account, and you come up with averages of 3.6, let me put it back to you: a lobby group could come to me, as the government, and say, `We are extremely concerned on behalf of low income people, pensioners and the unemployed'—that is, those who actually will get the compensation, and I will come back to the point about the large and increasing number of people who do not even get the compensation, like newly arrived residents in their first two years, unemployed people in their waiting periods, the increasing number of waiting periods. We do not take into account special atypical expenditure patterns here of people with disabilities and the need to cover off those things.
But if I came along to you as a government member and said, `I am very, very worried about the fact that there are figures here that show up to 3.6 as an average, and you are trying to tell me that your 1.9 per cent is okay, that that is safe for the people that I represent,' I, as the government, would want to be sure that we pitched the compensation at the top end of that scale—not at some average, not at the bottom—to make sure that low income earners, who cannot afford to be even a couple of dollars a week out, were fully compensated and not running the risks that these figures would indicate that they are being invited to take.
Senator O'CHEE —You have put the proposition to me. All I observe is that you have come here with a range of figures. The most dismal figure in every group, in the range that you have, is less than the compensation that we have put on offer.
—The point about the 1.5 per cent buffer picks up on Mr Raper's point and expands it a little. In every major consumption tax package over the last 15 years or so—there have been two of them—it has been accepted by those putting it forward, and widely accepted amongst expert opinion, that you have to over-compensate low income people. Compensation should not operate at the edge of the average price increases faced by
different groups of low income people. There has to be an adequate buffer. One of the main reasons for that is the average problem to which we referred. The government has, in principle, accepted that proposition in putting forward a 1.5 per cent CPI buffer, but that is inadequate because it is based upon the average CPI rise and not the increase faced by particular groups.
With assumption D, for a single age pensioner to have that 1.5 per cent buffer, the compensation would have to be to the order of 4.8 per cent; for an age pensioner couple, to the order of 4.8 per cent; and single, work force age or unemployed to the order of 5.1 per cent—all of which are well above the four per cent figure and also well above 2.4 per cent plus 1.5 per cent. There is not enough margin for error. There is not enough of a comfort zone between those 2.8 per cent to 3.6 per cent numbers and what is being offered by the government in compensation.
It is a compensation package that, on these numbers, runs very close to the wire. If these numbers in assumption D were correct, then it would be inevitable that large numbers of people would be worse off. It would be inevitable because large numbers of people will have above average effects within each of those groups.
That is precisely why in 1985 and 1992 it was taken for granted that compensation should be adequate to provide that buffer. In fact, the word `over-compensated' was repeatedly used in the debate. This is not over-compensation; this is very close to the wire on those numbers, which is one set of research we have taken for consideration, and not the final word, by any means.
Senator FERGUSON —Going on from Senator O'Chee's question, when the package came out it was based on the Treasury's model with the 1.9 CPI, which you did not accept. You asked for the release of the household expenditure data, which Treasury did, which you still did not accept. You then commissioned your own modelling, using work from the Melbourne Institute. I remind you, Mr Raper, we are talking about modelling today so we have to be looking objectively at what is in front of us. In the modelling that you have put forward in this submission to us, in none of those scenarios is there a greater than four per cent increase. In other words, in relation to the compensation under your own modelling—three sets of modelling: two that you have rejected and one that you have commissioned yourself as an additional modelling—none of those come to over four per cent.
While I acknowledge the concerns you quite rightly raised about people on the margins of these figures, you must logically accept that, under the modelling that has been put to you, which you requested—modelling done by the Treasury, by the household expenditure survey data and by your own modelling—according to these figures, your own figures in this submission, in general poorer people will be better off under this tax package than they are today.
Mr Raper —Senator, I have to repeat: we do not accept that conclusion.
Senator FERGUSON —But these are your figures.
—They are not our figures.
Senator FERGUSON —They are figures that you have put in your submission.
Mr Raper —Certainly. They are the Melbourne Institute figures, and it is the Melbourne Institute modelling. I repeat: it is not ours and it is not commissioned by us. However, that aside, we cannot draw that conclusion, we do not draw that conclusion and we do not believe it is open to you to draw that conclusion from these figures.
Senator FERGUSON —If you are using modelling, we can only go on what you have put in your submission.
Mr Raper —That is correct. There would be little point, it seems to me, in repeating either my answer to Senator O'Chee or Peter Davidson's further clarification. It would seem to me that you are ignoring the fact that these are averages. You cannot ignore the fact. It is not honest. It is not open to ignore the fact that these are averages and that, by definition, means that there is a range. Those at the top end of that range, by definition, will be worse off, and low income earners cannot afford to have that risk. They cannot afford to take that risk, nor should any government require them to take that risk. It means that they are out of pocket and down the tube at the end of the week. It is food on the table.
Senator O'CHEE —I think we are letting emotion get a little carried away. By definition, a person is not necessarily outside the range. You said, `We are here today to talk about modelling.' On modelling, you have to accept the fact that this modelling means that the average low income earner is better off with this package in place than they are at the moment. The choice is whether they are better off after the package comes in than they are now. I do not think, being intellectually honest, that you would say to me that these groups of people will be worse off after the change than they are now, because their real disposable income does go up.
Mr Raper —I repeat: I do not accept that conclusion, for the reasons I have given.
Senator O'CHEE —So you would say that we should not bring in the package, and these people will not get a four per cent increase in income even, though their increase in spending is only 3.3 per cent?
Mr Raper —Those are not the conclusions that we have reached. We will put the whole package together and give you our comprehensive conclusions about the overall package, what needs to be done to it and what should be done. I run the risk of repeating myself. Peter would like to have another go at that explanation.
Mr Davidson —On this `average' point, we can agree or disagree that, on average, low income people are better or worse off, but I do not think that is very helpful or informative. Low income people, on average, could be better off while one-third of them are worse off. This `age pensioner, single' category, includes over one million people. To say, on average, that those one million people are better off does not go far enough, in our view. We did not publish this data to provide a final word on the effects of the package on low income people; it was to demonstrate the difference that different assumptions can make to the outcomes.
We are urging this committee to commission modelling which goes into a great deal more detail than this. I would like to know how the bottom 20 per cent of single age pensioners are affected, the second 20 per cent and so on, and similarly with unemployed people, sole parents and so on. I do not think you can use this data and nor did we intend to. I apologise if the impression was given it is the final word on the effect of the package on low income people.
Senator O'CHEE —Do you agree on average that poorer people are better off according to your results?
Mr Raper —I go back to the word `average'. You ask us to agree on average, and we say that average is not helpful because if it means a million people or whatever number of people are worse off, then it is incumbent on the government to ensure that that does not happen. So you can ask the question about averages, but that is not the issue.
Senator O'CHEE —So you are saying that we should just throw it all out.
Mr Raper —No; get it right. Do not throw it out. Get it right.
Senator O'CHEE —You admitted that this is the most dismal range of assumptions you could come up with.
Mr Raper —No, in your words they were the most dismal, Senator. I am sure there are much more dismal scenarios that could be put together. We have said that you should not be relying on one set of figures, that we need to actually commission others. We need to have a range. We need to look in a much more comprehensive and sophisticated way. What we have before us is one set of inadequate figures which certainly demonstrates a big difference from the other set of inadequate figures, and we need to get a much more comprehensive set of figures. As Peter says, it does demonstrate that there are differences, but I urge you to take account of the points that we have been making about averages and that it does not help us if we simply continue to argue around that when an average demonstrates that there is a range. If you fail to take account of that, it is not helpful.
Senator O'CHEE —If you have a whole heap of poor people and you have the opportunity on average to make every group within that range of poor people better off, are you suggesting we should turn our back on that opportunity?
Mr Raper —No, I say we should take the opportunity to make sure that everybody in that group—not just that group on average, but everybody—is better off. This tax reform is not there to simply reward high income earners—and we are certain about that. It is there, presumably—I would have thought, primarily, first up—to address the problems of low income earners first and foremost—and all the others, yes, fine. To expect low income earners to be the ones that are at risk is inconceivable.
—I am back in the chair. I apologise for my absence earlier, Mr Raper. Before I ask Senators Conroy or Sherry to put questions to you, I will ask a couple of fairly straightforward questions. Yesterday we heard from the Business Coalition for Tax Reform. We have heard other people from time to time—I do not mean this pejoratively—including
VCOSS, speak for your organisation or refer to your organisation and its position. Indeed, even this week, such an elevated figure as the Treasurer, I think, did so. Can you tell us straightforwardly and plainly where you actually stand in terms of this package? Do you support it or not? Do you support it with significant amendments or minor amendments? Exactly, what is your position?
Mr Raper —I will do that in summary, but note at the outset that the full position will be very clearly set out in our comprehensive submission next week.
CHAIR —I just note that there is a titanic struggle going on to put words in your mouth. I would like to hear them from your mouth.
Mr Raper —I am very pleased to have the opportunity to do so. Subject to finalising the details in the next day in our large submission, it is clearly this: we believe that there is a need for tax reform. We believe that revenue is at risk—in fact, revenue has declined. We believe that that tax reform needs to be comprehensive on the income tax side, on the consumption tax side, on the business tax side and in federal-state financial relations. We believe strongly that, in all of that, we also need to address the situation of families and the poverty traps that have been addressed. The package that the government has put forward addresses a number of those things, but there are substantial problems with the package and substantial modifications that need to be made to this package in order to get a balance between equity and efficiency.
In the past, we have published our views, our benchmarks and what we believe tax reform needs to be. We have published our own agenda. We have measured the government's package against our agenda. It comes up deficient in a number of ways. We believe it needs to be modified. We have published those modifications. We will repeat a list of those modifications in our submission next week, but it should be evident from the evidence I have given to date that at the core of this package is an increase of some $6 billion in consumption tax. There is a reliance on food, which you could identify as at least $5 billion of that $6 billion. Food in the package creates enormous difficulties because it is 25 per cent. It constitutes 25 per cent of the expenditure of low income earners each week. Food needs to come out of the GST. The tax mix switch or the extra reliance on consumption tax of some $6 billion needs to be removed. If you need to fill that gap, we need to examine ways and we will put forward a number of ways that that can be done such as to demonstrate that the package does not unravel if you take food out.
CHAIR —We are senators who, at the end of this process, will have to vote and shift our bodies from one side of the chamber to the other according to the proposition before the chair. We have to make a decision. If the changes that you seek to the package are not agreed by the government—bearing in mind what the government has said about changing its package—do you support the package or don't you?
Mr Raper —If there are no changes?
—If the changes that you seek are not made—you might have gradations of them, of course; but if the principal changes, the core changes, that you seek—these are my
words; I am not trying to put words into your mouth—to bring fairness, equity and justice to this package are not agreed, where do you stand—for it or against it?
Mr Raper —If we do not make substantial progress, if there are not substantial changes, then we could not assure low income earners that they are better off under this package.
CHAIR —Therefore, if you were in my shoes and had to shift your body from one side of the Senate chamber to the other on a question of whether you vote for this bill or not, what would you do?
Mr Raper —I would be urging that you put the interests of low income earners foremost in your mind—not only, but foremost at least—because they are the ones who can least afford to be damaged by this package. That is not to say that we do not need tax reform—I think our interest in the subject, our preparedness to embrace tax reform and our record on that should be clear—but not at any price.
CHAIR —Not at any price?
Mr Raper —No.
CHAIR —I just want to be careful about this because it is, to me, an important point. Does that mean yes or no when it comes to the question? I mean we have to answer the question at the end of the day and, with no disrespect, would you mind answering it for your organisation? If the amendments are not there, would you vote for it or wouldn't you?
Mr Raper —It is a hypothetical, as you know, given that—
Senator FERGUSON —You do not get a vote.
Mr Raper —We do not get a vote, that is for certain. In two or three months time, who knows what further modelling might be able to give us—what evidence we may be able to base it on—and I hope there will be much better evidence so we can actually make that decision.
In many respects, there is great progress in this package. Certainly we have identified the proposals in relation to poverty traps, which are well overdue, and the move towards bringing services into the tax base but, unless there are substantial progress and substantial changes to this package, low income earners have far too much risk and we would not support the package under those circumstances. I hope, however, that there are changes that can be made so that we have sensible tax reform, so that we do ensure our tax revenue base for the future, which we believe strongly that we need, in a way that does not put at risk low income earners, pensioners, unemployed people and sole parents.
—I will try to make a statement to see if you agree with it. Please correct it if you do not, because I think there is a lot of mangled language out there, and people looking for headlines or short grabs sometimes get it wrong. I do not reflect blame or guilt on anyone, but this is a public debate fiercely contested over a serious issue. If I were in a position of talking to you on behalf of the government, would I regard those remarks as
meaning that you would want the core of your package but that you are not going to die in the ditch if you do not get every damned part of it?
Mr Raper —Sorry, I need to clarify that.
CHAIR —I understood you to have said that, firstly, you hope it changes. Let us all agree with that. The proposition I am putting is that the government has said that, at the end of the day, it is not going to change. We can be cynical about that or not, but that is what is before us and that is what we have to deal with. You want to make the changes that you are seeking—that there is some sort of cut-off where you might make acceptable progress. As far as that is concerned, you would buy the outcome, but there is a point beyond which you would not go to buy the outcome. Is that what you are saying?
Mr Raper —Possibly. That is substantially correct. We do not have to face that just yet, thankfully, because there is a long way to go. This is the beginning of what we consider to be the debate process around tax reform. It is by no means the end. We think the process was very regrettable—that there was no public debate during the time when the package was put together. This is the beginning of the debate, so we hope that much more will come out, that there will be much more evidence on which we can base that final decision, but there are some fundamentals that we are seeking.
Senator FERGUSON —Mr Chairman, can I clarify one point of Mr Raper's answer to you?
Senator FERGUSON —Senator Cook asked you a question about the existing package. Can I take it from what you said in your answer—and I think I am right—when you said that you support the taxation of some services, that you have no objection to the principle of a goods and services tax replacing the wholesale sales tax system provided the people that you represent are better off?
Mr Raper —That has been our position, yes. That is fairly accurately put. We have never been opposed to a GST, per se. There is no such thing as a GST anyway. It depends on the rate, it depends on what is in it, it depends on the base, it depends on what is out—all of those issues. It depends on the compensation and a whole range of those issues. We have never advocated a GST either.
We have been prepared, however, to examine the need for tax reform because of our concerns about revenue—I have already said that that included income tax and all the others—and that includes the examination of a consumption tax. We acknowledge the evidence that we have before us that the consumption tax base is at risk because of the shift in consumption towards services and the decline in consumption of goods. Historically, that trend is there. It has been pumped up over the years because of increases—for instance, the increase in the rates of the wholesale sales tax in 1993, which had a very serious effect on low income earners. We are anxious to avoid that happening again, because there was no compensation in the hiking of the wholesale sales tax rates in 1993.
We do understand the need to embrace services, but we do not understand the need for a goods and services tax to have a negative impact on low income earners—that if you structure it correctly and build compensation after you have structured it correctly with adequate and appropriate compensation based on a good range of models, then, yes, we have never been opposed to that need. In fact, we believe it is part of overall comprehensive tax reform.
I will add to that—I know the way these statements get used. We have always argued for comprehensive tax reform. Let me stress that that means closing down loopholes and shelters on the income tax side. That is our primary concern, in fact—to close down those loopholes and shelters to restore the integrity of our income tax base, which is still our primary source of revenue. One of our biggest concerns with this package is that the government has not gone anywhere near far enough towards closing down loopholes and shelters and restoring the integrity of the income tax base. It is hard for anyone to really believe in the overall package when they have not been prepared to do that and to firstly restore the base there.
Secondly, we have argued for business tax reform in the context of all of the other reforms—that is, income tax, consumption tax and federal-state financial relations—yet we fear that that is now drifting out to a report date of 30 June. We are asking for business tax to be reviewed and for the government to acknowledge that these things should be brought back together and kept together.
Senator FERGUSON —You have clarified the position. It was really a clarification that you do not oppose the GST in principle. Senator Cook is talking about people moving from one side of the chamber to the other, when in fact the position of the opposition is opposition in principle to the goods and services tax. I wanted to make it clear that that was not your position.
CHAIR —I will speak for myself, thank you very much.
Senator FERGUSON —The Labor Party's public position is that they are opposing in principle.
CHAIR —The Treasurer says that he does not give a damn what this inquiry finds. If you want to trade in absolutes, we can trade in each other's absolutes.
Mr Raper —We certainly do give a damn about what this inquiry finds.
CHAIR —I think you give several damns.
Mr Raper —Yes.
CHAIR —After the statement that was just put to you by Senator Ferguson about the goods and services tax, you said that you made a proviso. So that you are not misquoted, it seems to me that the proviso stands out in as sharp relief as the Manhattan skyline at twilight. This is not an insubstantial proviso. It is a substantial proviso, and you cannot take the first part of the sentence without taking the whole of the sentence.
Senator FERGUSON —Does this mean that you might change your position, Senator Cook?
Senator O'CHEE —One of the things that we have said consistently all along and that, if others are putting words in my mouth, the Business Coalition for Tax Reform has agreed with us on and public stated, is that whatever you do with the GST, whatever you do with your consumption tax base, you should only raise sufficient revenue to replace other consumption taxes. You should not raise more revenue from your consumption tax than the taxes you are prepared to replace. At the core of this package is a $6 billion increase in the amount of revenue that is being raised from consumption tax. That is a fundamental flaw. We have said that all along. It is part of the reason why we had to state a week after the government's package was tabled that we believed it was unfair.
CHAIR —You said that your primary concern is about the loopholes. I do not want to gloss over that, because if it is a primary concern it is fundamental to everything else. We have not got to talking about trusts and how they are treated and so forth—that will come in a later part of our inquiry—but I just want to clarify whether those words are right on consideration. Is it your primary concern?
Mr Raper —I think I said `a primary concern'. We have a number of primary concerns—they are all pretty high on the list—but we have always advocated the need to get that income tax base right.
CHAIR —Okay. ACOSS has always struck me as an organisation that is intellectually tough enough so that, if there is new evidence that was not available before that changes the circumstances, it would have the moral courage to change its conclusions. I think that is right.
Mr Raper —I hope that is correct.
CHAIR —As a committee, we commissioned research by Professor Dixon, and he emphasised the point that in his research commissioned by us the revenue generated from the existing system will more parallel GDP growth than will the changes being made. As I comprehend it, your support is for comprehensive tax reform in order to develop the pool of funding to meet the needs of the welfare bill that governments should, in equity and conscience, meet and your primary concern has been based on believing there is not sufficient money out there, as the system stands, to do that. Professor Dixon said yesterday that that is not true, that under the present system it is there and he cannot understand why Treasury has not done that modelling and presented it to the community.
I do not expect you to know whether I have accurately described Professor Dixon's work. I do not expect you to have studied Professor Dixon's work. In public life there is a belief that as soon as you hear a comment you understand comprehensively every last detail of it. I am one who does not believe that is true. People should be given sufficient time to acquaint themselves and make considered judgments rather than make the immediate media grab. But if you were satisfied that my description of it was right, on reflection and study you would change your position, wouldn't you?
Mr Raper —We would put forward fearlessly our assessment and analysis based on what we believe is best for low income earners—for pensioners, for unemployed people, et cetera.
We review all the evidence. We cannot undertake primary research, so we rely on reviewing other people's research and making an analysis of that. That is largely what we have to do most of the time. You are quite right, I have not had the chance to see that. We are prepared to revise our position if it is necessary, but that is of course one piece of evidence and we need to take into account all of the evidence, and we will certainly be doing that.
CHAIR —Okay, that is fine. It is now a public document and we will make it available to you. Can I suggest, respectfully, that ACOSS look at the work that Professor Dixon has undertaken and, if necessary, talk to Professor Dixon. In the context of your general position, when you come back to talk to us again, maybe we could talk about whether you feel that one of the reasons you have adopted the position is as sound as it has up until now been assumed.
Mr Raper —Fair enough. We shall do that when I come back. I believe it is probably appropriate to stress that the criteria that we would use in making those assessments do not just go to revenue alone—as in whether there are enough dollars. There are two other factors at least in all this. Efficiency is one—in a tax system, of course, you have to take that into account—and equity and fairness is another. Our assessments are based on all of that. Is it efficient? Is it effective? Is it equitable and does it derive the right revenue?
CHAIR —We have heard a fair bit about efficiency, and efficiency is doubtless a fundamental principle of tax law.
Mr Raper —Yes, but it needs to be balanced.
CHAIR —But in the balancing of efficiency and fairness—I am just flagging that I am in the fairness corner—if someone has to take the pain, let it be a little less efficient but a little more fair. There is the bias.
Senator CONROY —You were expressing your concern and disappointment about the manner in which some of the debate took place over the last few months in terms of there not being enough public information. ACOSS co-hosted a seminar on tax, which was closed and invitation only. I know because I actually wrote to your organisation and to the president and sought an invitation and was specifically excluded on the basis of my—
Mr Raper —Was this some years ago?
Senator CONROY —Yes.
Mr Raper —In 1996?
Senator CONROY —In 1996 or 1997. That was closed to—
— To politicians.
Senator CONROY —To me on the basis of my occupation.
Mr Raper —That is right, so I am informed.
Senator CONROY —So I probably have a little bit of a problem in terms of the question of public debate when you actually close your own seminars to interested members of the public, which I define myself as despite my occupation. You said that you assess your position—because you are not a primary source of modelling and things like that—on the information available to you. What information have you been provided so far by any source that shows the existing revenue base is declining or not keeping pace with GDP?
Mr Raper —Can I answer the first part and get Peter to elaborate? Just to clarify the point: we do not have the resources. There are very few full-time staff at ACOSS. There are a few policy officers. As you probably know, most of the people on the board, et cetera, are honorary. We do not have resources to commission modelling except occasionally when we rounded up some money to commission modelling about the impact of food in the GST, prior to the announcement of this package. But that is a separate issue. But you are coming to the question, broadly, of on what basis did we come to this view that we needed tax reform because of a declining revenue base or that that was at risk.
Senator CONROY —A potential threat.
Mr Raper —Peter will summarise that for us. We have documentation if you would like us to provide it to you.
Mr Davidson —To begin with, reflecting our primary concern with the income base, we focused most of our research on the erosion of that base, but we have concerns about the consumption base as well. In overall terms, between 1985-86—the last big tax reform package—and 1995-96, 10 years later, federal revenues declined by roughly two per cent of GDP, which is around $10 billion in current numbers. In our view, that has led directly to a series of rather nasty expenditure cuts, both in the late 1980s and again in the 1996-97 federal budget. There were a lot of factors that led to that decline.
Senator CONROY —What is your source document on that?
Mr Davidson —Federal budget papers. I refer you also to a document we released in September 1998, entitled `But it is Broke. Comprehensive Tax Reform is Essential to Restore Public Revenue', copies of which I have here.
Senator CONROY —Could you supply it to the committee?
Mr Raper —The sources are noted throughout that document, including ABS sources and government budget sources.
—On the income tax side, we believe that the primary reason for revenue erosion is the growth in tax avoidance and evasion and the increasing use of a range of tax shelters and avoidance opportunities. Some were closed off by the 1985 measures, but others
remain. The only reason that federal revenues have held up as well as they have is that governments have retained the proceeds of tax bracket creep.
On the consumption tax side, we believe the underlying problem is the relative increase in household consumption on non-taxed items, especially services, and the relative reduction in growth in household expenditure on taxed goods. We provide some evidence from last year's taxation statistics, namely a graph which plots growth in household consumption in respect of items to which sales tax applies and items to which it does not apply. That is all in this document.
The story is a lot more complex than that, and there are a series of swings and roundabouts but, fundamentally, it is the weakness of the income and consumption tax basis. The income base has been propped up by bracket creep and the consumption base by increases in tax rates such as the 1993 federal budget and the action by state governments to ramp up tobacco excise and so on.
Senator CONROY —You mentioned earlier a figure of 25 per cent for low income earners for consumption of food.
Mr Raper —Yes.
Senator CONROY —What is your source for that?
Mr Davidson —The Melbourne Institute publication. I think it is sourced in these.
Senator CONROY —You did not arrive at that yourselves, you have just taken it from them?
Mr Davidson —They derived it from the household expenditure survey.
Senator CONROY —The St Vincent de Paul organisation appeared before us last week and argued very strongly that all the measures so far did not reflect their own survey. Admittedly, it was relatively small compared with, say, the HES data, but it was exclusively of low income earners and it was much beyond 25 per cent. Would you agree with them, in terms of real world examples? They were not drawing cameos from anywhere, they were not generating a computer model picture of people, they went out and interviewed real people.
Mr Raper —I can give you the benefit of my experience in my day job at the Welfare Rights Legal Centre. We find many of our clients are having to repay debts to Centrelink—to the Department of Family and Community Services as it is now called. In order to justify having a reduction in the amount of repayment of that debt, we have to draw up with them, or get them to draw up, statements of income and expenditure. Invariably, I find that their expenditure on food is higher than 25 per cent but there is a range. With some single individuals it does not seem to get there but, intuitively, to me the 25 per cent is at the lower end of the range. Peter, can you add to this?
—The household expenditure survey itself suggests that certain low income groups spend a relatively high proportion of their budget on food because of the particular
expenditure mix that they have—they are age pensioners and low income families with children—but it would not surprise me in the least that those at the very bottom of the income range who are approaching organisations like St. Vinnies would have much higher proportions of their budget devoted to essentials such as housing and food.
Senator CONROY —Given your own real world experience, and now St Vinnies, why wouldn't you ask the Melbourne Institute to factor in a figure higher than 25 per cent in their modelling?
Mr Davidson —One of the deficiencies of the data they have produced thus far—and we mentioned it earlier—is that it is not disaggregated enough. You have got all single pensioners, for example. As I understand it, they are not, at this stage, able to break those numbers down further into smaller subgroups of age pensioners, sole parent pensioners and so on.
Senator CONROY —But, given your own argument that you need to be pitched at the top of an average range, you are not going to be able to solve that problem in the next three or four weeks before we have vote on it in parliament. Shouldn't you be asking for some modelling based on the higher end of that?
Mr Raper —Perhaps I could put that back to the committee. Couldn't the committee ask for modelling along that basis? We have no capacity—
Senator CONROY —It would have been nice if Treasury had done it.
Mr Raper —Yes. It would have been nice.
Senator CONROY —It would add some integrity to what they have done.
Mr Raper —Absolutely. It would have been nice. I would have thought it was essential, in fact.
CHAIR —We are commissioning some distributional modelling, but, at the end of the day, it surely is incumbent on the government to provide this information.
Senator CONROY —They will be held accountable if they will not.
Mr Raper —I could not agree more. We said from the outset that the onus here is on the government to demonstrate that low income earners will not be adversely affected by this. It is not on us to prove that they will be.
Senator CONROY —Is the Melbourne Institute modelling based on a first year or on a second year inflation figure?
Mr Davidson —I believe it is based on a first year figure, but I am not certain of that. As we indicated earlier, we did not give them those parameters. They conducted their own modelling and we got some figures from them. It is higher in the first year.
Senator CONROY —Before you start questioning some of their assumptions, Treasury have admitted that their figure is 3.1 per cent. Following discussions with Professor Harding, she was willing to concede that the figure is over four per cent in the first year for the income groups that you and we are the most concerned about. I was surprised to see your modelling. Although I appreciate that you have attempted to say that there were deficiencies and have explained that you have not been party to the assumptions, attaching your name to a document has given it a great deal of credibility, as you have seen from the Age and from the Treasurer, who today has again endorsed your report.
Before a range of assumptions are questioned, the first-year inflation rate is over four per cent. I am surprised that, given your relationship—whether you are paying them or they are doing it voluntarily—you have not sought to press them on some of these issues in terms of more realistic real world assumptions on the inflation rate. What is the Melbourne Institute's pass through effect? Is it a 100 per cent pass through rate?
Mr Davidson —I believe so.
Senator CONROY —Do you think it is credible to believe that business will pass on a 100 per cent of all indirect tax cut savings in the first year?
Mr Davidson —It is not going to happen in all cases. The problem you face in modelling these things, though, is coming up with a realistic assumption.
Senator CONROY —One hundred per cent is unrealistic?
Mr Davidson —Anything other than that is a stab in the dark. But one has to view these numbers with scepticism, given that all those factors are at play and in force.
CHAIR —That is an intellectually slothful position, Mr Davidson, I have to say. You are saying 100 per cent is not realistic but, therefore, you cannot look at other variations, because it is a stab in the dark, and so you accept the unrealistic one. Surely that is intellectually slothful?
Mr Davidson —No. You could undertake a sensitivity analysis, but I am not aware of any distributional analysis—either in this phase of tax reform or in previous debates—which has attempted to slot other assumptions into distributional modelling.
CHAIR —But you agree it should be done?
Mr Davidson —For the purpose of sensitivity analysis, it should, yes.
Senator SHERRY —But we are not wrong: your members are worse off.
Senator CONROY —The Farmers Federation is concerned about the pass through; VECCI is concerned about the pass through; St Vinnies is concerned about the pass through. Every other organisation has sat here and unequivocally said, `We don't believe—
—Business organisations tell us it is unrealistic.
Senator CONROY —Business says 100 per cent pass through is not going to happen. You have to believe in the tooth fairy to believe in 100 per cent pass through.
Mr Raper —Senator, there can be no doubt that we absolutely share that concern, but we are not in a position to commission our own modelling. That, simply, is the point. They did this study well before we came anywhere near them, and we have to take what they have put in there and make the most of what we can. But let there be no doubt, please, that we share those concerns.
We also feel that we always need to put forward a conservative position. We do not have a reputation for taking things out to the extreme and maximising any position or advantage that we might get out of figures, because we have only our research integrity to rely on. We, therefore, always put forward a conservative position, and we warn people about reading too much into the figures.
So, with all those caveats, we are in a difficult position. Again, it seems to me, to come back to you, the Senate and the committee, that you are the only ones, if the government and the Treasury refuse. I do not know what your capacities are, but it seems to me that the onus rests on this committee to get that modelling in some form, to get whatever is available, before the—
CHAIR —Ultimately, the government funds the Department of the Senate, which enables us to conduct these sorts of surveys.
Mr Raper —It is essential that it be done, so that the Senate is in a position to make the decision, as you have said, Senator.
Senator CONROY —You have been in partnership with some of the business organisations in this country for the last couple of years, looking at this issue. They have got you to a certain point, based, presumably, on indications of support and commitment about a broad package. You are standing at the altar. They are behind closed doors, talking about dudding the entity tax, trusts and capital gains tax. Are you beginning to work out that you have been had yet?
Mr Raper —I do not know if this is the appropriate place to deal with those sorts of allegations or suspicions.
Senator CONROY —They are in the newspapers. They are saying they are not going to come before this committee to talk to us about their concerns on entities, which are in this package.
Mr Raper —Let me address the issues you raised, objectively. Whether or not we have been dudded is another issue. What is at stake here is whether or not low income earners are going to be dudded by this overall package. We share that concern. We do share the concerns you have raised about the business tax review, and we have said so in our submission to the business tax review. Much of that has been published today, and I am happy to give you a copy of the submission we made to the business tax review.
We do share those concerns about the implications for that business tax review, particularly on personal income tax. We share concerns about trusts and what happens with them. We share the concerns about whether the capital gains tax rate might come down to 30 per cent. We share the concerns about the company tax rate perhaps being reduced to 30 per cent, in the absence of mechanisms being introduced now to prevent high income earners from exploiting private companies to reduce their tax rate to 30 per cent, with anything above that being optional.
That is absolutely right, and the Business Coalition for Tax Reform agreed—and agrees—with us that this should be a comprehensive approach and that those things should not be dealt with out there on a limb, separated from this overall package. We have argued today, in other documents—and I am happy to argue this before you—that the Senate, in our view, should not be called on to look at GST legislation and income tax legislation before and unless and until they know what is going to come out of the business tax review.
CHAIR —You are asking us to return the legislation?
Mr Raper —No, I am asking the business tax review to get a wriggle on. And we have clearly called on the government today to rule out the possibility of a 30 per cent company rate without mechanisms to close down the opportunity for high income earners to exploit private companies, and to rule out a capital gains tax of 30 per cent.
CHAIR —And if they do not?
Senator CONROY —How long are you going to wait at the altar for them?
Senator FERGUSON —Four people are asking questions at once.
CHAIR —Quite right.
Senator SHERRY —Can I bring you back to something you said earlier: that we are at the beginning of this process. I must have missed something in the last 15 years. We have had a 15-year debate, we have the government's package in front of this Senate committee, we have to hand down a report one way or the other in just over a week: that is the bottom line.
The Treasurer is saying, `I am not going to remove food from this package.' You are saying, `We want food removed from the package.' The Business Coalition for Tax Reform, who you have had a working relationship with, has said, `Don't remove food from the package. It is not worth proceeding, if food is removed from the package.'
If, as the Treasurer and the Business Coalition for Tax Reform keep saying, food is not removed from the package, what is the bottom line? There is one week before the Senate report, and people like the Democrats and Senator Harradine and Senator Colston have to declare their hands. If food is not removed from the package, what should they do? Should they vote for or against it?
—I was not aware of this one-week timetable.
Senator SHERRY —We have to report in a week.
Mr Raper —I was not sure that the Senate was voting in a week.
Senator FERGUSON —That is not true. According to my advice, 19 April is the reporting date.
CHAIR —We have to report on the macro-economic elements of these proposals.
Mr Raper —We have been given an extension until the end of this week to put in our submission in broad. I understood that we were to be invited back to address the senators, as Senator Cook indicated earlier, perhaps in March. I do not understand the one-week timetable.
CHAIR —The procedure is that we have to report by the end of next week on the macro-economic effects of the tax package. Following that report, the other committees will take the macro-economic parameters that we report on and review particular areas. We will pay heed to their reports and bring down a final report. But food does touch on the macro-economic elements, I think.
Mr Raper —So there is some urgency.
Senator SHERRY —Yes, there is some urgency. It seems to me that you have outlined a whole range of concerns. One of your bottom lines is, `Get food out of the tax package.' The Treasurer is saying, `No, I will not take food out of the package.' The Treasurer is saying that you support this package and the government's position. What is your position, if food is not removed from this package?
Mr Raper —Obviously, ACOSS is not responsible for the timetable, nor do I necessarily think the Senate has to accept that timetable. The Senate has to make a decision on this issue, taking everything into account. I understood the Senate ultimately was in charge of its own timetable there.
I am not responsible for what the Treasurer says nor for his views. Ultimately, the question the Senate has to deal with is whether this package is fair overall for low income earners and whether food should be in or out. If you are not in a position to make a decision, because you have not got the modelling, then I am not sure that the decision should be made.
However, we certainly would not be supporting the package without that tax mix switch of $6 billion being addressed without food coming out of the package. We have been very clear on that. We would say that the hole can be filled by adjusting the income tax cuts, as proposed, and by looking at many of the other loopholes and shelters on the income tax side that would easily fill the hole that would come from taking food out. I do not see the difficulty for the Senate in doing so.
—On page 8 of your submission, there is a remark that the Melbourne Institute's estimate of the average CPI increase is 2.44 per cent, compared with
Treasury's estimate of 1.9 per cent. I understand that you have had extensive questioning on this area already, but I want to check whether that 2.44 refers to the first year, the second year or the average of both years?
Mr Raper —We have dealt with this already, but I will have to ask Peter to clarify what he understands the position to be.
Mr Davidson —We will have to take that on notice. We would have to have another look at the Melbourne Institute material because, as has been pointed out, if it is the second year effect, then it is likely to be higher in the first year.
Senator MURRAY —I presume you are arguing that any compensation calculations should be based on the first year effect?
Mr Davidson —That is correct.
Senator MURRAY —Thank you, I thought so.
Mr Raper —This submission, as you would appreciate, was put in before Christmas, and that was probably the last time that we looked in detail at the Melbourne Institute figures, so we will take that on board and get back very shortly with a quick answer.
Senator MURRAY —Stop me if this point has been raised earlier: the Vinnies people made the remark that the cost of food, particularly fruit, vegetables and that fresh area, has been growing at a faster rate than the average CPI for the last four years. I have checked the CPI figures, and this seems to be accurate. None of us can predict the future but, if that were to continue, food would continue to become a larger percentage of the overall basket of goods. Is that not so?
Mr Raper —Precisely. That is certainly our understanding of the fact that the CPI in relation to food has been increasing faster than the actual CPI rate.
Senator MURRAY —Given that the statistics are quite clear that food makes up a greater percentage of a low income, poor household's basket than of a rich person's basket, that is going to increase.
Mr Raper —It is 25 per cent versus 12.5 per cent.
Senator MURRAY —Yes. Which reinforces the point made by the Labor senators that we—or you or somebody—therefore must ensure, if possible, that the modelling puts some sensitivities in on the percentage that food is.
Mr Raper —Correct. And, in your absence, there was some talk about that 25 per cent being at the bottom end of the range.
—Which reinforces that point. I have been fascinated by ACOSS's approach to this whole thing, because I believe you have been exceptionally conservative. But, in my view, you share a characteristic with Vinnies and other people concerned with the
welfare of ordinary Australians, particularly less well-off Australians: there is very little politics in your approach. It is very much trying to make sure people are better treated by the system.
I really want you to address a concern I have that the language employed by people such as yourselves is in fact too cautious and too conservative. My reading of all the data over the last decade is that, in relative terms, the relationship of the poor and of low income people to high income people has deteriorated. In other words, the gap has widened.
Mr Raper —Absolutely.
Senator MURRAY —My reading is also that, in absolute terms—in real disposable income terms, in real expenditure terms—the poor and low income people are actually worse off than they were some years back.
Mr Raper —I think it is more accurate to say that they are more numerous. They are not necessarily poorer, but there are more poor people. The number of poor people in Australia has increased. The number of people below the poverty line has increased. Some mechanisms which have been introduced—for instance, the increase in the aged pension over the last decade or the decade before, bringing it up to 25 per cent of average weekly earnings—have held the line until recently. In the last three, four or five years there was also some slight decline not in the number of people who are in poverty, because that certainly is increasing, but in the levels of poverty as well.
Senator FERGUSON —You were talking about a decline: is that as a percentage of the population or in real numbers?
Mr Raper —The percentage of our population living below the Henderson poverty line has virtually doubled since the Henderson poverty line was first measured.
Senator FERGUSON —Which was when?
Mr Raper —In the mid-1970s. It has gone from about six per cent to about 11 per cent or 11[half ] per cent.
Senator MURRAY —My understanding of the evidence put to this committee is that at the highly disaggregated level and with regard to particular sectors of society—such as rural and regional Australia, and the unemployed and poor people—the ability to model the actual impacts of this change is limited, simply because the database is poor.
I do not want to misrepresent the government's position, but my understanding of it is as follows: they have chosen an inflation figure, which is in dispute, as you know. Then they have said, `But, over and above that, to cope with the margin for error and to make sure that people are not going to be damaged materially, we are going to add 1[half ] per cent.' What I am putting to you with this line of questioning is that I believe that people like yourselves should actually be advocating that, through tax changes of this sort—and this is an instrument of social policy—we should be attempting to make poorer and lower income Australians better off.
Mr Raper —Absolutely. I have argued that here today.
Senator MURRAY —Good. Now, to achieve that, you need to indicate, I think, in our terms, what percentage might possibly deliver that and restore people, perhaps, to the position they were at a decade or so back, depending on what point you choose. Because our society has become less egalitarian, less fair, we need to be doing something about addressing that problem.
Mr Raper —That is absolutely correct. However, that is a separate question from GST compensation, as you would appreciate. It is certainly the subject of our entire budget submission, which we will be presenting to the government shortly and making public. It goes to a much wider question than simply GST compensation, but I take your point.
Senator MURRAY —It does, but it is within the same ability to address the policy position, because the other point I would put to you is that it should be the intention of this package to make substantial numbers of Australians worse off: those who are not paying their way.
Mr Raper —Sorry, it should be the intention to make substantial numbers of Australians worse off?
Senator MURRAY —Yes: those who are not paying their way, those who are avoiding tax—tax dodgers and tax evaders. Do you get the picture?
Mr Raper —Yes, precisely.
Senator MURRAY —On the other side of the coin, you want to make people better off. I do not think this tax policy can be addressed solely in terms of compensation, because compensation implies a balancing out. My question to you is: why have you not overtly campaigned on that basis? Why have you, as an organisation, just looked at what would happen if certain things are done, at how will we be no worse off? That is the feeling I have from your submissions.
Mr Raper —I am sorry; I got a little distracted by a byplay over here about—
Senator FERGUSON —We are trying to manage the time.
Mr Raper —No, it is the withdrawals debate that distracted me, and I missed that. I do apologise.
Senator MURRAY —I will leave that on notice.
Senator SHERRY —Don't repeat the question!
Mr Raper —I shall happily take it on notice. I do apologise.
Senator MURRAY —As a former socialist, you should surely like this.
Senator SHERRY —The evidence is obvious to us, I can tell you.
Senator MURRAY —Let me summarise, if I may. I suggest you take this on notice, and when you address the committee next, I would like the committee to hear your views as to how you believe inequalities in our society could be addressed through using a package which has a fiscal impact, which are income tax cuts, and has a tax mix change, which are the indirect tax cuts.
Mr Raper —Thank you, we shall do that.
Senator FERGUSON —Mr Raper, when you commenced your presentation, you said we should be concentrating on modelling today, because that is what the first part of this inquiry is about and what your submission was about. Although emotions have run a bit high on my right in regard to some of your answers, we ought to get back to one or two questions which I want to clarify about the modelling.
In asking one of his questions, Senator Conroy said you should have used some `real world' figures or assumptions when you were asking the Melbourne University to do some research, or when they were using their research. In fact, if you are going to use anecdotal evidence or disaggregated statistics, it becomes very difficult, because if you are looking at modelling, you have to do a statistical analysis, and it can only be done on statistics. If you are going to accept the use of modelling, which we are talking about today, you can only accept that modelling is important if you use averages: is that a fact?
Mr Raper —Surely, noting the fact that they are averages, you adjust. You do not ignore the fact that they are averages. Sure, it comes out as an average, but you do not ignore the fact. You accept the fact that an average is a range.
Senator FERGUSON —If you are talking about statistical modelling, which we are—we are using statistics and using modelling—you can only accept the use of modelling if you are prepared to accept the averages that they come up with. Because that is the only way they can arrive at any outcomes with any predictability.
Mr Davidson —It depends on the level of detail that you are prepared to go to in arriving at those averages. As I suggested earlier, an average of all low income people is a fairly meaningless figure, but we believe the HES and other data is capable of providing reasonably reliable data on the basis of, for example, quintiles of aged pensioners and not all aged pensioners, as appears in the table in our submission.
Senator FERGUSON —Do you accept the fact that the more you disaggregate information, the more unreliable the results can be?
Mr Davidson —It is a matter of judgement. I suggest you pose that question to the ABS this afternoon.
—I am quite sure we will. When the government set out to put this package into place, it did take into account that there would be a one-off effect on low income earners and the general CPI. It accepted that fact and agreed to put in place some
compensation. Senator Cook previously said that he would like low income earners to be compensated and to make sure that, if anything, they were over compensated.
CHAIR —No, I did not say that. I said that, in the trade-off between efficiency as a tax principle and equity, I err in favour of equity. If it means that we have got a slightly less efficient but a fairer system, that is a good outcome for Australia. That is what I was saying.
Senator FERGUSON —I am not sure whether that has been a principle that has always been applied by the Labor Party in government. As I understand it, when they raised indirect taxes by two per cent in 1993, there was no compensation whatsoever for low income earners or for those on fixed incomes or for social welfare recipients. Is this the first time in your knowledge that, when indirect taxes have been raised, a package of compensation has been put in place? Whether or not you judge that package to be adequate or not is open to debate later on, but is it the first time that a compensation package has been put in place to account for an increase in indirect taxes?
Mr Davidson —In both the 1985 package and the 1992 Fightback package, there were compensation packages proposed. Indeed, we believe the compensation package proposed in Fightback! is much more robust and adequate than the one that is being advanced by the government today. It is also true that there was very little in the way of compensation in the 1993 budget change, and we were just as loud in our objections to that as we are to the risks that we believe this package imposes on lower income people today.
Senator FERGUSON —In that case, there was no compensation offered; in this case, your complaint is about the adequacy or the level of the compensation?
Mr Davidson —Yes.
Senator FERGUSON —You have stated quite categorically your position in relation to food and the GST. Senator Murray has said on a number of occasions that he does not want the low income and poorer people in Australia just to be not worse off; he actually wants them to be better off. It was with that in mind that the government put this 1.5 per cent above CPI cushion in place.
If you could be satisfied that low income people would actually be better off with a compensation package that was put before you, and if the alternative was to have no tax reform at all and to leave people as they are today, would you still advocate the rejection of this package because the government said it would not move on the exemption of food?
Mr Raper —The first point I need to repeat is that we would want food taken out, in order to make this structurally a package that does not require anywhere near the amount of compensation first up. That is a fundamental point that you come back to.
Secondly, I do not understand, to be perfectly honest, why some think—and some advocate this—that if food were taken out the whole package would unravel. There is no justification for having that extra $6 billion in revenue in there. It is $6 billion more than what is being replaced. The whole rationale for a GST was to round up a number of taxes and replace them with one smooth, easy, clean, efficient tax.
Senator CONROY —Do you really believe that?
Mr Raper —That is the public rationale. So there is no justification for raising the extra $6 billion in the first place. Taking food out addresses both of those problems, and it largely addresses the amount of risk that low income earners are being exposed to.
Senator FERGUSON —Except that we have had a lot of witnesses before us saying that, by taking food out of the package, you significantly increase compliance costs.
Mr Raper —Yes.
Senator FERGUSON —You make it more complex: you then have to decide what is food and what is not, for example. A lot of other countries have had difficulties in that area. We have had a lot of witnesses say to us, `Make sure that you provide adequate compensation, but leave food in, because it only adds to the complexity if you exempt it.' I know you come from an alternate point of view but this is one of the reasons why it is in.
Mr Raper —I understand all those reasons, and mostly that is true. It does make it more complex, it does make it less efficient. But that is the price you have to pay. Most countries, in fact, do not include food. And the government has already accepted the need to exempt or zero rate a number of things, including health, education, child care and community welfare services. So food is just another thing. It is no different, in the sense of adding complexities or difficulties. Those conclusions are true, but that is the price you pay for getting tax reform that is balanced between efficiency and equity. It is the fundamental flaw in that balance, in our view.
Senator FERGUSON —But most of the countries that have either a zero rate for food or a lower rate for food also have value added taxes of somewhere between 15 and 25 per cent, and those would also impact on low income earners.
Mr Davidson —That is probably largely because they rely less on excises than we do in Australia. Most OECD countries have a pretty similar balance between consumption taxation and income taxation to the balance we have in Australia.
Senator FERGUSON —The figures show that the United Kingdom's 17[half ] per cent VAT supplies about 8.7 per cent of revenue, whereas New Zealand's 12[half ] per cent, broad based, provides only 6.7 per cent—or the other way around, I am not sure.
Senator CONROY —VCOSS appeared before us earlier in the week. They have devised something referred to as the RPI: is either of you familiar with that? It is a way of calculating a CPI for low income earners.
Mr Davidson —Yes.
—Are you incorporating that in your modelling or your calculations for your submission next week? We have agreed that there is a specific expenditure pattern, and it is perhaps higher than the 25 per cent that is acknowledged at the moment. Equally, there is a CPI figure that is not relevant to low income earners as well.
Mr Davidson —We are submitting that this committee should commission modelling which examines, in a disaggregated way, the effect of the package on the expenditure bundles of different income groups, because we do not accept that a single CPI measure, as used by the Treasury, is accurate. However, we do not have the capacity to undertake that modelling ourselves.
Senator CONROY —VCOSS appears to have done a fairly substantial amount of modelling.
Mr Davidson —Yes.
Senator CONROY —Is that a reasonable guide? They put to us very strongly that, if it did not use the sort of weighting that they refer to as an RPI, any modelling, whether it be one we commissioned, the Treasury's or anybody else's, was poor modelling which had not been well-researched.
Mr Davidson —I think their main point is that you have to separate out the likely effects on the CPI for each group. The CPIs for different groups move differently over time, that is the whole point. So it is essentially an argument for disaggregated modelling of the kind that is undertaken by some independent modellers but, apparently, not by the Treasury any longer.
CHAIR —I think that brings us to a conclusion for today. As you have pointed out, this is evidence in progress, and we expect to hear from you again. I thank ACOSS, Mr Raper and Mr Davidson.