ACTING CHAIR (Senator Ferguson) —I welcome the representatives of the South Australian Employers Chamber of Commerce and Industry. Senator Cook will not be here for this portion of the inquiry and Senator George Campbell will be substituting for him, so we will just continue on from there. I welcome Mr Ian Harrison and Mr Browne. Gentlemen, it is over to you.

Mr Harrison —By way of an opening statement, I should say that we have submitted evidence to the committee. It was a short, concise submission. It is worth noting that, in fact, you got the entire amount of it. We had a couple of questions asked of us whether we had missed some attachments. So we have not passed the weight test, but I hope that we have summarised the major points that the employers chamber seeks to put before the committee. We see this as a continuation of a long period of involvement in matters relating to tax reform.

The SA Employers Chamber of Commerce and Industry is the state's peak employer body. It has about 3,200 direct members across the entire business spectrum. There has been a number of mergers of employer bodies in this state over the last 25 years, which has given rise to this organisation with broad coverage. Under the umbrella of the chamber we have 70 trade associations and, through that group, provide direct services to a further 3,000 businesses. So the employers chamber in this state has a membership and a service list that totals in excess of 6,000 businesses. Employment in those businesses would be in excess of 160,000 South Australians. The body is a foundation member of the Australian Chamber of Commerce and Industry—an organisation that we understand is putting submissions to your committee—and we are a member of the Business Coalition for Tax Reform in our own right, also an organisation that has submitted evidence to the committee.

I might simply work through the tabled document—as I said, it is concise enough to allow that—and then I will supplement it as we go through with further comments. We would be very happy to engage in discussion, either on the way through or at the conclusion.

The employers chamber has been a strong advocate for business for tax reform for many, many years. That comes about from a basic premise that the existing system is in need of significant reform. At times we have said that the existing system is broken, and it needs fixing, and that is a view that is held very widely throughout the business community.

We participated in and were involved in organising the tax summit that was held in 1996 in Canberra under the umbrella of our national body and the Australian Council of Social Service. As I mentioned previously, the most recent extension of our involvement in this area is that we have become a participating and financial subscribing member of the Business Coalition for Tax Reform.

We have a range of objectives that we want to see put into place in a tax system, and they really are to secure a tax system which would improve the overall competitiveness of Australian goods and services; encourage employment, savings and productive investment; raise revenue more efficiently, with lower collection and compliance costs; foster adequate, efficient and enduring tax bases for all levels of government; and recognise adequately the need for equity considerations.

The tax system has a big influence on the economy. There are not too many decisions taken in the business community—and, indeed, in many sections of the general community—that do not incorporate a tax element in their determination. We contend that the major compelling argument for a substantial review of the tax system in this country is the growth in economic activity that such a review can engender. Out of that you will get business investment, and out of that we get jobs. We cannot accept that there are not two more fundamental requirements of the tax system in this country from where we are at this point in time than to make the changes necessary to engender business investment and jobs.

I will mention in my conclusion some issues pertaining to those in our package that we are proposing, or that the government has proposed, that are specifically relevant to South Australia, but at this point I would just like to mention something about economic modelling. We have read with interest some of the earlier media reports of your committee's hearings and the debates that have ensued because of recent econometric modellings that have come forward. We do not have in our own right substantive research that underpins the comments that we will be making today, but some of that, of course, has been done by our national bodies and, therefore, we are party to that.

But economic modelling is an interesting science in its own right, and there are a whole lot of assumptions that you have to undertake to make those sorts of modelling projections. I do not want to cast aspersions upon the science of economic modelling, but we at the employers chamber will take our guidance from the views of the business community. The people who make business decisions, who make investment decisions, are telling us what they think has to happen, what they know has to happen, to this system in Australia. They have got international experience in the marketplace—not in academia—to support their views.

So what we are bringing to the committee today is unashamedly a business focus. I make that comment, like many of you, having had some involvement with economic modelling and the matters pertaining to it. It is simply a tool that we can use, but at the end of the day you make a decision based on what you believe is right and on what your experience directs you towards. So it is of no surprise to any of us that the models, whoever produces them, do not agree.

The package of proposals that the employers chamber has developed and that we believe will meet the sorts of objectives we want in the tax system includes a goods and services tax at a rate of 10 per cent with minimal exemptions. We proposed in our original submissions to the government and others that we thought rent and financial transactions ought to be the only exemptions—an absolutely minimal base with exports to be zero rated.

Secondly, the introduction of this tax should be concurrent with the abolition of wholesale sales tax and payroll tax and a range of other indirect taxes as the revenue generated would provide. A fundamental premise of the view of the business community is to move the incidence of taxation in this country from income across to consumption, to get it out of the input costs of business and give business a chance to be world competitive, and to move the incidence of tax, as we have described, through to a GST.

The third area is reform of the income tax and social security systems to encourage greater incentive to earn and save and to provide a better interface between the two systems. The reform of the personal income tax scales we have proposed could include alignment between the top marginal rate of tax and the corporate rate of tax. I understand a report has come out today—which we have not had a chance to look at yet—from the Ralph committee, which obviously goes to that sort of item; I think it probably goes in the other direction. We want to see company taxation simplified to provide greater certainty, lower compliance costs and a business environment that encourages investment and enterprise.

Finally, we want to see a restructuring of the federal-state tax sharing arrangements to reduce the extent of vertical fiscal imbalance in this country and to give states access to a growth tax. We have put forward a proposal that that might be done through an income tax sharing arrangement—a piggyback system where the Commonwealth would collect money on behalf of the states and distribute it back through to them. We found the government's proposal to hypothecate the proceeds of the GST very interesting. It has business support and deserves wide support. This hearing is being held in Adelaide. We made the point, and we should repeat it, that the system of tied grants to states to offset the high costs of delivering certain services in the smaller states—I think we call that horizontal fiscal equalisation—must of course be maintained.

The government's package announced last August did not contain all the elements of what we were putting forward. That is obvious from what I have said. We accept it as a comprehensive set of reforms of the system and it has achieved wide acceptance amongst our membership. So, in terms of the business community in this state, we would say that that package has wide support. It has particular relevance to South Australia. We have a higher reliance on manufacturing activity than other states. It is not the biggest manufacturing sector, of course, but in terms of percentages of GSP, we are more reliant on manufacturing in this state than others and the removal of wholesale sales tax, in itself, is seen as a major advantage to South Australian industry. The rationalisation of a range of indirect taxes will help the manufacturers. Our vehicle industry is a world competitive industry. Our mining industry, like others in the other states, is world competitive—as are our agricultural products. We need to address the fact that they must have whatever costs are imposed through the tax system taken out of their structure.

We understand that wholesale sales tax, for example, puts something of the order of a billion dollars onto the cost of Australia's exports. South Australia's percentage might be close to 10 per cent of that, so we think there might be $100 million that you can take out of the cost base of South Australian exports. In terms of competitiveness, which is one of the basic tenets of our proposal for a new tax system, we think that is very significant.

The disappointment that we have in our organisation about the government's package was the decision not to include payroll tax specifically as one that might be eliminated. We really do not like payroll tax at all. It is discriminatory. It feeds directly into the cost base of goods and services. It offsets our international competitiveness, as I have just mentioned. If we have a GST, which will be a value added tax in some respects, it will pick up labour as well as the capital input into goods and services, so the labour component will be taxed twice. We do not think that is appropriate. At the time of introducing a broad based tax there will be some inflationary impact. We think removing payroll tax offsets that in certain key sectors. We think that ought to be another reason for its abolition.

We also think that the time for removing payroll tax is at its strongest when the reform process is initiated. We will hold out hope that, with the states being given access to a growth tax, individual state premiers will see the need to reduce or abolish this tax in the near future. South Australia, because of our existing debt arrangements, are not as well placed as some other states to achieve that in the time frame that we know is essential. That debate is going on in our state right now, as you would all be aware, but we contend that payroll tax ought to be got rid of. We recognise that it is not a well-understood tax in the community. We see it as a tax on jobs and we do not think it has any place in a community with the unemployment levels that we have had to endure for a long time. There is also sensitivity in the states about maintenance of their own revenue being reduced if they get access to a growth tax.

We come to your committee with a high regard for the intent of this process. We also have a view that the tax reform argument was well debated in the context of the recent federal election and the view of the business community is that we should be able to move ahead now with some speed to introduce a revised tax system for this country. We think that the electorate has had a decent look at it—not the absolute detail; we recognise that—and we would be hopeful that the Senate will deliver back to the government a package of reforms that is acceptable to the government in a timely manner so that we can move ahead. If that is not the outcome, then a tremendous loss of business confidence and, therefore, consumer confidence—and vice versa—will be the outcome. There is growing concern in this country about the ability of our parliamentary process—at state and federal level—to demonstrate the sort of leadership that the community needs.

Finally, I would like to move to the issue of food. We believe that minimising the compliance cost is a major objective of the reform process. A standard rate of broad based tax spread as widely as possible with few exemptions is, of course, the simplest system of achieving a low compliance cost tax system. We would argue, as I have mentioned, that there should be very few exemptions. The government has added health and education and a range of other activities to the list. We accept that there is probably good reason for that. There is certainly a lot of evidence that there is great complexity in some of those areas but we simply do not accept that food ought to be exempted from the GST. Definitional reasons emerge immediately which will create great difficulties so the compliance costs will go up.

Secondly, there are revenue implications of $5 billion or thereabouts. We stressed the issue of payroll tax in our submission because we always thought it ought to go. But, when the package was announced, the first feedback we got from the government about the reason that payroll tax was not identified as a tax to be removed was the question of whether there

was enough revenue generated that would allow payroll tax to go in the face of income tax cuts. If we actually exempt food, that is going to cause some revenue questions which will have to be accommodated if the package ultimately holds together. What we fear is that the final outcome of that sort of process might see a tax reform package in place where food is exempted, with all the problems that creates, and payroll tax is retained because there simply is not enough revenue to provide for both. There is probably some impact on other areas to the effect of $5 billion in income tax cuts or whatever. We cannot see that as being anything like an optimal outcome. So we think there are a lot of reasons why food ought to be included in the net, and we would hope that we will reach a time, in the near future, when the governments involved in it—as I said, it might be done at state level if this package goes through—can see their way clear to get rid of payroll tax; get rid of the tax on jobs. I think that is a reasonable summary of what we put forward and, as I said, I have sought to enlarge on it in some areas.

ACTING CHAIR —Your question, Senator Conroy.

Senator CONROY —I was interested in your comments about your experience with economic modelling. Could you briefly give an indication of it?

Mr Harrison —I did an economics degree and I majored in mathematics. I did quite a bit of modelling a long time ago on all sorts of outcomes, including sales projections, regression analyses and these types of models. I have had a fair bit to do with the Centre for Economic Studies here. They have produced some interesting modelling. I did not have a lot to do with the generation of Econtech's model; I had nothing to do with it before the automotive inquiry, but I was very interested in that because we used the outcome of that with some success. I congratulate the government and all those involved in that good decision.

In those sorts of exercises, what has always been clear to me is that you write a set of assumptions and those assumptions are then reflected in how you evaluate real circumstances. One of the worst definitions of an economist—that we all have to endure—is `somebody who sees something working in practice and tries to describe it in theory'. There is a bit of that in economic modelling. I am not saying you do not need it—because you do need it. At a macro level, which is where this is dealing, it is very important. But you have to balance it against what, from all the evidence and experience, you believe to be the real situation. That is often a great difficulty for those who produce the models, because they are people who have perhaps not had that breadth of experience.

That is the point I was trying to make. I am not trying to be critical. I was trying to say that we will bring a business focus to your inquiry. Others—and you have had them of course—will bring the more theoretical, academic version of their modelling. They have attempted to capture what many business people would say they had learnt some time previously.

Senator CONROY —You said before that you start with the assumptions and then you try and make the model reflect what you want at the end. Are you suggesting that that is what happened in the Murphy Econtech model with cars?

Mr Harrison —We have the view that Mr Murphy got it right, of course.

Senator CONROY —Just by coincidence, or maybe he had good assumptions?

Mr Harrison —He took good advice, perhaps.

Senator CONROY —You suggested that the premise from which you started looking at the tax system was that it was `broken'—you used the word.

Mr Harrison —That is right.

Senator CONROY —Do you have any modelling or any advice at all to back up that particular claim?

Mr Harrison —No; I can go back to what I said earlier, that the views we have about this system really come from the business people that we deal with. The employers chamber is a business organisation. Our board, our business council, our tax reform committee and all the other groups that we have inside the employers chamber are made up of business people. We go to them and say, `What are the issues we should look at and, in respect of tax, what are the views we should take?' In many instances these people operate in other tax regimes in other countries—they are exporters and those who own operations offshore. The overwhelming body of evidence that has come back from these people for a long time is that the tax system in this country seems to be more restrictive than the tax systems that they have experienced with other countries. They will say to us that this system really is not too good. There are some specific areas of this system in the business area, like the fringe benefits tax system and the capital gains tax system, that are in massive need of change, demonstrably. It is not an arguable case. Anyone who is in the professional environment that has to deal with these areas would say that they are falling over.

By way of a very personal comment—and Michael might wish to enlarge on this—I have recently had the difficult situation of fixing up an estate of a parent of mine who passed away who had quite a few shares including a long-time shareholding in BHP. It is just about impossible to work out capital gains tax. My tax guy that I went to said, `It is not worth me doing this, Ian. It'll cost you so much in my fees. You just have to go away and sort it out yourselves.' That is another view of the system, not the business view. Previously I operated in the tax area for a little while, many years ago. I have not heard many people argue in defence of the current system, other than that we cannot seem to fix up the way we should go by way of change. There is political debate that seems to have taken over the actual reality.

Mr Browne —Can I add a little to that?

ACTING CHAIR —Sure, Mr Browne.

Mr Browne —As Ian has put it, FBT and capital gains tax are clearly relevant, but the other issue that seems to come through time and time again is that the current tax system pervades all business decision making approaches. Whenever somebody is looking to do something, the first or second question that seems to come up is, `What's the tax implication

of that decision?'—not whether it is necessarily a good or a bad decision. If you keep having to come back to the tax fundamental in every circumstance, that certainly seems to reflect a view that perhaps the system is broken.

Senator CONROY —Regarding the point he had, when the Treasury start arguing about the system being `broken', they are usually referring to the level of revenue that can be generated by a tax system, as opposed to an individual bit here or there. They are looking at the macro effect. I was wondering if you had any evidence or advice on whether there was a sustainable base currently for the needs of the community down the track—whatever the definition was. I was wondering if you had a view on that.

Mr Harrison —Yes, we do. We do not believe the current system is sustainable. We do not accept that the income tax scales, for example, are anything like they should be. They are an absolute disincentive to work in this country. We have never, as a community, compensated the middle income earners and the low income earners for the inflationary effects through the seventies and eighties when bracket creep absolutely cruelled the incidence of people who are now at the so-called top marginal rate.

At company tax level, people are telling us that we do not have a system that is world competitive. Businesses that are looking where they should invest their money are telling us that Australia's tax system is not competitive, that the cost of capital in this country is far too high.

At a state level, it is an absolute debacle. We go through a charade in this state each year when the state government has to, what we call, rummage around the bottom of the barrel to find some area to increase revenue. The vertical fiscal imbalance is one of the problems they have despite that. So at state level, the potential sources of tax revenue in the High Court decision 12 months ago put a bullet through the last avenues, I suppose, that they were working towards. The state systems are bereft of opportunity, unless they want to just put more taxes on to the business community, which is widely recognised to be anti-competitive, and that is just going to cost jobs in our jurisdiction.

Senator CONROY —Like yourself, nobody on this committee has seen any modelling from Treasury or any other economist about the potential revenue base, other than what we have commissioned ourselves, which showed that there is actually a sustainable revenue base currently for the projected needs—that is, the current revenue base is projected to grow by about the same level as GDP. I just thought Treasury had shown you something they had not shown us, but I guess not.

Mr Harrison —No, you can rest assured about that.

Senator CONROY —One of the assumptions that has been made in the very little bit of modelling that has been done on the ANTS package is that there will be a 100 per cent pass on of all the savings to consumers. Do you agree that your members will pass on 100 per cent within a very reasonable short term, within months, to consumers?

Mr Harrison —I think either you have confidence in the competitive marketplace or you do not. We see no evidence in the marketplace in South Australia from all the feedback we

get—and we survey our members very regularly—that we do not have anything but a very competitive marketplace. Costs are being driven down irrespective of ANTS, irrespective of the outcome of this inquiry.

We would not support any regulatory arrangements, although we understand that different things have been threatened if the pass on does not occur. The time frame for those sorts of things really has to be taken into consideration within a corporate body. There are contracts for the supply of inputs; there are contracts for the outputs. There will be winners and losers in this change, like there has to be in every change. That is where, as a parliament and a community, we have to take a view that is beyond the real short-termism that seems to be reflected in some of that point you just put.

Senator CONROY —So you would accept the argument that that flow through will be reasonably quick, in terms of the 100 per cent pass on by your members?

Mr Harrison —Yes.

Senator CONROY —I am not signing you up to day one, but in a few months when there are contracts and those sorts of things.

Mr Harrison —Yes, we would. We would expect a more competitive Australian economy to win back some of the import competition that we are losing and to expand on exports. So we would expect to see a dividend come out of this process, not just a static arrangement where we are taking from one and shifting the deck chairs. We are really into putting in place some efficiency and some productivity gains for Australian industry which will see jobs and investment.

Senator CONROY —That is what I am trying to come to, because there is not one cent extra profit in this to your members if they pass on the full flow through from the impact.

Mr Harrison —I think that is one of the static assumptions of the modelling—that there is no overall change in the size of the economy.

Senator CONROY —No, employment growth was that particular assumption, that there is no employment change in the long run. It may surprise you but the actual economic modelling we commissioned is roughly the same. It is not actually divergent. I appreciate that the media may have represented it that way, but there is a general consensus between Murphy and Dixon that their results are actually pretty similar—that is, there is virtually no economic growth. I think Murphy was 0.2 per cent, which was the Prime Minister's preferred modeller's view, and Dixon had about minus 0.1 per cent. When you are modelling on that size, that is within statistical error for both of them.

So, no, it was not actually an assumption that was put into the model; that was a different assumption you are talking about. The net macro effects that came out of both the models and the Melbourne Institute were also down between zero and about 0.3 per cent for the general economy.

Mr Harrison —As I said, I have clearly relied on some media reports, but I suspect we will get into a debate about the exchange rate impacts of the modelling, too, and that is where we started to chance our arm.

Senator CONROY —Treasury and everybody else seem to agree that there will be an increase in the exchange rate by three to four per cent. What they argue is that those sectors that have cross structures that will benefit by more than three or four per cent will actually increase their exports. For instance, we had the wine industry here this morning saying, `Because of the way the tax system is structured, we in actual fact have only projected savings between one and two per cent. So we are a net loser.' That was their written submission to us, because they are not going to be able to gain the great cross savings that are flowing throughout. Are they members of yours?

Mr Harrison —Yes, the major wine companies are.

Senator CONROY —They admitted there will be job losses and wine closures in your state as a response. That was in their submission to us this morning.

Mr Harrison —I am not familiar with that.

Senator CONROY —You are welcome to take away their submission.

Mr Harrison —We will have a look at that. That is a bit surprising, because the chief executive of one of the very large wine companies is on our board and, everything I have said today, I am sure he would agree strongly with.

Senator CONROY —I know. It was dragged out of him screaming and kicking, don't worry. He did as good a job to avoid answering the questions as he could, but it is actually in writing.

ACTING CHAIR —Order! Let us not have a debate, Senator Conroy. Actually, Senator Conroy, I will give you one more question because time has expired.

Senator CONROY —I will throw that one question to Senator Sherry.

Senator SHERRY —You stress minimal exemptions. One of the features of the wine industry submission this morning was exemption for cellar door sales in order to minimise the adverse impact of this package on the wine industry, particularly for small to medium sized wineries. Do you agree with that new exemption that is being claimed by the wine industry?

Mr Harrison —No, we could not agree with that.

Senator SHERRY —You do not.

Mr Harrison —Can I just clarify that? Was that in the context of food being excluded or food being included?

Senator SHERRY —No, it was nothing to do with food, just the cost of the package on the wine industry. They had a range of recommendations. One recommendation to minimise the cost on the wine industry—because of the impact, particularly on smaller wineries in regional areas, on their cellar door sales and restaurants—was for the exemption of cellar door sales. They are a constituent of yours in a major South Australian industry and I am a little surprised at your approach.

Mr Harrison —It is a level of detail that we certainly have not gone to, so I cannot comment.

Senator MURRAY —Mr Harrison, would it be the general approach of your organisation that you want this package passed as a whole as its stands right now?

Mr Harrison —Yes.

Senator MURRAY —I understand that you are a generalist organisation in contrast to, say, industry organisations?

Mr Harrison —That is right, yes.

Senator MURRAY —You would have members in your organisation from the construction industry, from the credit union industry, from tourism and from the wine industry.

Mr Harrison —Yes, we do.

Senator MURRAY —Are you aware that each one of those industries has asked for major changes to the package?

Mr Harrison —Yes, but I cannot give details of what they have actually pursued. I have not sought to incorporate that into our general submission.

Senator MURRAY —Without putting words into their mouths, some of them have said they would rather the package went down if their own particular needs were not met because they are so fundamental.

Mr Harrison —I said earlier when going through the submission that the prospect of getting absolute agreement across the business community on any matter is very small. The business community, by its nature, is made up of competing sections, competing interests, and there will always be winners and losers. If you are an industry or company that will be a loser, no matter what the issue, then the view that we hold is that, while on balance there is a direction that ought be pursued, we fully respect the rights of sections within our membership, or individual companies within our membership—and that is a macro comment at the national level—to take their own case forward and argue it. That is the position you are describing now.

Senator MURRAY —I understand you have large numbers of small business as members.

Mr Harrison —Yes, we do.

Senator MURRAY —We have seen surveys—of course, they can always be manipulated, as you know—which say that 48 per cent of small business do not want a GST. Do you think that would be indicative of the small business members of your organisation?

Mr Harrison —No, I would not.

Senator MURRAY —Have you asked them?

Mr Harrison —Yes. We asked them by a general survey. We do a quarterly survey of business trends. We asked our members two years ago, I think—I have to go back a bit—about tax reform and they were overwhelmingly in favour. We were part of a national survey and got 800 responses. Sorry: it was about three months before the election last year that we did a national survey and the positive response for tax reform was very strong.

Senator MURRAY —But it is possible that within your organisation there are unsubstantiated numbers, unless you have checked them, in those industries I mentioned or in small business who might in fact oppose the totality of the package unless it is changed or alternatively might oppose the GST altogether.

Mr Harrison —I am sure there would be individuals who, for all sorts of reasons, would take that position, yes.

Senator MURRAY —One thing the committee is faced with in these inquiries is the relative ability of organisations to respond professionally; for instance, a charitable organisation will not have the resources often to do the full research and work that are necessary. I want to check from a professional organisation such as yours whether you have read the following documents which helped inform us. Have you read the ANTS document?

Mr Harrison —Not completely. I have read parts of it that I went to to see what we were looking for. I cannot say I have read it from cover to cover, but I am quite familiar with what is there.

Senator MURRAY —I am asking you these questions because we have to take in mind the views of the whole community, not just of business.

Mr Harrison —Can I supplement my earlier answer. There are people in our organisation who have read that document from cover to cover, in the role that they had. I am here in an organisational capacity; I am not here as the font of all knowledge, please.

Senator MURRAY —That is probably a fairer question for those who are forming your policy. Would they have read Labor's tax policy which they put out during the election?

Mr Harrison —Yes.

Senator MURRAY —Would they have read the Democrat's response of 18 September to the government's tax policy?

Mr Harrison —Yes.

Senator MURRAY —Would they have read the first report of Ralph?

Mr Harrison —The principles?

Senator MURRAY —Yes.

Mr Harrison —I am sure amongst our constituency it has been analysed very much. Our own tax committee spent a lot of time trying to come to grips with what we should say to that committee. So the answer to that is yes.

Senator MURRAY —Would they have read Ralph's second report which was the Arthur Andersen report which did comparisons of our tax system internationally?

Mr Harrison —That is under analysis now. It is not a document that we were seeking to comment on.

Senator MURRAY —It has been out for a couple of months.

Mr Harrison —That is right.

Senator MURRAY —And the third one you would not have read, nor would you have read the Senate select committee report which only came out on Friday.

Mr Harrison —No.

Senator MURRAY —The reason I put those questions to you, Mr Harrison, is that during your presentation and in the submission itself, you made a series of subjective judgments, if you had not read the material yourself. Those subjective judgments do not reflect all the views which are now current in this debate; for instance, the modelling questions of Senator Conroy were directed to that question, as was the question of food, the payroll tax question and others. I put to you this proposition: if the government negotiated an outcome with the Senate in whatever form—either with individual parties or on the Senate floor with amendments—which altered the package somewhat but they accepted it, would you accept that outcome as the reasonable outcome of the parliamentary and political process or would you dig your heels in and say, `Actually no, all we wanted was the ANTS package and nothing else'?

Mr Harrison —We would review in our own forum the proposed amended package and make a decision as to whether or not we would support it. We would not support it automatically because the government supported it. We have a view about the way the tax system ought to be varied. We would want to look at the outcome in our own right. We would do that in conjunction with our national body, the Australian Chamber of Commerce and Industry, and in conjunction with the Business Coalition for Tax Reform. If the package was substantially different, then it could well be for the reasons that we would make clear at that time that we might propose further changes to be necessary before it would be acceptable to the business community.

Senator MURRAY —In view of your remarks earlier about leadership, I hope you would acknowledge, if the government chooses with the Senate to make a decision representative of all the community views, that that is their right, even if you chose to disagree with it.

Mr Harrison —Yes, we would accept that. I think the political process is very important. It is not an end in itself and I guess the concerns that many people have is that political aspects of the debate seem to be dominating what is required out of the debate. That is a concern which gets put to us regularly.

Senator MURRAY —I put to you that, if you are relying on media reports and not on the substance of the reports, you might well get that impression.

Mr Browne —With respect to our attitude to the government's package—and I think it is indicated in the submission with respect to payroll tax—it is clear that the chamber's view was that, notwithstanding that payroll tax was not included, on balance this was a reasonable approach and I am sure that the chamber would continue to adopt it, on an analysis by analysis basis, subject to what the parliament determined.

Senator MURRAY —My last question concerns payroll tax. Obviously any government, this one included, has to lay off different priorities. If this government were to reduce income tax cuts in favour of laying off payroll tax—in other words, reducing payroll tax—would you regard that as being a beneficial choice, or do you not think that that is an option?

Mr Harrison —If another part of the same package was that food was exempted, then we would not think that is an acceptable option, no. If food was included in the GST, as we are proposing it ought be, then we are prepared to accept that payroll tax be retained in the context of the broader package, although, as Michael has just indicated, that was one area where we made a decision to accept the package that had been put forward. If the government were to have offered less in the way of income tax cuts and had moved to abolish payroll tax, then we would have been very happy with that.

Senator MURRAY —So that would be your priority both in the economic sense and the business sense?

Mr Harrison —Yes, but I want to bring food back into that, because that is what we were trying to make clear in the submission. We do not want to see a three-way trade-off that leaves lower income tax cuts and payroll tax and has food exempted. We think that would be a very bad outcome for jobs and for all sorts of reasons.

Senator MURRAY —If there were a choice between payroll tax and income tax cuts to the upper quintiles you would choose payroll tax?

Mr Harrison —Yes. In the context of a restructuring of the income tax scales which are still available.

Senator HARRADINE —I have one question. You say that the Senate `must deliver in a timely fashion a tax reform package acceptable to the recently elected government'. What is meant by `in a timely fashion'? What date would you put on that?

Mr Harrison —The short answer to that is yesterday. The view we have, and I have tried to bring it out this afternoon, is that reform of the tax system is an absolute imperative to generating economic growth in our economy. We take the view that any delay in making those changes, every day we do not do it, is an opportunity lost. We think we should get on and do it for economic reasons, notwithstanding the findings put forward by the modelling as we have discussed earlier.

The second side of it is that the recent election was fought with the tax proposals being a major component of the election campaign. All sorts of wise counsel was given to the government of the day by everyone in the media, and other places, that you cannot win an election if you take a tax package to the electorate. That was not the outcome. So, in that context, the business community would look forward to the parliamentary process moving forward. The timely fashion is not intended to pick up 30 June or these other times that have special significance; rather it is a comment that we should get on and do this thing.

We have been arguing about tax reform in this country since 1985 when we ran a tax summit. We have had all sorts of instances since then and all that has happened is that the system gets demonstrably less and less efficient in its performance. We just want to see movement ahead. We are in a world competitive globalised marketplace and we seem to be unable to effect some fundamental change.

If you accept the premise, which we do, that tax is a major determinant of business activity, and economic activity generally in the community, then we should be making progress a lot faster than we seem to be able to.

Senator HARRADINE —For business, the big ticket items include FBT and capital gains tax, don't they? Shouldn't they have been introduced yesterday? Business has been suggesting that action should have been taken a long time ago on those.

Mr Harrison —Yes, that is certainly our view. I think the clear statement by the government is that if this process—the ANTS process—cannot proceed then neither will the Ralph process, despite all the good reports that have been produced. That is of great concern to the business community. We see the Ralph process as very, very important and we look forward to—with the report being released apparently today—analysing the report, debating it to the level required and moving forward to change. To think that the whole thing might in fact be stillborn is of great concern. The government has made it clear that this process needs to be proceeded before that process can move to its conclusions.

Senator HARRADINE —Has it?

Mr Harrison —I thought it did, as I understood it. I keep looking around for support but, yes, I am reflecting on what the Treasurer has said in a number of public statements about that. In fact, when the Ralph committee appeared in Adelaide in December that very point was made by the chairman: John Ralph said, in answer to a question that was asked, that it

was his clear understanding that if this package did not go forward—if the ANTS process did not move quickly to a conclusion—the very basis upon which his review had been established would be undermined to the point where it could not continue.

That is not to say that you cannot still make important changes to fringe benefits tax and capital gains tax. The revenue neutrality assumptions underpinning the Ralph review were framed on the basis of implementation of the ANTS package. That is what John Ralph said in response to a question from us.

Senator HARRADINE —Do you think it is reasonable or unreasonable for people to want to know what both packages mean? You see the business taxation processes that the Ralph committee looked at are already in the ANTS package. It also includes the treatment of trust entities. You would have a lot of members who would run their businesses as a family trust, wouldn't you?

Mr Harrison —It is very prevalent in the small business sector.

Mr Browne —That is almost certainly the case.

Senator HARRADINE —That is going to have an enormous effect on small business, is it not? Shouldn't we know what is going to happen there before we go ahead? Obviously the government has the right to bring forward packages at any time it likes.

Mr Browne —Just on that point, it seems to me, in the discussion that we are hearing from small business, that the taxing of trusts—whilst it is clearly extremely relevant in the planning process—does not seem to be the issue that is absolutely front of mind in the business community. Certainly within the groups that I am associated with that is not the key front of mind issue. That may reflect your comment, Senator, that it is not fully articulated yet, but it may also be that there is a perception that, as part of the overall, it is extremely important that we move forward on the process.

ACTING CHAIR —Mr Harrison, can I get some clarification. When you talk about the timely introduction of the government's package, I presume you are thinking June 30 or prior to June 30 and not a lengthier time?

Mr Harrison —Yes. We understand there are some political imperatives relating to June 30. We would like to see the issue resolved as quickly as possible. As I mentioned, yesterday would have been a good time for us. We could then move on to the important issues in the Ralph review with a sense of certainty in terms of the framework within which we understand the Ralph review to have been conducted. We are clear that we would like this matter to be resolved appropriately but with much haste.

ACTING CHAIR —Senator Conroy raised the question with you about whether the tax system is broken. It might be some consolation for you to know that the Labor Party is the only political party that does not believe the tax system is broken. In the report that was put down last Thursday, both Democrats senators and government senators agreed that the current system was broken and that in fact tax reform was necessary.

Senator CONROY —They probably would not have spent the weekend reading the reports.

ACTING CHAIR —Senator Conroy, you were heard in silence, which was quite an effort, I can tell you. I ask you to be silent. In fact, the system is broken. I know Senator Gibson has a question about the percentage of revenue from indirect tax that comes later, but he will ask that. He also talks about a 0.2 per cent real GDP growth when in our report, which you would not have had a chance to read, and in the Democrats' additional report, Professor Dixon's modelling quotes a figure of 0.15 to 0.21. Econtech says that there is a real GDP positive effect of 1.8 per cent. David Johnson from the Melbourne Institute talks about a 1.7 per cent positive growth and Access Economics—

Senator CONROY —Over 10 years—divide by 10!

ACTING CHAIR —Order, Senator Conroy! And Access Economics talks about plus 2.5 per cent. He says that 0.2 per cent is just a mere $600 million—which Senator Conroy would probably leave behind.

Senator SHERRY —Sixty-five cents a week.

ACTING CHAIR —So the fact that some of the things he has said about the tax system not being broken are the results of only one set of economic modelling that we have had done.

Mr Harrison —The issue the models will find very hard to pick up is business investment intentions. We are seeing very important decisions being taken by businessmen as to where they invest their next investment dollar. It is not always in this country. We are trying to attract international investment into this country and our tax system is one of the determinants that those who make those investments will look very seriously at. That will not be captured in modelling.

It follows on, of course, from the recent inquiries by the Industry Commission and others into aspects relating to the auto industry and the textile, clothing and footwear industry, and the tax system sits very much in those baskets. I have not had a chance to look at the 65c per week that Senator Sherry tells us about, but I cannot accept from my own experience and the information that comes constantly to us from our members—the business community; the people making investment decisions—that the impact of a better tax system in our country will not be more pronounced than that.

Senator HARRADINE —What effect will the 36 per cent dividend toll charge have on capital coming into this country?

Mr Harrison —I have not had a chance to analyse that. I am not quite sure of the context of the question.

ACTING CHAIR —In your report you mention the effect on South Australia, which is very important because of its manufacturing base. Could you expand on that?

Mr Harrison —Wholesale sales tax is a tax that impacts very much on goods. South Australia has a strong manufacturing base. Manufacturing is more important to our state than it is to any other state. Victoria is a much bigger manufacturing state, of course, but in terms of percentages we have a stronger reliance on manufacturing. We think the abolition of wholesale sales tax is a major advantage for manufacturing in this country. To that extent we believe it will be very good for South Australia. South Australian manufacturing industry is dominated by the automotive industry—vehicle parts and finished product. They are operating increasingly in global marketplaces. The penetration of imported vehicles is rising all the time. We have to take a view that we could see things go the wrong way pretty dramatically in some key sectors of our economy if we do not do everything we can to make the circumstances more competitive. A review of the tax process and the abolition of wholesale sales tax is a very important part of that.

In our own submissions we argue, as I said earlier, for the abolition of payroll tax, which we put in the same category. Indeed, there has been some research which indicates that the abolition of payroll tax would be at least as favourable as the abolition of wholesale sales tax. If we can get rid of those two taxes, which is our clear objective, it would be a lot better for manufacturing in this country, and if we make it better for manufacturing in this country we are making it better for all Australians. It will take some of the pressure off our external trade balance, our exchange rate and job creation. The dollar moves in response to commodity prices. The evidence and history are clear on that.

Senator GIBSON —On page 34 of the Labor Party Senate report of last week it says that the tax system is not broken. Yet I may quote from the Democrats' report on page 71 with regard to the indirect tax base decline—again quoting basically from the budget papers—showing that Commonwealth indirect taxes have gone down steadily from 7.15 per cent of GDP in 1987-88 to 5.72 per cent in this current financial year. The forward projections for the next three years are that, without any change, they will go down to 5.5 per cent. I might add that 5.72 per cent for this year includes the increases that the Labor Party brought about in 1993.

Senator Conroy interjecting —

CHAIR —Order!

Senator GIBSON —Thank you. The evidence is incontrovertible that the indirect tax take is in fact going down.

Senator CONROY —Absolute rubbish!

ACTING CHAIR —Order!

Senator GIBSON —What comments are you getting from your businesses about this indirect tax take?

Senator CONROY —They enjoyed the lower tariffs. They were very vocal on that.

ACTING CHAIR —Order! Senator Conroy, if you cannot help yourself, please leave the room.

Senator CONROY —Have you tried to chair impartially?

Mr Harrison —We have not engaged in serious debate within the employers chamber on the declining significance of indirect taxes. We accept the expert advice that has been given to our national bodies, in which the employers chamber participates, that the indirect tax system is under stress and for issues of sustainability of revenue in the future we do need to make a change. I recall very clearly that that was one of the agreements of all the participants at the tax summit in Canberra in 1996. The ACOSS people and the ACCI people—and there were 200 of us in total at that forum—

Senator CONROY —I wrote and asked to attend, but was excluded.

Mr Harrison —I do not want to comment on that.

Senator CONROY —Deliberately.

ACTING CHAIR —You can see why he was excluded, Mr Harrison.

Mr Harrison —There were 200 at that forum and it was widely accepted—I believe unanimously—that the sustainability of the tax system as it is currently structured was at great risk. That came to us from the ACOSS people. They were therefore strongly of the view that wholesale sales tax had to go.

Senator GIBSON —I would like to change to the GST and whether food should be included. You made it quite clear to us in your submission as to where your chamber stands. Do you get much evidence coming to your office from businesses concerning problems with the complexity of the wholesale sales tax system?

Mr Browne —I am not sure whether Ian's organisation gets those questions directly because in many instances they are directed to the accounting profession. That is the area that I am involved in.

Senator MURRAY —Just for clarification—Ian's organisation?

Mr Browne —In my capacity as a member of the Business Council I am here supporting Ian, but in my working environment as a professional accountant it is absolutely clear that the indirect tax area does give rise to significant questions in dealing with day-to-day business activity.

Mr Harrison —I can also mention that we offer a hotline service to our members on wholesale sales tax. Years back we handled them in-house but we now send those out directly to the profession. It is a service that we have offered for four years now and it is in constant demand. So my answer is, certainly, yes. I do not know the detail of wholesale sales tax to be able to give advice—Michael and his professional colleagues do that—but it is an area of great disputation.

Senator GIBSON —Given that, I assume that one reason you do not want food exempted from the GST in a new system is to keep it as simple as possible.

Mr Harrison —Absolutely. It is difficult to understand why we would design a new tax system that carried some of the inconsistencies and some of the very litigious aspects of the previous system. As I answered to a question a while ago, the tax summit, which was an expert group consisting of the two broad areas, unanimously agreed that wholesale sales tax had to go for those very same reasons. To think that we might reintroduce that level of complexity and uncertainty in a new system would be to nobody's credit.

Senator MURRAY —Was I right earlier in establishing that you had not read any of the documentation which argues the case for why food should be excluded? That list of documents I outlined included two which argue the case.

Mr Harrison —No, I said that we have read those documents. The fact that I personally may not have read every bit of all those documents is not the issue here. I am here in a representative capacity. The views that I am expressing are those of the representative body. Within that body those documents have been analysed very much, and we are strongly of the view that food should not be exempted from the GST.

CHAIR —Thank you, Mr Harrison and Mr Browne, for appearing before the inquiry today.

Proceedings suspended from 2.40 p.m. to 2.51 p.m.