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Neil Mitchell, 3AW, Monday 16 February 1998, 8.30am: transcript of radio interview [Tax reform; Indonesia; wages; AFL Grand Final]

MITCHELL: ... The Constitutional Convention is out of the way, now some of the real business, in a sense the real business which touches your lives. The Treasurer Mr Peter Costello came out of the closet, and declared he was for change, for the Republic, and now for change for tax too. The GST would be certain under a re-elected conservative Government. Mr Costello, good morning.

TREASURER: Good morning Neil.

MITCHELL: Which figure is the most likely for a GST?

TREASURER: Well we're not talking figures at the moment. Yesterday I launched a campaign to try and inform Australians about the nature of the current tax system because there are so many people that don't understand they're already paying tax on household items at 12, 22, 32 per cent. And this is really a campaign of information so that people know what the current system is. They know why it's not working and so they understand the need for change.

MITCHELL: Would you be then, under a reworked tax system, be removing those taxes, those sort of sales taxes?

TREASURER: Oh that's right. Look at the moment in Australia we've got sales tax rates of 12, 22, 32, 37, 41 and 45 per cent.

MITCHELL: OK so you remove those, what else would you remove, petrol excise?

TREASURER: And the first point about this is that it is complex, there are five rates, it's unwieldy, it's on a narrow base. The important thing that we should do is we should widen the base and simplify it. That's my first point. My second point is this in relation to income tax. By the year 2000 the average earner in Australia is going to pay $1 in 2 in tax. That means every time you do some overtime, half of it is going to go to the tax man. Or if you get a promotion, half of it's going to go.

MITCHELL: Or if you don't change the tax rate ...

TREASURER: And I'm saying we have to change those tax rates because it's just not fair for average earners, I'm not talking about high income earners, I'm talking about average earners around about $38,000 who will be paying $1 in 2 to the tax man. We've got to do something about that. So what I'm saying is look, when you understand how unfair the current Australian taxation system is, you understand that we need to change it. We need to simplify indirect tax and we need to get income tax rates down.

MITCHELL: What about petrol excise, will you take that off?

TREASURER: Well it's one of the things that we've looked at over the years and we're certainly taking submissions in relation to that at the moment.

MITCHELL: Because I look at the things you're talking about, which is obviously a very dramatic change, and to do that you're gong to need a very broad based consumption tax, presumably on

things like food, on health, on education, on power, that sort of thing?

TREASURER: Well you don't need it on all of those things.

MITCHELL: Well are there any no-go areas?

TREASURER: Well, look there are always areas where you take public advice. But the point I'm making at the moment is this, that the broader the base, the lower the rate. At the moment the reason we have rates like 22, 32, 37, 41, 45, we have rates that high because we are taxing a narrow range of goods. Now what is wrong with that? What's wrong with that is this, that business spends an incredible amount of time in court cases going through classifications, because if you can get into one classification through 12, get into another area at 32, if you get into another area at 47, and there's all this energy which is expended on classifications, legal challenges. It would be much simpler if it was broad based and at a lower rate. And what's more it's much fairer. Can I explain why. It's fairer because there are so many people today that escape the tax net.

MITCHELL: ... [inaudible] broad based and at a lower rate. When you say broad based you would cover as much as you felt the public would wear.

TREASURER: Yes, basically we would be punting for a broad base. We are still taking submissions from the public on how broad the base will be. But I just make the point the broader the base the lower the rate.

MITCHELL: But you would have an idea in your own mind obviously ...

TREASURER: Oh, of course.

MITCHELL: ... of areas that would be politically difficult.

TREASURER: Of course I do.

MITCHELL: Politically and morally difficult.

TREASURER: Yes of course.

MITCHELL: ... [inaudible].

TREASURER: Well, of course I've got an idea in my own mind, but Neil I'm not announcing the answer at this point. We'll be announcing the answer before the last [should be next] election. What I'm trying to do is detail the problem at the moment, and the problem is that the tax system is unfair and I want people to understand why it's unfair because until they understand how it's unfair and why it's unfair we can't fully explain how to improve it.

MITCHELL: I think most people would have a fair idea that it's wrong, they might not know the detail but I think most people feel the tax system is wrong because of the level of income tax they pay and that's why the book is so valuable ... other people .... But what about the figure? 10 per cent seems to have popular currency at the moment. Do you think that that is the sort of figure we could be looking at?

TREASURER: Well, as I said I'm not putting any figures on it at the moment because we're still taking discussions on that. I see some people bandy figures around like that. But, look ...

MITCHELL: Would you have an upper limit?

TREASURER: Well, my point is this, the broader the base the lower the rate.

MITCHELL: And you would rather see a broad base with a low rate than a narrow base and a high one.

TREASURER: I think it would be a better design. Because a narrow base and a high rate is what we've got at the moment. What we've got at the moment is a narrow base. We've got a tax system that was introduced in the 1930s on a narrow range which has lead some rates to go as high as 32 and beyond. If we can broaden the base we can bring down the rate. And, what's more, we can secure sufficient taxation for the hospitals and the schools and the age pensions and all of those things that people in need in our society, so desperately need, into the next century. Now, I want to make the point though that one of the reasons for re-weighting tax to the spending part is that you pick up a lot of people that currently don't pay any tax at all. And the truth of the matter is in our society if someone's not paying their fair share, someone else has got to make it up. And there are too many people that are just dodging the tax system at the moment. We need to pick them up.

MITCHELL: Will the bottom lines change under your system? Will you in fact bring in any more tax ...?

TREASURER: Oh no, no, no. The one fundamental cornerstone of tax reform is that, overall, the amount of tax raised in Australia will be the same or less. We are not looking for more tax because this year we can balance our budget. If we balance our budget we don't need any more tax, we'll have filled in that Beazley 10 billion hole. So we're not doing this because we need more money. Far from it. We're doing it because we want to make the tax system fairer.

MITCHELL: Will nobody suffer under ....?

TREASURER: Well it's my aim to make sure that it's re-weighted in such a way that the poor are protected, middle income earners are given more incentive. And the people who will suffer, yes there will be some, it's the people who are in the black economy and not paying their fair share at the moment. Yes there will be people.

MITCHELL: What about people who aren't in the black economy but are into legitimate forms of reducing tax. Surely it's going to affect them as well. It's the high income earners who are using legitimate ways to reduce their tax.

TREASURER: Well, you know you always get into this argument as to what's legitimate and what's not. Whenever we find a scheme which we think goes to the margin we close it down. There was a scheme going around a year or two ago with RD syndicates. It was in the legislation. People could say oh that was legitimate, we were putting money into these syndicates and it had the result of making us not liable for tax. I didn't think that was fair and we closed it down. Now legitimate business enterprises, yes, that's one thing. But where they go to the margin and they get an unfair tax advantage which the average wage and salary earner can't access I don't think that is fair.

MITCHELL: Do you think that top marginal rate will change in terms of the rate rather than where it cuts in?

TREASURER: Oh, well, I would hope so yes. Look, you know I want to do two things. One is I want to make sure average wage earners aren't paying the high rate that they're being threatened with which is $1 in 2. And if we can also bring rates down for everybody, that would be a good idea too. Because ...

MITCHELL: Even the top rates?

TREASURER: Well, all rates, yes. All rates.

MITCHELL: Which is what 47.

TREASURER: 47 plus the Medicare levy.

MITCHELL: So what would you look to bring it down to.

TREASURER: Well as I said look I'm not, good on you Neil, but I'm not announcing rates at the moment.

MITCHELL: But the aim is to bring all rates down?

TREASURER: Yes, because look it's not just that people are lacking incentive when, look, you know what it's like, somebody says do you want to do some overtime, and the worker thinks to themselves why would I? I've got to stay back after work, there might be $20 in it and I give $10 to the Government and I take $10 home. But that's bad enough. But when you actually factor into that that with extra income people start losing social security benefits like family allowances and child care, some people actually go backwards by earning more in our society. You know, what a joke. The more you earn at some income levels the less you take home.

MITCHELL: It's at least a couple of years off, isn't it? Because it would have to be put before an election and then you go to an election, whenever that is, and then it's got to be legislated.

COSTELLO: We've got to get it through the Parliament. And you see, we've got to get it through the Senate and you know, Labor is opposed to tax reform.

MITCHELL: ... inaudible ...

COSTELLO: Well Labor said, we will try and beat you in an election on this by opposing tax reform. But if you win it, we'll let you introduce it. Now why? Why? Think about it for a moment. Why? Because what they will then say is well you implement the system, we'll take the advantage of it even though we won't help you do it.

MITCHELL: Oh no, I think they're probably doing it, because they think people are still frightened of a GST ...

COSTELLO: You can get cheap votes it. And when they say, well, we'll try and get every vote we can, but if we still lose you put it in a place and we'll take the advantage of it. That's what they're saying.

MITCHELL: Will, under this Budget, will payroll tax go ...

COSTELLO: Well, that's one of the things that we've discussed with the States. We've had one meeting with all the State Premiers already and asked them their views on the tax system and we've got another meeting coming up in March to follow that up.

MITCHELL: How close to ready, do you think, is your package?

COSTELLO: It's not finished yet. We're still taking submissions. We've got a taskforce out there which, I think, has got 300 submissions from the public and is working through them. We've got another meeting to go with the Premiers, so it's getting there but it's not finished yet.

MITCHELL: ... an election July/August, would it be ready for that?

COSTELLO: Oh yes. It will be ready for an election. Oh yes. We've made it clear that we'll put our cards on the table before the election so that people have a chance to vote for tax reform and for fairness in the tax system but whilst we've got time, we'll just work on taking more and more public submissions. Can I say this is something we really want to involve the public in, because it's their tax system. We only run a tax system so we can pay hospitals, and aged pensions, defence and those sorts of things. Governments need money for those sorts of things but they ought to do it in the fairest possible way. It's the Australian people's tax system. They know that it's unfair. We've asked them for submissions on how to improve it.

MITCHELL: Meanwhile, ... inaudible ... we live with a system which is totally unfair. The black economy continues to drive people to evade or avoid tax.

COSTELLO: Yes, that's right. Quite right and if I could introduce legislation to enact a Tax Reform package, believe me I would, but we don't control the Senate. The Labor Party and the Democrats control the Senate and they're opposed tax reform. So we've got to take this case to the Australian public and we've got to get the Australian public to say they want tax reform.

MITCHELL: A big risk. We all know what happened last time.

COSTELLO: Oh yes it is, it is. A big risk but it's worth doing.

MITCHELL: Could it cost you power?

COSTELLO: Nothing that's really worth doing comes cost free. But I can say this as the Treasurer that administers the tax system that if we don't engage tax reform this system will break in a couple of years. It won't be producing fairness. It won't be producing the ability to sustain the hospital system or the aged care system. So if people can't embrace tax reform, I think the consequences, the down consequences will be far worse and that's the sole thing that's motivating me.

MITCHELL: ... inaudible ... if we don't embrace it you say the whole system will come unstuck.

COSTELLO: It will, it will. The current system will not last, it will last a year or two but it won't last the decade. It will come unstuck because it's on a narrow base. It's taxing ordinary earners one dollar in two and if you continue to do that, you're going to drive more and more people into the black economy. You're going to get less revenue and you're just not going to have the revenue to run a decent social security system. Oh, it won't last. This Australian taxation system which was put in place in the 1930s for a 1930s economy will not last and if we don't seize the opportunity to turn it around and reform it, the consequences will be worse.

MITCHELL: And what are those consequences? ... inaudible ...

COSTELLO: Well what happens is that you drive more and more people into the black economy. The Government's revenues will get less, your social services will start to crumble. You will lose your export competitiveness in overseas markets, your economy starts turning down and as your economy starts turning down, your revenues turn down with it. You see, we'll just gradually sink down in terms of living standards because we will be running the 1930s tax system in a world which is running into the 21 st century.

MITCHELL: Mr Costello, if I may, something else, what's happening, is Jakarta is looking very is looking very unsteady at the moment. ... inaudible ...

COSTELLO: Well in political terms it's a very serious situation. This is a full-blown financial problem in Indonesia. There's been a massive currency devaluation, as a consequence there are many businesses which are borrowing foreign currencies which are unable to service debt on borrowings. The economy is turing down, unemployment is rising and there is serious social problems.

MITCHELL: ... inaudible ... flow through ...

COSTELLO: Well Indonesia is not really one of our major trade destinations, but it will have, it will have a small


MITCHELL: But its stability ...

COSTELLO: But its stability is very important. This is one of our nearest neighbours. It's a very large country and we have an interest in the situation being stable in Indonesia. We actually, as part of the international community said that we would join a rescue which was led by the international community. The international community said it had a recommended program of action which would stabilise the financial system there in Indonesia and we are urging the Indonesian authorities to maintain those. That is their best chance to turn their economy and to stabilise the situation.

MITCHELL: Something else, the eight dollar pay rise, the wage case ...

COSTELLO: Yes, that's right.

MITCHELL: ... inaudible ...

COSTELLO: Because we think that that is a wage rise which would be consistent with growing employment. If we can grow our economy, the idea of growing our economy is so that people can get higher wages. That's what we want. You don't want wage increases outside sustainable levels, because if you get that, all that means is that firms put off workers. We've now got a situation where employment is growing, unemployment is coming down, inflation is low. If we can share some of the benefits with an eight dollar wage increase, that will help those in work and not penalise those out of work. So that's why we say, eight dollars is a good mark. But the warning is this, if wages rise, above that, if the decision is significantly above that, good if you're in work, it will be bad if you're out of work. It won't help job creation.

MITCHELL: ... inaudible ... got your own whiteboard ... The Australian reports today that the first payment of the Natural Heritage Trust ... inaudible.

COSTELLO: Well I saw that. I haven't actually studied the details but there is a rigorous program process in place to asses these environment projects. I haven't done a geographical analysis myself but I'm sure the responsible minister will do one, will announce a response during the course of the next day or so.

MITCHELL: Today you're old friend Michael Kroger seems to be backing you as a future leader. ... Peter Reith ... did you read that ...

COSTELLO: No, I haven't.

MITCHELL: Oh come on.

COSTELLO: It's very early in the morning actually Neil.

MITCHELL: Oh well you want to be Prime Minister one day?

COSTELLO: I think we've had these conversations before, I'm not sure I've ever said yes to that question.

MITCHELL: You want to keep the grand final at the MCG?

COSTELLO: Absolutely. I'm absolutely devoted to that. The MCG is the best football stadium in the country. It's the home of football. The grand final should go nowhere else and of course the MCG is the home ground of the Essendon Football Club.

MITCHELL: I knew we'd get that. Thank you very much for speaking to us.

COSTELLO: Okay, thanks very much Neil.