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Transcript of joint press conference: Commonwealth Parliamentary Offices, Melbourne: 6 August 2008: launch of the Discussion Paper on Australia's Future Tax System; Malcolm Turnbull.

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DR KEN HENRY Secretary of the Treasury

JOINT PRESS CONFERENCE Commonwealth Parliamentary Offices, Melbourne

6 August 2008


SUBJECTS: Launch of the Discussion Paper on Australia's Future Tax System; Malcolm Turnbull

TREASURER: It’s a pleasure to be here with the Treasury Secretary, Ken Henry, this morning to launch this very important discussion paper - Australia’s Future Tax System; the Architecture of Australia’s tax and transfer system.

Now, what this is about is the long-term modernisation of our tax system to make it more competitive, and also to reward the hard work of many Australians. And we’re very serious about this Review. That’s why we have asked such quality people to conduct the Review. It’s a very important task.

I think this is perhaps the most comprehensive review of the tax system since the Second World War, and it’s one that we’re very serious about. What we want here is a full, frank and mature conversation with the Australian people about tax reform. It is long overdue, which is why we are commencing with this discussion paper.

Now, let me say something else at the outset. It will not be my task in this process, as we go through it, to be ruling things in and to be ruling things out. What we do want is a full, frank and mature conversation with the Australian people, because we are serious about the long-term modernisation of our tax and transfer payment system.

So much has changed in Australia since the war: globalisation, the rise of new information technologies, population ageing, climate change. All of these challenges demand a comprehensive review of our tax system. We do need a modern tax system for the 21st century.

Now, the Review is also part of our broader efforts to modernise the economy. We have the COAG process. We have the Carbon Pollution Reduction Scheme. These are all linked to the Tax Review because the Review is part and parcel of making our economy more productive

and particularly to encourage people into work in a tight labour market, and also to prepare for the ageing of our population.

We also have the task, through this Review, of looking at pension adequacy. This is also a very serious part of the Review, and there will be a further discussion paper coming in that area.

I think the Government has three goals through this Review: making our tax system more internationally competitive; rewarding hard work, particularly untangling those disincentives which do result from complex interactions between the tax system and the welfare system; and simplifying the system as well. It has become very, very complex. And that’s why we are commencing with a discussion paper prepared by the Treasury.

I’d like to stress this. This is the beginning of a conversation - it is not the end. We are determined to get these things right for the long-term, because the previous government had a rolled-gold opportunity, when money was rolling in and revenues were up, to reform the tax system - and they squibbed it.

Now, whatever comes out of this Review for families and businesses, they can rest assured that we will do what is economically responsible. There is no magic pudding when it comes to tax reform. But we will do what is economically responsible. We want taxes as low as possible, consistent with the provision of quality public services. And we will approach this task in an economically conservative and rigorous way.

I’d like to thank Ken and his team at the Treasury who prepared this paper, for all of their hard work and I’ll pass to Dr Henry.

SECRETARY: Well, thank you very much Treasurer, and it’s a pleasure to be here and it’s a pleasure to have the opportunity with you to launch this document.

As the Treasurer’s indicated, this is a Treasury report. It’s not a report of the Tax Review Panel, far less is it a report of the Government.

It sets out to detail the architecture of the present tax and transfer systems. Its purpose is to inform discussion. It makes no recommendations about the future direction of the tax and transfer systems in Australia. It presupposes no particular reform agenda.

It does, nevertheless, make some observation. Some of those observations will no doubt be controversial. Some groups in Australia will want to contest some of those observations. As the Treasurer said, this process is designed to encourage open discussion. So, it’s okay that some of the propositions, some of the observations contained in this report might be contested and debated by some groups. That’s part of having a real discussion. Many of the Tax Review Panel members look forward to participating in that discussion.

I want to say just a little about the structure of the report.

Section One sets the context of the Review. It identifies the challenges - economic, social and environmental - confronting Australia, and it talks about the role of the tax and transfer systems in responding to those challenges. It also makes the point, as the Treasurer has already made, that there is an opportunity for reform.

Section Two provides a rather detailed, almost encyclopaedic, overview of the tax-transfer systems operating in Australia at the level of the Australian Government, at the level of the States and Territories, and also local government. It provides a brief description of every significant tax and transfer in Australia.

You will find in Section Two a table of 110 pages describing the tax bases and the tax rates right through from income tax applying to resident individuals, which everybody is familiar with, to things as unusual as the Queen Bee levy. It’s quite a detailed table.

Section Two notes that there are at least 125 different taxes operating in Australia - 99 of those at the Australian Government level, 25 at the level of the States, and one, of course, at the local government level, that is local government rates. It notes that of those 125 different taxes, ten raise 90 per cent of the revenue.

The next ten sections of the report explore topics that are relevant to the terms of reference of the Tax Review Panel. I won’t go through in any detail, I’ll jut make a couple of observations about one or two of them.

Section Three goes to the economic structure of the tax and transfer system. It notes, not surprisingly, that all taxes and transfers have economic effects on incentives and on the distribution of income and wealth.

Section Four provides a history of the Australian tax and transfer systems.

Sections Five and Six provide international comparisons involving benchmarks against OECD standards, but also looking at the Australian system relative to our regional neighbours, both the tax system and the transfer system.

Section Seven deals with the personal tax transfer system. It notes that our tax and transfer systems are, by international standards, quite progressive, that they are highly redistributive, and as the Treasurer noted, they contain increasing levels of complexity.

Section Eight deals with the taxation of saving and investment.

Section Nine, the taxation of goods and services.

Section Ten deals with State taxes. It does, of course, point to pronounced vertical fiscal imbalance in the Australian federation, as you would that it would. It discusses the reliance of the States on transactions taxes and it points to differences among the States in tax rates, tax bases and tax exemptions applying to otherwise similar taxes.

Then Section Eleven devotes considerable space to a discussion of the complexity of the system. It notes that this is a growing problem in both the tax and transfer systems. It points out that we don’t know what this complexity is costing in economic, social and environmental terms, though we can be sure that the cost is very substantial.

And then Section Twelve deals with the impact on households of the Carbon Pollution Reduction Scheme and notes the relationship between that scheme and what the tax and transfer system might do to compensate households for the impact of that scheme.

Can I just conclude by identifying the next steps in this process. By the end of this month the Tax Review Panel will set out its plan for public consultation and it will identify key questions and key issues to focus those consultations.

There’s more information available on a website. You have the address of that website in the publication but it’s simply, quite straightforward.

And finally, I would note that one of the members of the Review Panel, Dr Harmer, will be releasing a companion paper on the transfer system as it affects seniors, the disabled and carers. That’ll be released shortly and there’ll be an opportunity for consultation on that document as well. Thank you, Treasurer.

TREASURER: Over to you.

JOURNALIST: Treasurer, this document up the very front, says by OECD standards Australia is low tax country, eighth lowest in the OECD, (inaudible) country, the third lowest. That actually seems pretty good. Are you saying that there’s scope to actually lift this up -

the OECD ratings there?

TREASURER: I’m not saying any of those things and that’s precisely the point I made at the beginning with my remarks. I am not in the business of ruling things in, ruling things out. There are observations that have been made in the Treasury paper which I think will be contested by some groups. And I can take you through the ones that I’m aware of already because, as you know, I’ve been in this debate all the time I’ve been on the frontbench in Parliament. And I’ve had a lot to say over a long period of time about much that is covered in this paper. I don’t necessarily find that everything in this paper gels with everything that I have said on tax in the past, and that is as it should be. This is a Treasury discussion paper which is out there to promote discussion. There’s a process we’re going to go through. So, I’m not going to be in the business of saying that I think it’s correct or not. What I did say at the beginning is that I think that international competitiveness is critical. I think anyone who was at the APEC meeting over the past couple of days will understand the context of that. If I needed any reinforcement in that view, I got it again at the APEC meeting. I think that making reward for effort, particularly in the context of our labour market, is more important, I’ve said a lot about that, but I don’t necessarily think that the Review gels with everything I’ve said in that area in the past.

So, what I’m saying is this is just a discussion paper. There will be groups of people out there who have long established views about particular areas of tax, where they may agree with the observations of the paper or they may not. But the whole process from here on in is they will be putting their views through the Henry committee.

JOURNALIST: But Mr Swan, can we just clear something up? I heard Dr Henry refer to the myriad of taxes and the Queen Bee levy, which I wasn’t aware of…

TREASURER: I thought you’d know all about that.

JOURNALIST: Can we just clarify. I mean, surely it is the Government’s intention, your intention, to develop a more efficient system, a more productive tax system, and that means fewer taxes. So the aim of the exercise, without ruling anything in or out, is to reduce the 99 taxes levied by the Commonwealth? That is surely a primary aim of this exercise?

TREASURER: The aim of the Review is to make the system simpler and to make it more efficient. But I’m not going to buy into the means by which we do that because that’s what the Review is about. Dr Henry may wish to comment on that but I’m not buying in or out about lesser or more. I can tell you what our objective is on tax - to have it as low as possible, consistent with the delivery of quality public services. I think we’ve seen at APEC in the last few days that it’s just extraordinary that as our region has exploded in growth, as we have become so much more part of a global economy, our system of federalism has not followed.

I gave a speech in Brisbane the other morning about federalism where I remarked that lecture notes that I was using 30 years ago on federalism would be just as accurate today. We have to have a seamless national economy to compete internationally. That means cleaning up the

mess in COAG. That’s why this Review is closely linked to COAG.

JOURNALIST: You’ve said you won’t rule anything in or anything out but you’ve already definitively ruled out any changes to the GST.

TREASURER: Yes, because they’re the terms of reference for the review and I make no apology, none whatsoever, for saying that we will not be moved on the base or the rate of the GST. That was a solemn commitment that we gave to the people at the last election and we are not moving on that. There’s plenty to do in tax reform. There’s plenty to do and that’s what this paper demonstrates.

JOURNALIST: Mr Swan, do you believe that it is possible to reform taxes without creating losers?

TREASURER: Look, there are swings and roundabouts in tax reform. Everybody knows that and it would be silly to say that there are not. But how we go about changing the system is what this Review is about.

JOURNALIST: Dr Henry, you said there were a few controversial parts of your discussion paper. Can you take us through what you see as being maybe the top two items that are likely (inaudible) controversy and discussion, as it were?

SECRETARY: No. I think my comment was really to the effect that although this document is descriptive, it does comment, it makes observations about particular features of the tax system just in its description, and no doubt some people will find some of the

observations a little uncomfortable. No doubt.

JOURNALIST: What are some of those observations?

SECRETARY: I don’t want to point to any particular ones. I think to do so would be in itself to make comment on the quality of other people’s arguments and I don’t want to choke off discussion.

The whole point of this document is to open up discussion. I think you’ll find that you’ll be writing about some of those observations yourself.

JOURNALIST: (inaudible) In terms of what you were talking about in Section Seven, the increasing complexity of the system at the same time as it (inaudible), is there a way of maintaining the good things about that progressive system without having the complexity (inaudible)?

SECRETARY: Well, certainly the Tax Review Panel will be looking at that sort of question. Obviously the Tax Review Panel will be.

JOURNALIST: (inaudible) said that the income comes from ten of the taxes. Would you say those ten are (inaudible) the most important to look for reform?

SECRETARY: No, I don’t think that necessarily follows. I’m not trying to be obscure here. I just don’t think that necessarily follows.

JOURNALIST: You said that the complexity of the tax system had an economic cost, substantial but unquantified. Should there be some work on quantifying that cost, and would it follow that reducing the number of taxes would in itself have an economic benefit and that may in fact put an argument for cutting the number of taxes?

SECRETARY: Well, as to the first part of the question, I think it would be very helpful to have some quantification of the impact - economic, social and environmental - of the complexity of the tax and transfer systems. Sure it would. And the Tax Review Panel will be considering whether it might not itself commission some work on that topic. We haven’t taken a decision on that matter but we have certainly discussed it.

As to the second part of the question, I don’t think it necessarily follows that reducing the number of taxes will automatically reduce the complexity. It may, but it doesn’t automatically follow, that’s for sure.

JOURNALIST: (inaudible)

TREASURER: No, not at all. What we have here is something that’s pretty rare in Australian politics. We’ve been prepared to say, here’s a discussion paper, here’s a process. People can air their views through this process and I’m not going to be out there saying yay or nay, or running down particularly individual points of view.

My points of view in a lot of areas are very well known and at various stages I will probably repeat them as we go through the discussions, but we just want to see a full and frank debate.

JOURNALIST: Treasurer, you’ve made it clear the GST’s not part of it, but at the time the GST was brought in there were other reforms that were meant to be accompanied with the GST. So, I guess at the edges of the GST debate back in 2000, there was some unresolved questions. That’s surely part of this process as well.

TREASURER: Sure, and that’s clear from the terms of reference.

JOURNALIST: Do the observations made in Section Twelve gel with the Government’s plan for emissions trading?

TREASURER: Well, I’d have to look at Section Twelve.

SECRETARY: As far as I’m aware they do.

TREASURER: Given that we’ve only got a Green Paper out there, I would think that is the case.

JOURNALIST: Dr Henry, in Section Five, the observation that you were doing pretty well by world standards on corporate tax rates and when it was reduced from 36 to 30 in 2000-2001, what happened in the last seven years that we’ve slipped down that ladder again? I mean, the rest of the world seems to view this as a much more important priority…

SECRETARY: The report certainly makes the observation that other countries have been cutting their corporate taxes over that period of time. It’s a difficult question to analyse. A lot of attention has been paid over recent years in Australia to the ratio of corporate tax collections to GDP and the Government has, in the Budget Papers, my recollection is the former government in Budget Papers did it as well, point to some of the risks in using that simple metric to make an assessment of what’s been happening to the corporate tax burden.

We have highly profitable companies in this country and we have a very high profit share, historically high profit share, and there are two reasons why that sort of comparison is difficult. Nevertheless as the report also notes, Australia does raise a relatively high proportion of its total tax revenue from taxes on capital. In fact among OECD countries as the report notes, we would have the highest proportion of our total tax revenue raised from tax on capital. That’s obviously broader than the company income tax but nevertheless includes the company income tax. The report just sets that out there as fact.

JOURNALIST: Dr Henry, how is that a function of the point of the cycle we’re in now, 17 years of continued growth, virtually nil losses for a lot of companies to carry forward. Is there a risk that by setting (inaudible)?

SECRETARY: I guess another way of putting that is that there could be a cyclical element in the profit share and there probably is a cyclical element in the profit share. The profit share of course has also being affected by strong growth in the terms of trade, not all of

which it would be sensible I think to regard as cyclical in the normal sense of cyclicality (inaudible).

JOURNALIST: Dr Henry, without prejudicing any outcomes of this Review, and putting aside the Queen Bee levy, are there glaring anomalies in the tax system that you can (inaudible) as a result of this particular stock take, and particularly on issues like FBT on leases where at a time when we’re trying to reduce carbon emissions, motorists, including your good self, presumably receive a tax benefit the further you drive (inaudible) in terms of climate change. Are those sorts of areas where you think there’s scope, potential to reform as part of this Tax Review?

SECRETARY: Look, I’ve found the Treasurer’s language in response to these sorts of questions quite sensible. Today is not the day to be ruling things in or out. This is, as the Treasurer said, the start of the process and this paper is just the first step, the very first step in the process, and it has been designed in order to get people asking precisely the sorts of questions that you’re asking.

JOURNALIST: We don’t have a world class system. It’s pretty clear from this that there’s (inaudible) cost of the myriad of taxes. You obviously, as the head of Treasury, want to drive a more efficient world (inaudible). That’s what this Review is all about.

SECRETARY: Sure, as the Treasurer said, that is one of the objectives of the Review.

JOURNALIST: How do you simplify a tax system without (inaudible)?

TREASURER: Well, I’m not going to buy into any of the ways we do that. There’s a myriad of opportunities out there to do all of those things, some of which I’ve attempted in the past to fix from Opposition. There are obvious things that can be fixed in the intersection between the tax system and the social welfare system. There are lots of these things out there, but I’m not going to buy into individual ones today.

JOURNALIST: Mr Swan, did your discussion of inflation earlier this year encourage banks to raise rates (inaudible)?

TREASURER: Well, it’s funny, you know, Mr Turnbull and the Liberals seem to think that by ignoring problems you make them go away. That’s their approach to the economy because there is no factor which is more responsible for the slowing of economic growth in our economy than the ten interest rate rises that occurred under the Liberal Party.

So, Mr Turnbull is not in a position to point the finger at others when it comes to the slowing of growth. Ten interest rate rises, eight of which occurred in the last three years have had a very substantial impact on economic growth and direct responsibility for that lies with Mr Costello, Mr Turnbull and all of those that sat round the Cabinet table and took the irresponsible decisions to spend like drunken sailors at the wrong time and took the

irresponsible decisions not to invest in the future of our productive capacity, particularly during the last three years. So they are in no position, no position to say that others have talked the economy down.

We inherited a 16-year high in inflation. That’s the legacy of the Liberal Party and on day one we put up our hand to accept responsibility for dealing with that and the Budget put in place the process for doing that.

Since that time we’ve had the oil shock, we’ve had a re-emergence of the impact of financial turbulence in world financial markets which has put further pressure upwards on borrowing costs for households and business.

That’s the situation this country faces at the moment and we’re dealing with it. But on the other side of the ledger we also must remember the underlying strengths of our economy.

We’ve got a $55 billion working families package out there where people are receiving tax relief. We got a strong surplus. We’ve got the highest commodity prices in over a generation. All of those things, along with the fact that we do have first class regulators, mean that in the situation in which we find ourselves globally we have some strengths working in our favour. Mr Turnbull and the Liberal Party ought to be honest about how and why growth is slowing, rather than playing this silly politics that they’re playing.

JOURNALIST: Mr Swan, there seems to be a timing problem between the cause of this review and requirement to get legislation into place for the climate change legislation next year in time for it to be passed by the end of next year. So, presumably you’re going to have to make decisions about how you’re going to be compensating the low income people before you’ve decided on how transfer payments, the tax and transfer payments should be reformed. (inaudible)

TREASURER: No, I don’t think that’s necessarily the case. The Committee has yet to detail their process of consultation from here on in. I might throw to Dr Henry just to talk a bit about that.

JOURNALIST: This does say report at the end of next year.

TREASURER: (inaudible) end of next year and there is a difference but I’ll throw to Dr Henry.

SECRETARY: As the Review Panel interprets its terms of reference, there is certainly scope for us to address particular issues on the way through and we expect to be doing that. So, that would mean that we would be providing the Government from time to time with the opportunity to take decisions on particular matters and not have to wait until the end of 2009 for the whole thing.

JOURNALIST: So just to clarify, Dr Henry, your expectation is that you will provide a report to the Government in relation to climate change well ahead of (inaudible)?

TREASURER: Well, can I just intervene there. We’ve already said that there’s going to be a report from the Committee on pensions, and the first discussion paper coming out on that is due in the near future. So, from the Government’s point of view we have always envisaged that we would be receiving progressive reports from the Committee. But the timing of that and how they go about all that, is up to Dr Henry and his Committee, and we’ve made that clear before.

JOURNALIST: Dr Henry, on the consultation, Ross Garnaut held town hall meetings in capital cities. Do you think that there is some scope for that and do you want to have an exchange of views on the tax system with the Australian people?

SECRETARY: Well, look, the Review Panel hasn’t concluded its views on the appropriate form of public consultation but that certainly is an option that we will be considering. I’m not going to rule that in or out either but the Review Panel will be having a discussion about that matter and several others as early as tomorrow.