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The Liberal Party's speculative gains tax

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(PRESS) ^release] NO. \oi





Thank you for the invitation to address you tonight.

A feature of the debate which has taken place over the past fortnight regarding the Opposition's so-called Economic Action Plan is the overwhelming consensus among commentators that in terms of economics what is proposed is no real plan

at all.

The Opposition package is devoid of economic content.

It is nothing more than a cynical and grossly irresponsible grab for votes.

Nowhere is that better illustrated than in the shameful performance of Opposition spokesmen in relation to the proposed child care tax rebate.

But as I said in an address to the MTIA three days ago, what this Liberal policy package is really about is busting the Australian consensus model - ripping to pieces the very thing which has lifted this country out of the pall of gloom which

covered everything before the Labor Government came to office in 1983.

Through the Accord with the ACTU the trade union movement has accepted the importance of profits in the economy - the need to restore the profit share to generate investment and employment.


And we have given the consensus model the structure of a decent tax system and the development of a world-class social wage with Medicare, housing assistance, childcare, the family allowance supplement, increases in dependant rebates, and the

provision of superannuation coverage for the whole workforce.

But the Liberals want to destroy these achievements.

The Liberals don't want consensus on wages.

They stand for enterprise bargaining - companies standing up against unions, fighting it out over the distribution of the cake while the cake itself disappears under the weight of confrontation.

But its not only in the wages area where the Liberals stand for confrontation.

It is also their social agenda.

They have quite explicitly said that they are determined to take money from the most disadvantaged groups in our society - the older, long-term unemployed and Aboriginals.

They have a commitment to destroy the social wage.

And what they take from these groups they want to give to the property speculators and share market tycoons.

They are saying that the billions of dollars accumulated in capital gains since September 1985, in the largest share market boom in our history and a very large property boom, will be given tax free to these people.

The Liberal Party membership is saying that it will take its profits tax free and drive the social wage into the ground at the same time.

Forget consensus.

The Liberals are about confrontation.

They are about social divisiveness - company against union; Australian against Australian.

At the heart of this program to break down the social cohesion which has facilitated the economic progress of the last six years is the Liberal proposal to replace the capital gains tax with what Mr Peacock calls a speculative gains tax.

That is what I want to focus on tonight.

The introduction of the capital gains tax in 1985 was a vital cog in our efforts to bring some respectability to a tax system which had been allowed to decay under 8 years of Coalition government.


In coming to office we were faced with a tax system which was strangling the productive capacity of the nation.

Investment decisions were focussing not on the underlying yield on investments, but rather on the composition of that yield as between tax free capital gains and assessable income.

The "clever" people were making a fortune advising others how to convert taxable income into tax free capital gains.

They were employed in the fastest growing industry in the nation.

And at the centre of this industry were the bottom-of-the-harbour schemes - a national disgrace.

But not only was the absence of the capital gains tax destroying our productive capacity, it had completely undermined the equity of the tax system.

It was grossly inequitable that with capital gains adding to purchasing power in the same way as ordinary income such gains nevertheless escaped tax altogether under the former Government.

With the distribution of the ownership of capital being heavily concentrated among the higher income groups, the absence of a capital gains tax severely weakened the progressivity of the tax system.

This was something we could not let continue.

Our decision to introduce a capital gains tax was certainly not novel by international standards.

Indeed, virtually all OECD countries have some form of capital gains tax.

The necessity for a tax on capital gains in any respectable income tax system had therefore been well recognised in the international arena.

The capital gains tax has yielded since its inception about $500 million directly and billions of dollars indirectly in shoring up the income tax base.

This year the capital gains tax will yield another $500 million directly.

And in ensuing years it will prove to be an increasingly important component of the tax system - further emphasising its contribution to equity - as assets acquired after 19 September 1985 are realised.

The Budget papers released in August set out details of capital gains tax revenues for the 1987-88 income year - the latest for which data are available.


The data reveal some interesting facts.

In the case of individual taxpayers, 62 per cent of capital gains tax collections came from taxpayers with taxable incomes in excess of $50,000.

Taxpayers with incomes above this level comprised a mere 3 per cent of the individual taxpaying population.

The concentration in the higher income groups of ownership of assets yielding capital gains is demonstrated by the fact that while this top 3 per cent of taxpayers pays 62 per cent of capital gains tax, it pays just 17 per cent of total personal income tax.

It is also instructive to note that the capital gains tax is paid by a small minority of taxpayers.

Indeed, less than 1 per cent of individual taxpayers paid capital gains tax in respect of the 1987-88 income year.

So much for Mr Peacock's absurd claim that the capital gains tax is paid by "countless millions" of taxpayers.

Mr Peacock's idea of equity is that such taxpayers - among the wealthiest in our community - should now have their liabilities reduced - or even eliminated entirely - at the expense of the other 99 per cent of the taxpaying community.

This is tax equity - Liberal style.

The Liberal proposal is to abolish the capital gains tax, not just in respect of assets acquired from the time a speculative gains tax may be introduced, but in fact in respect of all assets acquired after 19 September 1985.

They propose replacing the capital gains tax with a tax applying on a 5 year sliding scale.

Their own estimate is that this will mean forgoing 90 per cent of the annual revenue presently collected from the capital gains tax.

This is such a ridiculous idea, with no basis in tax principle and so inconsistent with common decency, that you really have to wonder why the Liberal Party is proposing it.

I don't believe the motivation behind this element of the package to be simply a cynical attempt to buy votes, though that is certainly true of the other elements of Mr Peacock's tax package.

The capital gains tax is not unpopular - not surprising when it affects such a small percentage of the population.

Neither is there wide-spread opposition to the principle of taxing capital gains.


Where is the Liberal Party finding any opposition to the existing capital gains tax?

No one else in public life can hear a cacophony of voices against it.

Mr Peacock himself has put up only very limp excuses for this policy.

He suggests that the abolition of the capital gains tax should help smaller businesses and encourage longer term investment and savings.

Whilst we all recognise the role and importance of small business in the economy it does not follow that assistance for small business requires dismantling the capital gains tax

In fact only a small proportion of capital gains tax proceeds come from small businesses.

Less than 2 1/2 per cent of corporate taxpayers paid any capital gains tax in respect of the 1987-88 income year and 68 per cent of capital gains tax came from the 1.4 per cent of companies with the highest taxable incomes.

That is, less than 1 1/2 per cent of companies - our biggest - paid more than 2/3 of the total capital gains tax payable by all companies.

Furthermore, the design of the capital gains tax provides a deliberate concession for small business in the form of a targetted goodwill exemption.

Removing the capital gains tax is clearly an awfully expensive and terribly inefficient way to help small business

And it should be seen against the enormous changes which this Government has secured to assist small business.

I refer to the company tax imputation system which reduces the tax on distributed company income from a maximum of 78 per cent under the Liberals to 47 per cent.

The abolition of Division 7 tax on excess retentions.

A cut in the company tax rate to 39 per cent, and cuts in personal marginal tax rates which have seen the top rate come down from 60 to 47 per cent, and the bottom rate from 30 per cent to 21 per cent.

An increase in the threshold for wholesale sales tax from $12,000 to $50,000, increasing by more than double the increase in the CPI.


Six years of sustained economic growth - with GDP growing by 4 per cent on average over the last six years compared with 2.4 per cent on average in the previous 10 years - and an economic policy which, with real unit labour costs down by

14.2 per cent since 1982/83 and the highest profit share in our history, has given us the biggest investment boom on record.

Investment has grown at an average annual rate of 10.8 per cent over the last five years compared with only 1.6 per cent over the previous five - and last year we had 16 per cent investment growth.

These are not gimmicks such as you will see the Liberal Party peddling.

They are outcomes which provide real benefits to small business.

And of course, they make an absolute mockery of Mr Peacock's claim that the capital gains tax has discouraged investment.

10.8 per cent annual investment growth following the introduction of the capital gains tax - 1.6 per cent in the five years prior to its introduction.

How can anybody argue with any credibility that the capital gains tax has discouraged investment?

Indeed, the effect of the capital gains tax has been to encourage a dramatic improvement in the quality of investment

This is equally if not more important than the total volume of activity taking place.

No longer does the prospect of capital gain feature overwhelmingly in investment strategies as it did in the past

Funds are being put to use in activities with the greatest underlying returns, not only for the investor but for the country as a whole.

What then about Mr Peacock’s claim that removal of the capital gains tax would increase savings in the economy?

In much the same way as he did in regard to his embarrassing flirtation with an inflation adjustment proposal, Mr Peacock has again failed to come to grips with the concept of national savings.

The Peacock proposal is not a formula for boosting national savings.

In fact it is a prescription for national dissaving.


It would reallocate private savings in a most counterproductive and inefficient fashion, and at the same time diminish public savings to the extent of the substantial revenue costs associated with removal of the capital gains


The likely implications of Mr Peacock's proposal are all too clear.

There would be a return to those types of investments offering a high proportion of capital gain.

Tax avoidance activity would once again be back in fashion.

Pitt and Collins Street farming would be back in vogue.

Investment properties would be all the go.

And at what cost?

Rural and residential property prices would skyrocket.

How would this be greeted by potential first home owners?

Even higher house prices and the certainty - under the Opposition's pitiful excuse for a macroeconomic policy strategy - of interest rates in the high 20s.

The structure of the proposed speculative gains tax itself would exacerbate this problem - encouraging a lock-in of investment for a five year period, thereby constraining supply and forcing up prices.

But first there would be a wave of asset sales following the introduction of a speculative gains tax as people holding assets with accrued capital gains sought to wash out those gains forever.

This rush of selling would have a disasterous impact on property and share markets.

These are the certain affects of this Liberal Party proposal.

But if it has such disasterous economic implications who, if anybody, would benefit from it?

A clue to that is in the peculiar retrospective design of the proposal.

As I noted earlier the Liberal Party proposal is to forget about any capital gains made in respect of assets acquired after 19 September 1985.

That is, suppose you acquired an asset in, say, September 1987.


Under this Liberal Party proposal, if they were to get into government at the next election, you would be able to dispose of that asset in September 1992 - just before the re-election of a Labor government - completely tax free.

Not only would you not pay any tax on gains which accrue during the life of the Coalition government, neither would tax be payable on gains which have already accrued to date.

So all those people who are sitting on accrued gains coming off the share market and property booms of recent years would be given a retrospective windfall gain if the Liberals were to have their way.

All that money going back to the property speculators and passive investment specialists.

For some individuals the retrospective windfall would be many millions of dollars - economy-wide, it is billions of dollars.

This is all money which Mr Peacock is apparently determined to see taken from the general taxpaying community and distributed among the Liberal constituency.

So much for Mr Peacock's suggestion that his tax policy is about handing money to struggling families.

A few dollars to families with children.

Billions of dollars to his Liberal Party mates.

So much for equity.

So much for fairness.

And in the light of that what can you say about the Federal President of the Liberal Party, who had the shameless gall to stand up last week and say that the Liberal tax policy is about taking from the bludgers and giving to the workers.

It is a wonder he didn't choke on his cavier getting that one out.

As I said at the outset, this Liberal policy starts with the premise that the disadvantaged deserve to be belted, while the relatively wealthy deserve a hand-out.

Such a proposition is totally abhorent to the Australian Labor Party.

If Mr Peacock has achieved anything with the launch of his so-called economic action plan a couple of weeks ago, it is to guarantee the total unity of the Labor Party.

A unity which will carry the Labor movement to certain victory at the next poll, whenever that may be.

CANBERRA 26 October 1989