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Taxation- the real alternative



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TREASURER

EMBARGO

N O ./yf'

ADDRESS BY THE TREASURER, THE HON JOHN HOWARD, MR TO THE ST GEORGE FORUM AT 1.1 5 P.M, ON WEDNESDAY 3 SEPTEMBER 1930-AT THE ST GEORGE CLUB, HURSTVILLE

TAXATION ~ THE REAL ALTERNATIVE

I WELCOME THE OPPORTUNITY TO ADDRESS THIS LUNCHTIME

MEETING OF THE ST GEORGE FORUM AND IN DOING SO OF

BEING ABLE TO SPEAK IN SUPPORT OF MAURIE NEAL THE

MEMBER FOR ST GEORGE. .

MAURIE HAS MADE A VALUABLE CONTRIBUTION TO THE

PARLIAMENT IN THE TIME THAT HE HAS BEEN THERE AND

HAS DISPLAYED A LIVELY INTEREST IN A WIDE RANGE

OF AREAS INCLUDING DEFENCE AND FOREIGN AFFAIRS

AND SOCIAL WELFARE.

IN SPEAKING TO YOU TODAY, I WOULD LIKE TO SAY

SOMETHING ABOUT THE ISSUE OF TAXATION AND IN

PARTICULAR ABOUT THE DIFFERENCE IN ATTITUDE BETWEEN

THE GOVERNMENT AND THE OPPOSITION ON THE SIZE OF

GOVERNMENT AND THE LEVEL OF TAXATION, '

.AS TREASURER, I AM ACUTELY AWARE THAT THERE ARE ·

FEW SUBJECTS WHICH PROVOKE AS MUCH INTEREST

AS DOES TAXATION. '

c

IT IS AN ISSUE ON WHICH THERE IS L IT T L E CONSENSUS

EXCEPT FOR BROAD AGREEMENT THAT THE LESS TAX THE

BETTER! . .

SINCE THE BUDGET, MR HAYDEN HAS TRIED TO PORTRAY

THE LABOR PARTY AS A PARTY OF LOWER TAXATION.

THIS IS A DEMONSTRABLY FALSE CLAIM AND DISINTEGRATES

UNDER CLOSE EXAMINATION.

IT RESTS ON A COMPARISON OF TAXATION LEVELS, AS A

PROPORTION OF GROSS DOMESTIC PRODUCT, IN 1975/76 AND

1980/81, . ,

IN 1975/76, TOTAL BUDGET r e c e ip t s WERE EQUIVALENT TO

2 4 ,8 PER CENT OF GDP AND THIS YEAR THEY ARE EXPECTED

TO BE 26 ,7 PER CENT, .

THERE IS NO DISPUTE ABOUT THE FIGURES. THESE ARE

FIGURES WHICH THE GOVERNMENT HAS NOT SOUGHT TO HIDE AND

ARE, INDEED, AVAILABLE FROM ITS OWN BUDGET DOCUMENTS,

HOWEVER, SUCH A BALD COMPARISON IN NO WAY ESTABLISHES

THE CLAIM MADE BY MR HAYDEN. ' * ' '

FOR ONE THING, ΤΗ E COMPARISON IS AFFECTED BY THE

ABOLITION IN 1976 OF THE TAXATION CONCESSION FOR

DEPENDENT CHILDREN AND THE SUBSTITUTION OF AN

EXPANDED FAMILY ALLOWANCE SCHEME.

THIS CHANGE HAD THE EFFECT OF STATISTICALLY INCREASING

THE LEVEL OF TAXATION ALTHOUGH THE OVERALL VALUE OF

THE BENEFIT CONTAINED IN THE TAXATION CONCESSION '

CONTINUED TO BE PROVIDED THROUGH THE EXPENDITURE SIDE

OF THE BUDGET. .

IF AN ADJUSTMENT IS MADE TO TAKE ACCOUNT.OF T H IS ,

TOTAL RECEIPTS IN 1980/81 WOULD BE EQUIVALENT TO

ABOUT 26 .2 PER CENT OF GDP.

MOREOVER, SUCH COMPARISONS IGNORE A NUMBER OF

VERY SIG NIFICANT DEVELOPMENTS IN OUR TAXATION SYSTEM.

THE FIRST DEVELOPMENTS WHICH SHOULD BE RECALLED IS

THE S IM PLIFIC ATIO N OF THE PERSONAL.INCOME TAX RATE

SCALE WHICH TOOK EFFECT AT THE BEGINNING OF 1978,.

4 .

THAT REFORM REDUCED THE NUMBER OF STEPS IN THE . , .

RATE SCALE FROM SEVEN TO THREE. . * ' .

THERE IS NOW ONE STANDARD MARGINAL RATE OF TAXATION

FOR THE OVERWHELMING MAJORITY O F 'IN D IV ID U A L TAXPAYERS.

THIS MEANS THAT IN D IVID U ALS ARE NOT SO QUICKLY

PUSHED INTO HIGHER TAX BRACKETS THROUGH INCREASES IN

WAGES. IN THIS WAY, THE CHANGE HELPS TO PROTECT THE

AFTER-TAX VALUE OF EARNINGS, .

IT ALSO MEANS'THAT THERE IS NOW GREATER INCENTIVE

IN THE TAXATION SYSTEM TO EARN MORE INCOME. FOR

EXAMPLE, A PERSON EARNING AROUND AVERAGE WEEKLY

EARNINGS - SAY $13,000 - CAN EARN A FURTHER $4,240

BEFORE HAVING TO PAY A HIGHER MARGINAL RATE OF.TAX.

UNDER THE TAX ARRANGEMENTS WHICH WE INHERITED WHEN

WE CAME TO OFFICE AND WHICH APPLIED IN 1975/76 A

PERSON ON AVERAGE WEEKLY EARNINGS WOULD HAVE BEEN.

PAYING TAX AT A HIGHER MARGINAL RATE THAN NOW AND,

AFTER RECEIVING A SIMILAR PERCENTAGE INCREASE IN HIS

INCOME, WOULD HAVE BEEN PUSHED INTO A 45 PER CENT TAX

BRACKET, .

5 ,

WHAT SUCH COMPARISONS ALSO IGNORE IS THAT, AS A • »

RESULT OF RELATIVELY HIGH INFLATION AND SUBDUED

ECONOMIC GROWTH, THERE HAS BEEN A TENDENCY FOR THE

BURDEN OF TAXATION, MEASURED RELATIVE TO GDP, TO

RISE THROUGHOUT MOST OF THE INDUSTRIALISED WORLD

AS GOVERNMENTS HAVE TRIED TO M A IN T A IN , TO THE EXTENT

THEY ARE ABLE, THE VALUE OF THE SERVICES THEY PROVIDE

TO THE COMMUNITY,

AMONG THE OECD COUNTRIES, THERE HAS BEEN A GENERAL

UPWARD TREND DURING THE COURSE OF THE 1970$ AND

AUSTRALIA HAS LARGELY MIRRORED THIS TREND - THE

EXCEPTION BEING THE VERY LARGE JUMP IN THE TAX

BURDEN WHICH OCCURRED IN AUSTRALIA IN 1973,

IN 1973/74 COMMONWEALTH TAXATION REVENUE LEAPED

AHEAD BY 29. PER CENT, FOLLOWED BY A FURTHER

DRAMATIC RISE OF 30 PER CENT IN 1974/75.

THESE INCREASES IN TAXATION RECEIPTS MEANT THAT

BY THE END OF 1975-76 TAXATION WAS EQUIVALENT .

TO SOME 23 .2 PER CENT OF GDP COMPARED TO 19 .8

PER CENT IN 1972-73. .

6.

DURING THIS SAME PERIOD, BUDGET OUTLAYS ROSE SY

115 PER CENT TO A RECORD 3 0 .1 PER CENT OF GDP

IN 1975/76.

CONSEQUENTLY, THE BUDGET D E F IC IT ROSE TO

4 .9 PER CENT OF GDP FROM 1 .7 PER CENT IN

1972/73.

IF IN 1975-76, THE D E F IC IT HAD REPRESENTED

THE SAME PROPORTION OF GDP AS IT IS EXPECTED

to in 1980-81 t h a t is 1 .2 per c e n t - t o t a l

BUDGET RECEIPTS WOULD HAVE BEEN NEARLY 29 PER

CENT OF GDP - CLEARLY MUCH HIGHER THAN THEY ARE

NOW. '

THE FACT' IS THAT NOT ONLY DID THE FORMER

LABOR GOVERNMENT IRRESPONSIBLY INCREASE GOVERNMENT

EXPENDITURE BUT IT COMPOUNDED THAT IRRESPONSIBILITY

BY ALLOWING THE ADDITIONAL EXPENDITURE TO BE LARGELY

UNFUNDED BY TAXATION. .

IF HAVING DECIDED, HOWEVER IL L ADVISEDLY, TO INCREASE

EXPENDITURE AT SUCH A RATE IT HAD SOUGHT TO FUND

THE ADDITIONAL EXPENDITURE BY FURTHER TAXATION

RISES, OVERALL TAXATION LEVELS WHEN THE WHITLAM

GOVERNMENT LEFT OFFICE WOULD HAVE BEEN SIGNIFICANTLY

HIGHER THAN THEY WERE. .

7.

RATHER THAN FACE THE FULL TAXATION CONSEQUENCES

OF ITS PROLIFI GATE EXPENDITURE POLICIES THE

FORMER LABOR GOVERNMENT SIMPLY RAN HIGHER DEFICITS

AND PRINTED MONEY, -

IN OTHER WORDS, IT LEFT US WITH THE WORST OF

BOTH WORLDS,

IT NOT ONLY ADOPTED IRRESPONSIBLE EXPENDITURE

POLICIES BUT ALSO FUNDED THE ADDITIONAL

EXPENDITURE IN THE MOST IRRESPONSIBLE OF

FASHIONS, . ,

ALL THE EVIDENCE AVAILABLE AT PRESENT SUGGESTS

THAT A FUTURE LABOR GOVERNMENT UNDER MR HAYDEN

WOULD DO PRECISELY THE SAME THING. .

THE GOVERNMENT WOULD HAVE LIKED TO HAVE HAD .

LOWER TAXATION OVER THE LAST THREE OR FOUR ·

YEARS. HOWEVER, THIS COULD ONLY HAVE BEEN

ACHIEVED AT THE COST OF CONTINUING TO RUN

VERY HIGH BUDGET DEFICITS OF THE SORT

MOST NOW AGREE ARE TOTALLY INAPPROPRIATE .

FOR OUR ECONOMIC CONDITIONS, OR THROUGH FURTHER

REDUCTIONS IN EXPENDITURE. . . ■

δ.

SOME MAY SUGGEST THAT WE COULD CUT EXPENDITURE

FURTHER TO SUSTAIN LOWER LEVELS OF TAXATION, *

HOWEVER, GIVEN THE COMBINATION OF ECONOMIC.AND

PO LITIC AL REALITIES WHICH ALWAYS FACE A

GOVERNMENT, THIS GOVERNMENT'S RECORD IS AN

EXTREMELY GOOD ONE,

EVEN TAKING ACCOUNT OF THE INCREASE IN EXPENDITURE

WHICH OCCURRED THIS YEAR, OUTLAYS W ILL HAVE GROWN

IN REAL TERMS AT AN ANNUAL AVERAGE RATE OF ONLY

ABOUT 1 PER CENT UNDER THIS GOVERNMENT,

THIS COMPARES WITH AN AVERAGE RATE OF ABOUT .

10 PER CENT IN THE PREVIOUS THREE YEARS AND A '

RATE OF AROUND 4 ^ PER CENT IN THE. THREE YEARS

PRECEDING THAT, .

BY ANY STANDARD THIS IS AN EXTREMELY GOOD RECORD

AND ONE WHICH COULD NOT BE SURPASSED WITHOUT '

CUTTING VERY HEAVILY INTO AREAS OF EXPENDITURE

SUCH AS SOCIAL WELFARE, WHICH OCCUPIES SUCH A LARGE

PROPORTION OF TOTAL BUDGET OUTLAYS, OR DEFENCE,

WHICH IS CLEARLY OF SUCH HIGH PRIORITY THESE DAYS.

9 .

THE GOVERNMENT HAS AT ALL TIMES MAINTAINED A

RESPONSIBLE BUDGETARY APPROACH AND, OF COURSE,

SIG NIFIC AN TLY REDUCED THE S IZE OF THE.BUDGET

D E F IC IT ,

ANY OTHER COURSE WOULD HAVE HINDERED OUR

ECONOMIC DEVELOPMENT,

WE HAVE NOT TRIED TO HIDE T H IS , WE HAVE

AT ALL TIMES MADE IT CLEAR WHAT WE HAVE

BEEN TRYING TO DO. ·

ON THE OTHER HAND, MR HAYDEN AND THE OPPOSITION

HAVE BEEN FAR FROM CLEAR,

IF MR HAYDEN IS OBJECTING TO THE PRESENT LEVELS

OF TAXATION - AS ONE COULD ASSUME FROM HIS

COMMENTS - . H E MUST BE SAYING EITHER THAT WE

OUGHT TO CUT EXPENDITURE BACK FURTHER OR ·

THAT WE SHOULD BE.RUNNING A MUCH LARGER D E F IC IT

WITH ALL THE IMPLICATIONS THAT HAS FOR ECONOMIC

MANAGEMENT.

10.

BUT THE FACT OF THE MATTER IS THAT EVERY

BUDGET BROUGHT DOWN BY THE FRASER GOVERNMENT *

HAS BEEN ATTACKED BY THE OPPOSITION AS BEING

CONTRACTIONARY. .

THE OPPOSITION HAS MADE IT QUITE CLEAR TIME

AND TIME AGAIN THAT IT WOULD HAVE BEEN

SPENDING MUCH MORE THAN THIS GOVERNMENT

OVER THE LAST FIVE YEARS. '

THE OUTCOME OF TH IS WOULD UNDOUBTEDLY HAVE

BEEN EITHER A CONTINUATION OF- THE HIGH

D E F IC IT WHICH LABOR LEFT US IN 1975 OR

HIGHER TAXATION. THERE IS NO THIRD

ALTERNATIVE. .

THE REAL COMPARISON WE SHOULD BE MAKING IS

BETWEEN WHAT WOULD OCCUR IF A LABOR

GOVERNMENT WAS TO BE ELECTED LATER THIS

YEAR AND WHAT WOULD OCCUR IF THE FRASER

GOVERNMENT WAS TO BE RE-ELECTED. .

11.

THE RECORD AND THE WORDS OF THE LABOR PARTY SHOW

THAT IT IS INDISPUTABLY AND FUNDAMENTALLY A *.

PARTY OF BIG GOVERNMENT. IT IS A PARTY OF

HIGHER EXPENDITURE THAN THE FRASER GOVERNMENT.

IT IS A PARTY WHICH BELIEVES THAT THE GOVERNMENT

OUGHT TO BE SPENDING A LARGER PROPORTION OF

THE COMMUNITY'S RESOURCES THAN DOES THE PRESENT

GOVERNMENT. .

IT IS,THEREFORE, A PARTY OF HIGH TAXATION.

MR HAYDEN MADE TH IS ABUNDANTLY CLEAR IN HIS

F . E . CHAMBERLAIN LECTURE IN 1979. WHEN HE

SAID "THE CHALLENGE TO TRADITIONAL DEMOCRATIC

SOCIALISM HAS BEEN EXPRESSED IN A NUMBER OF

DEEPLY D IS P IR IT IN G DOCTRINES". HE WENT ON

TO IDENTIFY ONE OF THESE SO-CALLED "DEEPLY

D IS P IR IT IN G DOCTRINES":

- "ONE EXAMPLE,IS THE RAPID SPREAD

■ OF PHILOSOPHIES BASED ON LOWER .

TAXES AND SMALLER GOVERNMENT . . .

T H IS SORT OF APPROACH STRIKES

DIRECTLY AT THE CONVENTIONAL

. DEMOCRATIC SOCIALIST NOTION THAT

EQUALITY AND EQUITY CAN ONLY BE

ASSURED BY A STRONGER PUBLIC SECTOR."

I

/ . ' ·

LEST ANYONE THINKS THIS IS NOTHING MORE . .

THAN AN UNFORTUNATE ABERRATION ON THE PART '

OF MR HAYDEN, THE WORDS OF HIS COLLEAGUE,

MR W I L L IS , FROM HIS 1978 ADDRESS TO THE CONFERENCE

OF LABOR ECONOMISTS IN QUEENSLAND, ARE ALSO "

WORTH NOTING: " .

" i f lab o r does not g a in o f f i c e n e x t

ELECTION THEN BY 1983, WHEN WE

COULD NEXT HOPE TO GAIN OFFICE,

WE WOULD FACE A MAMMOTH TASK IN

REBUILDING THE PUBLIC SECTOR -

• AND· MAYBE AN EQUALLY MAMMOTH TASK

IN CONVINCING THE ELECTORATE THAT

IT SHOULD PAY A HIGHER LEVEL OF

TAX TO ENABLE US TO DO S O ."

THESE ARE THE MEN WHO W ILL PRESUMABLY SET LABOR'S

ECONOMIC PO LIC IES. THESE ARE THEIR WORDS ABOUT

WHAT THEY BELIEVE TO BE THE ROLE OF THE PUBLIC

SECTOR. .

ANY PRETENCE. WHICH THEY HAVE, FOR THE PURPOSES

OF THE COMING ELECTION·, TO BEING A PARTY OF LOWER

TAXATION WOULD QUICKLY DISAPPEAR ONCE THEY

WERE ELECTED AND ONCE FULL REIGN COULD BE GIVEN

TO THEIR CLEARLY ESPOUSED PHILOSOPHICAL POSITION.

12.

13.

THE GOVERNMENT HAS COSTED THE MAJOR POLICY

COMMITMENTS THAT THE OPPOSITION HAS MADE

TO DATE AT AROUND $2,000 M ILLIO N ON A FULL .

YEAR B ASIS.

UNLESS MR HAYDEN IS TO RUN A GREATLY INCREASED

BUDGET D E F IC IT THESE PROGRAMMES MUST BE

FUNDED THROUGH AN INCREASE IN TAXATION.

IF THIS ADDITIONAL EXPENDITURE WERE TO BE

FUNDED BY TAXATION, TOTAL BUDGET RECEIPTS

THIS YEAR WOULD AMOUNT TO OVER 28 PER CENT OF

GDP, COMPARED TO THE 2 6 .7 PER CENT WHICH

IS CURRENTLY EXPECTED.

TH IS IS THE CRUX OF THE COMPARISON THAT NEEDS

TO BE MADE,

THE OPPOSITION HAS SO FAR NOT PUT FORWARD .

ITS FULL TAXATION POLICY. ' .

ALL WE HAVE TO DATE ARE SCATTERED COMMENTS ON

WHAT IT MIGHT DO AS A. GOVERNMENT.

I T IS CLEAR THAT IT W ILL BE HAVING SOME

SORT OF RESOURCES TAX, ACCORDING TO

MR KEATING THIS COULD WELL RAISE MORE

FROM THE O IL COMPANIES THAN THE CRUDE

O IL LEVY WHICH THE GOVERNMENT HAS IN

PLACE.

PRESUMABLY MR HAYDEN'S COMMITMENT IN . '

1979 TO AN INCREASE IN PERSONAL TAX

RATES FOR THE TOP 2 PER CENT OF INCOME

EARNERS S T IL L STANDS. HE HAS NOT DENIED

I T / NOTWITHSTANDING THE FACT THAT IT

WOULD REQUIRE A MARGINAL RATE OF TAX

OF UP TO 80 CENTS IN THE DOLLAR.

THEN THERE IS THE PROPOSAL FOR A CAPITAL

GAINS TAX. THIS IS OBVIOUSLY A DANGEROUS

SUBJECT TO MENTION IN THE PERIOD LEADING

UP TO AN ELECTION. I ASSUME IT IS FOR

TH.IS REASON THAT A PREVIOUSLY FIRM .

PROPOSAL HAS NOW BEEN WATERED DOWN INTO

AN INQUIRY FOR THE PURPOSES OF THE ELECTION

CAMPAIGN.

15.

TH IS S ITS ODDLY WITH MR HAYDEN'S WORDS IN

MARCH 1979. IN REFERRING TO THIS TAX,

HE SAID ;

" . . . I SAY QUITE BLUNTLY THAT WE

. WON'T RETREAT FROM I T . "

TH IS DEBATE IS IMPORTANT BECAUSE IT IS

FUNDAMENTAL TO THE QUESTION .OF ECONOMIC

MANAGEMENT ™ TO THE S IZE OF THE BUDGET

D E F IC IT AND THE CONTROL OF IN FLATIO N .

BUDGET D E F IC IT S CONTRIBUTE TO MONEY SUPPLY

GROWTH AND FUEL· IN FLATIO N .

IF THE GOVERNMENT SEEKS TO BORROW TO

COVER T H E D E F IC IT IT W ILL BE COMPETING WITH

THE PRIVATE SECTOR FOR FUNDS - FUNDS IT

NEEDS' TO PARTICIPATE IN THE DEVELOPMENT

WHICH IS TO TAKE PLACE DURING THE 1980s.

16,

THIS IS WHY WE SOUGHT TO FURTHER "REDUCE THE ,

D E F IC IT IN THE BUDGET - AND THE REASON FOR

OUR FIRST DOMESTIC SURPLUS IN SEVEN YEARS,

AS I MADE CLEAR IN MY BUDGET SPEECH, LOWER

INFLATION REMAINS FUNDAMENTAL TO. GREATER

PRIVATE SECTOR GROWTH AND TO OUR

INTERNATIONAL COMPETITIVENESS,

UNLESS WE PERSIST IN OUR FIGHT AGAINST

IN FLA TIO N , OUR PULL ECONOMIC POTENTIAL

WILL NOT BE. REALISED. . .

THE COST OF THE ALTERNATIVE SET OF PROGRAMMES

PUT UP BY THE OPPOSITION ONLY SERVES TO

AGGRAVATE OUR INFLATIONARY PROBLEMS, '