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Tuesday, 5 November 1985
Page: 1544


Senator JESSOP(5.02) —I join this debate on the matter of urgency put forward by Senator Messner, namely:

The need of the Hawke Labor Government to abandon its proposed capital gains tax because of the destrutive effects on incentive.

Today in Australia we have to face the fact that incentives have not been applied in industry, commerce and generally throughout the community, which is evidenced by the tremendous problems we have with respect to our export trade. I think anything we can do to create incentives for people to work harder, to generate income, to provide employment opportunities, to increase export income and so on should be done. It is a way that the Government and Australia ought to be going. It is evidenced in the Budget with which we are dealing at the moment that we have to find of the order of $6.7 billion from the taxpayer to service the public debt. That tends to amplify the problem.

I have always thought that the present capital gains tax in Australia was reasonable. However, the introduction of further capital gains taxes certainly is not the right way to go. Certainly, it does not provide incentives for people to look after themselves. When we talk about a capital gains tax the left wing of the Australian Labort Party always looks at the rich people of the community. I am reminded in that respect of the days when death duties applied in South Australia under the Dunstan Government and federally. At that time the revenue derived from death duties came largely-97 per cent-from estates of $50,000 or less. We are not hitting the rich people with these taxation measures but are damaging the people about whom we are supposed to be most concerned; that is, average, frugal employees who want to put aside something for their retirement.

It is not beyond the capacity of many of these people-I know plenty of them who are doing so-to save money so that they can provide themselves with one or two home units with the objective that when they retire that will bring in additional income and tend to get them off the taxpayer's back as far as social welfare commitments are concerned. They not only do that but also provide themselves with beach houses that can be upgraded in time to provide for retirement, at which time they will wish to sell their original family home. Those sorts of things happen time and again amongst the ranks of the average small businessman and the average frugal employee who wish to look after themselves upon retirement. I suppose it is appropriate at this stage to quote from the Government's own White Paper on tax reform:

Australia and Canada are now the only two OECD countries which do not impose a general tax on wealth. However, Australia does raise a significant proportion of total revenue from State land taxes and local government rates and in that form raises a higher proportion from wealth than do most OECD countries.

I think that that, coming as it does from the Government's own White Paper, is worthy of note. It has been stated by members of the housing and real estate industries that a capital gains tax will act as a disincentive for investment and especially combined with the--


Senator Townley —It really will, yes.


Senator JESSOP —I am glad that Senator Townley agrees with that. He, as an astute Tasmanian senator, recognises the damage that that can do to the building industry and the real estate industry in his State. That is the attitude that we on this side of the chamber adopt-apart from the Australian Democrats, I might say, who seem to be intent on disregarding the importance of encouraging the average Australian employee to put something aside for his retirement. The average small business owner, farmer and frugal Australian employee work very hard to obtain a capital gain at the end of their careers to assist them in their retirement and, as I suggested before, to ease government expenditure in social welfare payments.

Senator Siddons talked about the United States of America. I have used this example before. It seems to me to be dramatic in its historical importance that when President Johnson, I think it was, wanted to have some additional funds to finance the Vietnam war he decided to increase the capital gains tax to 48 per cent. At that time the number of new companies floated on the stock market slumped from about 900 in 1969 to none in 1971. Not only that; it also had a dramatic effect on the encouragement of overseas capital inflow. History again shows that when President Johnson increased the capital gains tax to that degree to pour money into the Vietnam war the inflow of new capital dropped from $171m in 1969 to $97m in 1970 and eventually went down to $17m in 1976. That seems to me to be a very significant historical example of what happens when we increase capital gains taxes. That is what the Government is contemplating in Australia today. When the tax rate in America was cut back-I think it is about 27 per cent now-new venture capital increased from $39m in 1977 to more than $4,000m in 1983. In my opinion and that of other Opposition members Australia cannot afford any fall in investment and still hope to support the biggest spending government since World War II. That is the reason why we strenuously oppose this measure and suggest that there is an urgent need for the Hawke Government, if it is interested in reducing the social welfare bill and encouraging the average employee, the average frugal trade unionist in Australia, to review its decision on a capital gains tax and to abandon it in the context of this Budget.

There are many disadvantages in capital gains taxes apart from those that I have already mentioned. There is the lack of roll over provisions for plant and machinery for businesses and industry and there are adverse effects on employee participation schemes. There is the question of the increase in value of private houses. This is already happening. People are upgrading their homes to avoid capital gains taxes and this will adversely affect prospective first home buyers. The capital gains tax discourages the issue of ordinary shares in favour of preference shares and that distorts the pattern of company financing. For example, branch holdings will delay their issue of bonus shares. The tax will increase the trade in options rather than shares and it will affect retirement packages based on investment in shares or property. Also, there is no relief for the bunching effects of capital gains tax when an investor, who normally pays tax at a lower marginal rate, is suddenly taxed at the highest rate due to the sale of the investment property.

This measure is relatively insignificant in revenue raising terms. Capital gains tax applies only to assets purchased from September this year and although the estimated yield is a modest $25m, it falls far short of the expected revenue yield of $450m which was outlined in the draft White Paper. There are a number of disturbing effects which require further comment. The basic problem with such a universal tax is that it fails to draw any distinction between productive investment and speculative investment. In the Treasurer's statement this failure is reflected in the comment:

The current system of taxing capital gains violates horizontal equity . . . and undermines the progressivity of the tax system since the distribution of the ownership of capital is skewed in favour of higher income groups.

Interestingly this did not stop the Government from skewing the income tax scale changes in favour of higher income groups. It is abundantly clear to me that the promise made by the Prime Minister (Mr Hawke) during the election campaign, which was referred to by Senator Messner, that he would not introduce a capital gains tax has been broken because of the pressure exerted upon him by his left wing. I think he realised during the election campaign that the public was very concerned about the possibility of a capital gains tax being introduced, so after he was elected he abandoned his promise, his undertaking and the good faith which was professed to the electorate during the campaign. Having satisfied himself that the election was conveniently out of the road, he and the Treasurer (Mr Keating) acceded to the wishes of the left wing, ignored the pre-election promise and decided to introduce this quite unfair tax as it applies to the majority of small business people and smaller people in the community.

I can understand the attitude of any Government to big business deals on the share market when tremendous capital profits are made. I am opposed to that. There must be a way to deal with such people. They are in a position to get around this tax, but the small people whom Senator Cook and others are supposed to represent cannot do that. Small people must be encouraged to look after themselves. They must be provided with an incentive to look after their retirement. They must be encouraged to get off the backs of the taxpayers in relation to social security and the tremendous amount that that costs us at present. The Government must deal with the big boys in a far more effective way. It could do that in other respects. I have already told honourable senators what happened about death duties and how 90 per cent of the revenue from those came from estates of $50,000 or less. Small people are being hit all the time. I support Senator Messner's motion requesting the Government to abandon this tax and when we return to government in two years' time I will strongly support the repudiation of any capital gains tax if this Government is stupid enough to proceed with it.