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Wednesday, 6 November 1985
Page: 1634

Senator PARER(11.25) —The Opposition welcomes the opportunity to debate the September statement by the Treasurer (Mr Keating) on taxation reform. Indeed, we commend the Government for placing taxation reform so firmly on the political agenda. We also acknowledge the difficulty of obtaining complete community support for meaningful taxation reform. Yet, the high hopes raised by this Government's taxation review have been dashed by its own incompetent handling of the whole issue. The result is a package that will not provide real reform, that does not solve the long term tax problems the Government set out to solve and that will not make our economy operate more efficiently. It is a package containing major elements that already have been rejected by the private sector and by many commentators aware of the economic subtleties involved. It is a package that the Treasurer did not want. It is the option that was delivered by consensus politics with the Australian Council of Trade Unions. It is a package that has been bargained for, not a package that has resulted from political will and a commitment to genuine reform.

The Treasurer's statement was entitled `Reform of the Australian Taxation System'. Senator Maguire called it a great reform. What a misnomer! The Trade Practices Commission should look at it in the context of false advertising. It was obviously designed to salvage some remnants of dignity from the fiasco called the `National Taxation Summit' and the Government's preferred option C. The result was accurately depicted by a Bulletin cartoon of the Treasurer going to the Summit to collect the Ten Commandments and coming back with one and a half tablets. To call it reform is to tax the most fertile of imaginations. The tax review process undertaken over the last 12 months tells us much about this can do Government. The impetus for reform came from the Opposition prior to the last election. We had a tax policy. The Government did not. The Government's response was very much a response on the run. The Prime Minister (Mr Hawke) hastily put together his nine principles of taxation reform and then revealed the depths of his political wisdom by calling for a summit on taxation. These two steps enabled the Government to get through the 1984 election campaign without a tax policy.

Following the election, the ongoing debate on tax reform almost destroyed the Government. It revealed the Australian Labor Party bitterly divided over a crucial Government decision, a Labor Party unable to agree on the most basic of principles and a Labor Party still without a tax policy. The Summit process also says a lot about this Government. It is a Government unable to make its own decisions. It is a Government run by vested interests, by deals and by compromise with the ACTU. The Summit process tipped executive government on its head. It demeaned ministerial responsibility and by-passed and ignored the proper role of Parliament. More fundamentally, it was a flawed way of reaching decisions. It just did not work. In effect, the Summit destroyed the Treasurer's will to reform the taxation system. The damaging debate had to be stopped. Hence the quick fix at the Canberra International Motor Inn with the ACTU bosses, behind Mr Keating's back.

The Summit had to be shown to be of some use. The research, the White Paper, the public debate, the seminars, the conferences, the factional meetings and the hard sell by the Treasurer all came to nothing. The Government's preferred option C, much to the Treasurer's embarrassment and obvious annoyance, was ditched. In its place a grab bag of measures, hastily conceived and internally contradictory, was presented to the electorate. Yet even this compromise did not and could not survive. The eventual outcome was the package announced in September.

So what can we say about the Government's approach to tax reform? The idea of tax reform came from the Opposition. The response was made hastily without consideration of the consequences. The debate nearly destroyed the Government. The Summit made a farce of government decision making. The public debate sapped the electorate's willingness to accept meaningful change in the taxation area. The wheeling and dealing merely confirmed the hold the ACTU has over the Government. The final package, the package not preferred by the Treasurer, has put real reform on the backburner and, at the same time, alienated significant groups in the community. We still do not know what is to be in the legislation. The Treasurer, perhaps understandably, lost his appetite for tax reform. `This is the end of it', he said. The real tragedy is that the greatest opportunity this country has had for tax reform for years has been botched by the Government and by the politics of consensus it employs. The irony, of course, is that in the process the Government has sacrificed its tenuous relationship with the business community, so carefully nurtured by the Prime Minister and the Treasurer.

So much for the Government's approach to tax reform and its methods of making decisions. What of its rationale for tax reform? The one thing that those at the Summit, the Government, the Opposition and most commentators agree upon is the need for reform to solve a set of problems in the current tax arrangements. These problems are: High marginal tax rates which act as disincentives to working, saving and investing, the complexity of current laws, a narrowing tax base, and an increasing reliance on direct income tax. Most would agree that all these aspects of the tax system are problems and, moreover, that they are the principal problems to be addressed by tax reform.

There would, of course, be disagreements as to which are the most pressing of these problems and, hence, which priorities should govern the reforms. The Government has attempted to explain its actions by talking about tax avoidance and evasion. We have seen the Minister for Finance (Senator Walsh) valiantly attempting to explain the Government's position by fighting his way out of it with a brown paper bag. As a tactic to divert people's attention away from the real cause of high taxation, the Government goes on about rorters and cheats and its strategy to broaden the tax base by reducing tax shelters in order to lower the marginal rates. It is patently obvious that neither the Treasurer nor the Minister for Finance believe this nonsense. It is a pity that they are not more honest and admit that their genuine efforts at tax reform were destroyed from within their own ranks and by the ACTU.

The Opposition does not accept that tax evasion and avoidance are the reasons for the existence of high marginal tax rates in this country. Nor is it clear that engaging in activities that avoid tax is confined to the few. In fact, high marginal tax rates are caused by excessive government spending. The high rates cause avoidance, and not the reverse. The ever-growing government sector, which now consumes nearly 45 per cent of our gross domestic product, can be financed only be further tax hikes-so much so that the average wage earner is now paying 150 per cent more income tax than he was 30 years ago. High marginal rates cutting in these days at quite ordinary levels of income, combined with inflation, force many honest people to minimise their tax, mainly by taking some of their income as non-taxable fringe benefits. To label these people as crooks and rorters, as the Treasurer and the Minister for Finance continually do, is not only insulting but also entirely misses the point. It says more about the obsession of senior Labor Ministers than it does about the relative fairness of our tax system or the reasons the system should be reformed.

This attitude on the part of the Government also conveniently ignores the fact that most working Australians receive some sort of fringe benefits. A recent survey by the Australian Bureau of Statistics revealed that in August 1983, 57.9 per cent of employees received one or more of the 15 benefits surveyed, which included entertainment allowances, superannuation, holiday expenses and some goods and services. By August 1984, that figure had grown to 60.3 per cent. It appears from evidence such as this that the rorters and cheats are spread fairly widely throughout the community. Of course, it is clearly the case that many activities which minimise tax have important econmomic benefits and spin-off consequences-for example, negative gearing, the ability to offset farm losses against non-farm income and the tax deductibility of business entertainment expenses. It is simply a myth that tax avoidance as defined by the Government is confined to a few cheats ripping off the system at the expense of the vast majority of honest, oppressed taxpayers. This is simply convenient rhetoric. The incentive to minimise tax resulted from high marginal rates biting at low levels of income, and its incidence reflects an overreliance on direct taxation and a belief on the part of many people that the government spending policies simply waste their money.

The increased reliance on income tax is borne out by the fact that 30 years ago the Commonwealth received 35.3 per cent of its revenue from income tax. By 1985 that figure had increased to 53 per cent. High marginal rates have also been brought about by the policy of successive governments not to tax income below the threshold, despite the fact that much of this income is earned by people who are in no sense needy. I refer, for example, to the spouses of high income earners who at present can get tax free pocket money to the tune of $4,595, to those who work part time or for only part of a year, and so on. It seems that those tax avoiders are moral whereas those receiving non-taxable fringe benefits are not.

Clearly, the Government has the problem around the wrong way. It refused even to discuss expenditure reductions, as opposed to reduced real spending increases, as a means of financing real tax cuts, which is what tax relief is all about. It sees tax avoidance as a cause rather than a result of high marginal tax rates. It is obsessed by so-called tax immorality yet, by not increasing indirect taxes, it refuses to acknowledge the importance of the cash economy as a means of avoiding tax; nor does it recognise the fact that the evasion schemes were wiped out by the previous coalition Government. The Government's much vaunted cuts in marginal rates will largely be financed by inflation. In the absence of tax indexation the slightly flatter rates being introduced by the Government will lose much of their appeal. Moreover, a better way to restore incentives both to work harder and to pay taxes is to raise the salary levels at which high rates bite rather than to drop the rates themselves by a few cents. Losing half of one's extra income in tax can hardly be said to restore an individual's incentive to work, save and invest, which is the fundamental economic reason for tax reform in the first place.

Not only was the Government's approach to tax reform disastrous and counter-productive but also its tax reform aims were misconceived. Base-broadening measures by means of the introduction of new taxes such as fringe benefits taxes, capital gains taxes, the quarantining of non-farm income and the abolition of negative gearing may close off some tax loopholes but they will not destroy tax avoidance and they will not enhance incentives. Base-broadening by means of more reliance on indirect taxes is much preferred. The Government has simply got it wrong. It knew what to do but it was unable to do it.

Let me turn to the package itself, to its timing and to its likely economic consequences. There has been a growth in the grocery list of fringe benefits. They grew quite openly, mainly in the pay as you earn sector, because of the level of taxation. In fact, many of the fringe benefits were brought about by the requirement by unions that any increases be in the non-taxable area. These fringe benefits were a response to an unacceptable level of personal taxation. With the Government's clampdown, it is the already over-burdened PAYE group which will pay, either directly or indirectly. In many areas, as anticipated by the Treasurer, the burden will shift over time from the employer to the employee. In other cases it will be passed on to the consumer. In the case of exporters, whose prices are fixed, it will be absorbed. Many of the non-cash fringe benefits fall into grey areas and will be virtually impossible to police without a further army of investigators, whose costs will significantly diminish the returns.

Senator Button —That is absolute rubbish. You should look at the procedures.

Senator PARER —It has already been agreed that another 700 people will be employed in the Australian Taxation Office to look at this.

Senator Button —Are you talking about fringe benefits? That is rubbish.

Senator PARER —I am talking about the new tax measures. Mining employees, because of the location of mine sites and, in some cases, the expected life of mines, have been granted special conditions. The companies have been told that they will be given a special housing concession. They will be taxed on 66 2/3 of the difference between the estimated commercial rent and what is paid by the employee. Additionally, companies will be taxed on the maintenance of these homes. This is a new tax on the mining industry, which is already overburdened with state charges and a very competitive world market. Governments which make these artificial impositions, whether they be Federal or State, do not seem to understand that every artificial cost reduces the level of economically recoverable reserves and thus reduces the lives of mines and employment.

The removal of legitimate promotion and entertainment expenses not only denies normal section 51 deductions but also has a negative multiplier effect on the economy. We all know that there were some who abused the system. However, in the overall scheme of things, that abuse was minor when compared with the impact on honest business. In my own business experience I disliked business lunches and dinners. I always looked upon them as being among the more tedious and demanding of chores. Be that as it may, they were and will always be an essential ingredient in trade, particularly in promoting exports from Australia. International buyers expect the courtesies they provide when Australians are in their countries. Such lunches produce a different atmosphere from that at the negotiating table and provide the opportunity for long term relationships to be established and cemented. While this expense is now denied to our front line traders, we are engaging in a massive Expo `88 promotion, funded by the taxpayer, to sell Australia to the world. Another inconsistency is that Ministers opposite have hosted or attended functions involved with the promotion of our exports. This they can still do, but if they attend a promotional function hosted by an Australian company, the considerable expense involved will no longer be deductible.

What of the small businessman who has an opening ceremony function, where he invites his local parliamentary representatives, customers, potential customers and the Press to his new premises, simply to promote his new business or location? He does it not because he wants to spend his hard earned money but because he wants to promote his business. This is specifically excluded as a tax deduction; yet it is an expense incurred in earning his assessable income. If he did not expect to get new business from both the contacts he makes and the press he hopes to receive he would not waste his money. On the other hand, he can do as much advertising as he likes, even on a sail on a yacht, and claim a deduction. Presumably, whatever is paid to an advertising agency will be allowable. It is obvious what will happen. There will be-I think it has already started-a proliferation of seminars and barter arrangements. As I said earlier, there are some-a minority-who abuse the system, but the majority is being quite incorrectly and unfairly penalised because of that minority. The hallmark of this Government seems to be government by and of the minority.

The capital gains tax is yet another broken promise. The words of the Prime Minister in the run up to the 1983 election have often been quoted. He said:

Let me say in words even my opponents will understand, there will be no capital gains tax.

At this stage the new tax has been sold as minor. Everyone knows, however, that over time, once there it will be a major impost. Even at this stage when we need more employment in the private sector, it will be damaging. Its introduction shows a complete lack of understanding of how small businesses start. Most start with leased equipment and borrowings for working capital. This measure means that any new business commencing from September 1985 will pay capital gains tax on 100 per cent of goodwill accumulated. Every small business starts with the hope of building something that will provide the risk taker with the possibility of success that surpasses the consumer price index. Many do not succeed. If the potential to succeed is taken away, what incentive is there for a person to forsake the security of a paid job? A capital gains tax does not affect big business. It is a direct frontal attack on small business.

The same sort of mentality applies to the limitation of non-farm income to farming losses of $15,000. This proposal will stop the growth which has occurred in the past of, for instance, avocado and macadamia nut plantations, which require massive injections of capital for many years before production. The improvement in efficiency and the modern techniques introduced over a whole range of rural products owe much to the ability to use non-farm income. That is why our rural producers are so cost competitive. The value of rural properties will fall because of this limitation, the capital gains tax, in the form it is today and the justifiable fears about how it will change in the future. Many Australian individuals and companies have invested overseas because of the forward-thinking policies of other governments, some of which have offered tax holidays to companies prepared to invest in new industries in their countries. This has been to the advantage of Australia, as well as to Third World countries.

The amendment to the foreign tax credit system will demolish those incentives and the returns to Australia in additional export income will be wiped off. I predict that under these new conditions Australia will become a branch officer country rather than a head office country. The imputation system for company tax appears to be a welcome measure. I must say that I have never understood why returns on borrowed money were an acceptable deduction, whereas returns to shareholders were taxed. Both are rewards for capital investment. Yet there are growing concerns in the business community and elsewhere that the imputation system may cause severe cash flow problems for many companies. Again, the implications have not been thought through. Amendments to the income tax scale are welcome. As anticipated, however, they contain an element of `now you see it, now you don't'. As I have said, fiscal drag or bracket creep, whereby inflation lifts the average wage earner into a higher tax bracket, will reduce any gains to less than the price of going to the pictures over a two-year period.

The identity card without a photograph is an attempt to stop the frauds which we all know were being perpetrated on the social security system by Labor supporters. Instead of attacking the cause, it is an attempt to tackle the disease. From what we know so far-and we do not know much-it is very doubtful whether the attempt will succeed. If it does not, it will have been a very expensive exercise, like so many others, where taxpayers' money has been wasted. So many of our social security payments are wasted. They are going to single mothers, for instance, when the fathers of the children are not contributing a cent to their maintenance. Without the fathers being accountable or having any responsibility, is it any wonder that a high level of other people's money is being paid to single parents?

The Treasurer in his opening remarks said that there was a time when Australia had a reasonably sane and credible taxation system. Apart from the total neglect of the linchpin of our society-the family unit-by this Government and the Whitlam Government, the taxation system has not really changed to any significant extent. It is government which has changed and has got itself into the duplication business of taking over roles which should be the responsibility of the States, in areas such as education, health, local government, environment, export controls on international trade and so on. It is government which has borrowed huge amounts of money and is thus bequeathing the next generation a debt to pay, as well as providing for itself.

This Government, with its redistributionist ideology, penalises success and rewards and encourages failure. Instead of promoting wealth, the Treasurer, emasculated by the insane Left, has bravely defended the final package and has proudly announced that we will be taxed only half our earnings. That is before a man with a family has made repayments on his home and car, purchased food and paid local government charges, school expenses and many other State government charges. The family man has had enough. He and his family are revolting because they see government as revolting. That is why, to quote the Treasurer, `tens of thousands of people have walked away from the system'. That is why, irrespective of measures taken, they will continue to do so. If the Government thinks that this so-called reform will change that, it really does have an ivory tower mentality. Since John Howard closed the major tax loopholes, the more sophisticated tax evasion industry has been dead, but the cash economy will continue to thrive.

By any measure this Government's tax package is a failure. The Government's bungled approach to the taxation review has postponed, probably for many years, the prospect of real and lasting reform. The Government has got the challenge of tax reform the wrong way around. It is obsessed with avoidance and it fails to see that government spending levels determine the level of taxation. The Government has not solved the problems that it set out to solve in response to pressure from the Opposition prior to the last election. The Government's final package will have a disastrous effect on the economy at a time when this country desperately needs more growth, investment and jobs. Clearly the agenda for tax reform is an ongoing one.