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Economics Legislation Committee

GRUDNOFF, Mr Matt, Senior Economist, The Australia Institute

RICHARDSON, Mr David, Senior Research Fellow, The Australia Institute


CHAIR: Welcome. I invite you to make a brief opening statement should you wish to do so.

Mr Grudnoff : Thank you very much for inviting us to come here to give evidence today. The Australia Institute, over a long period of time, has taken a keen interest in taxation policy in Australia. Research undertaken by The Australia Institute on the proposed income tax cuts shows that, when the tax cuts are fully implemented in July 2024, the benefit will go overwhelmingly to high-income earners—62 per cent of the benefit will go to the top 20 per cent of taxpayers, while the bottom 30 per cent will only get seven per cent of the benefit. This is concerning at a time when inequality in Australia is growing. The World Bank and other distinguished economists around the world have warned that higher rates of inequality are associated with lower rates of economic growth. The government's focus should be on reducing inequality. Unfortunately, this income tax plan will make inequality worse, not better. Flattening the tax rates, as the income tax plan is designed to do, will reduce the progressive nature of our income tax system.

Not all of this tax plan is targeted just at high-income earners; the first stage of the plan will benefit low- and middle-income earners. Australia Institute research shows that in the first year of the tax plan, in 2018-19, low-income earners will receive 21 per cent of the benefit, middle-income earners will receive 70 per cent of the benefit and high-income earners will receive nine per cent of the benefit. The problem is that the benefits from the latter stages of the tax will overwhelmingly flow to high-income earners. These latter stages are also worth considerably more in dollar value than stage 1. Increasing the top threshold to $200,000 and removing the 37 per cent tax bracket will mainly benefit the top 20 per cent of tax payers. By 2024, 80 per cent of the benefit of that top end tax cut will go to the top 20 per cent and the remaining 20 per cent will go to the next 20 per cent of taxpayers. This means that the bottom 60 per cent of taxpayers will get no benefit at all. Because of this, we are recommending to the Senate that it split or amend the bill to remove those parts that flatten income tax by increasing the top threshold and removing the 37 per cent tax bracket.

These top end tax cuts come at a significant cost to the budget, a cost that will grow over time. Large tax cuts to high-income earners will reduce the budget's ability to generate income into the future. If the rosy predictions in the budget for things like wages growth do not come to pass, it is possible that the government will find itself with budget deficits into the future years—much as the income tax cuts during the noughties paid for by the temporary mining boom caused larger budget deficits after the mining boom faded.

The Australia Institute has done distributional analysis of the tax cuts by gender. When fully implemented, this tax plan will give twice as much in tax cuts to men as it does to women. This is because men are more likely than women to be high-income earners. If we look at just the top end of the tax cuts, the gender divide is even greater—70 per cent of the tax cuts will go to men and only 30 per cent will go to women.

These tax cuts represent a radical plan to change our income tax system. They will flatten the tax scales and reduce the progressive nature of the tax system. This is particularly unwise at a time when inequality is rising both in Australia and around the world. The government should be focused on reducing inequality. These top end tax cuts will take us in the wrong direction.

Mr Richardson : A lot of our submission goes to background considerations of things you should take account of in designing personal income tax scales. One of the major contributions in our submission is the results of some polling that The Australia Institute did. We think it is better to have a simple tax system so that we all understand it. But, when we asked people what their current marginal tax rate was, only 16.4 per cent of them could correctly identify that and only 5.6 per cent of them correctly identified what the tax rate would be if they moved into the next bracket. So it sounds nice in principle that we have a nice simple tax system that everyone understands but, by the look of it, we could design a perfectly fair system—which may look complicated but nobody understands anyway—so that we could go for principle rather than elegance.

CHAIR: Mr Grudnoff, in your opening statement you mentioned that inequality is growing in Australia and around the world. What data are you pointing to that indicates that that is the case?

Mr Grudnoff : The ABS survey of income and wealth calculates Gini coefficients. If you look at the long-run trend in those Gini coefficients, they have been increasing since about the early eighties. While there is some variation in the short term, the long-term trend is definitely increasing.

CHAIR: My understanding is that the Gini coefficient has actually shown no increase at all; in fact, there has been more like a stabilisation over recent years.

Mr Grudnoff : No. The long-term trend, as I said, has increased—

CHAIR: Since the 1980s.

Mr Grudnoff : Since the 1980s, yes. If you look at it over decades—

CHAIR: What has happened in the last five years, for instance?

Mr Grudnoff : The ABS data shows that it has still increased—but it does move about, around that long-term trend.

CHAIR: What about the last 10 years?

Mr Grudnoff : In the last 10 years it has definitely increased.

CHAIR: Just last Friday the Fair Work Commission noted that income inequality in Australia has stabilised for some period.

Mr Grudnoff : I'm not sure what data they are referring to. There is data from the HILDA survey, which shows a flatter Gini coefficient. But the HILDA survey wasn't designed to work out changes in equality like Gini coefficients. It is basically a longitudinal study: it started in 2000 and they have followed people over a long period of time. When people are young, their income and wealth starts out low. As they work through their life, their income and their wealth increases over time. If you follow the same people, it will actually show their wealth increasing. So the HILDA data isn't the best data to use for calculating inequality. The ABS data is the gold standard for this sort of thing. They produce the survey of income and housing, which is specifically designed to calculate this sort of stuff.

Mr Richardson : I remember seeing that from the Fair Work Commission. My understanding is that they were looking at income distribution among employees, which looks different from income distribution generally.

Senator HANSON-YOUNG: The income distribution among the population?

Mr Richardson : Yes.

CHAIR: Does The Australia Institute believe in 'setting a speed limit' on taxes?

Mr Grudnoff : No. Basically, how much we spend is a democratic question. It is a question for parliament. The sorts of services we want is for people to advocate for and for our elected representatives to decide. And then, having determined what sorts of services we want our government to provide, the government should raise taxes to fund those services. The idea that we should think about how much we should tax is putting the cart before the horse.

CHAIR: You don't think tax relief should be a priority for government? Is that The Australia Institute's position?

Mr Grudnoff : No. At times, tax relief might be perfectly reasonable. But that would be in a situation where we were collecting too much taxation.

CHAIR: Do you believe Australia should be rewarded for the hard work that they do and keep more of their own money in their own pockets? Is that The Australia Institute position?

Mr Grudnoff : As I said, what the government should focus on is the sorts of services that Australians want and then they should raise the taxes to be able to fund those services.

CHAIR: You didn't answer the question. I just want to know whether The Australia Institute believes that Australians should be rewarded for the hard work that they do and should keep more of their own money in their own pockets.

Mr Grudnoff : I think that would depend on the situation.

Mr Richardson : It also depends on who we are talking about.

CHAIR: Australians who work hard. Should Australians be rewarded for hard work?

Senator HANSON-YOUNG: Jane's not interested in low-paid Australians, just the hard-working ones. The ones who are working hardest would be the ones who are working more than full-time and getting less than the minimum wage—for example, cleaners and childcare workers.

Mr Richardson : Second-income earners in the households, when they return to work, face a lot of disincentives. There is a very good argument for assisting them. Speaking for myself—I am upper middle class and I am perfectly well remunerated—I work hard but I contribute hard too, and I am proud of that.

CHAIR: I am not entirely sure that answers my question, but I'm very pleased to know that you work hard, play hard and are well rewarded for it. How many times has The Australia Institute advocated for tax reductions in recent years?

Mr Grudnoff : I am not sure. I would have to go back and look at the research.

CHAIR: The Australia Institute comes out with significant policy positions all the time. How many times have they been on tax cuts—any tax cuts?

Mr Grudnoff : At the moment we don't have a particular problem with stage 1 of the current income tax plan, and that's a tax cut.

CHAIR: Have there been any other taxes you have suggested cutting in the last 12 months, 18 months, two years, three years, five years—

Mr Grudnoff : Sure. We've definitely advocated against increasing the GST. We don't believe there should be a higher tax—

CHAIR: That's not a tax cut, that's just tax maintenance. Have you advocated for a tax cut anywhere?

Mr Richardson : I've written a paper suggesting that the structure of the Medicare levy should be changed so that instead of a flat two per cent it should be whatever proportion you need added on to the personal income scale, which would give the bottom 80 per cent of income earners in Australia tax relief.

CHAIR: Have you argued for higher taxes? Has The Australia Institute argued for higher taxes?

Mr Richardson : Yes: the Minerals Resource Rent Tax; getting rid of tax subsidies to mining companies; estate duties—

CHAIR: Do you think The Australia Institute has influenced Labor Party policies on any particular issues?

Mr Richardson : I think you'd have to ask them.

CHAIR: I'm after your opinion. Do you think your analysis has been of influence?

Mr Richardson : We'd be very flattered to hear that it was.

CHAIR: Do you seek to influence the Labor Party?

Mr Grudnoff : We seek to influence policy decisions. We seek to influence all parliamentarians. We see our job as coming up with ideas and trying to advocate them, particularly in the parliament.

CHAIR: Have representatives from The Australia Institute met personally with the Leader of the Opposition or the shadow Treasurer or other shadow ministers?

Mr Grudnoff : I haven't personally done so but—

Mr Richardson : But I have to declare I used to work for one.

CHAIR: Which one?

Mr Richardson : Brian Howe and Nick Bolkus. This is going back a bit.

CHAIR: How many meetings have you had with Labor members of parliament over just the last year?

Senator HANSON-YOUNG: I'm not sure how this is relevant.

CHAIR: I'm just interested to know.

Mr Grudnoff : Personally I haven't had any.

Mr Richardson : Apart from venues like the present.

CHAIR: Not one-on-one?

Unidentified speaker: No.

CHAIR: What about the Australian Greens?

Mr Richardson : No.

CHAIR: Is it correct that Ben Oquist, your executive director, was formerly the chief of staff to Greens leaders Bob Brown and Christine Milne?

Mr Grudnoff : Yes, that's correct.

CHAIR: Is it correct that Richard Denniss, your chief economist, was a former strategy advisor to Greens leader Bob Brown?

Mr Grudnoff : That's correct.

CHAIR: Is it also correct that Ebony Bennett, your deputy director, was the national campaign director for the Greens in 2010 and was a media adviser to Greens leader Bob Brown?

Mr Grudnoff : That's correct.

CHAIR: What proportion of the staff at The Australia Institute have held paid or volunteer roles with the Greens—

Senator HANSON-YOUNG: I don't know how this is relevant—

CHAIR: either the parliamentary party or the party organisation?

Mr Grudnoff : I wouldn't be able to tell you.

CHAIR: On notice is fine. Can you take that on notice?

Mr Richardson : That's exactly the proportion of the staff who have worked for Greens?

CHAIR: Yes. What proportion of your staff have held paid or volunteer roles with the Greens, either in the parliamentary party or the party organisation?

Senator HANSON-YOUNG: Then we can start asking about how many staffers in the government work for big mining corporations and the banks. How about that?

CHAIR: You will get your chance when the big mining corporations and the banks appear.

Senator KETTER: I thought we were here to talk about tax cuts.

CHAIR: In April 2016, you published an open letter under the heading 'Australia does not need lower taxes'. Mr Oquist has written about why income taxes should not be cut. In April this year, you called for taxes to be increased. Is that your view—that the Labor Party is acting irresponsibly in proposing income tax cuts?

Mr Grudnoff : Which income tax cuts are you talking about?

CHAIR: Personal income tax cuts.

Mr Grudnoff : The ones currently before us?

CHAIR: Yes. He has written 'why income taxes should not be cut'.

Mr Grudnoff : Yes.

CHAIR: In fact, he called for income taxes to be increased. So, are you suggesting that the Labor Party is acting irresponsibly in proposing income tax cuts.

Mr Richardson : I think we have to distinguish between the absolute amount collected and the distribution of it. Yes, as I mentioned before, we would like to see around the range of—I shouldn't talk on behalf of The Australia Institute because we're a bunch of individuals.

CHAIR: Hang on. You are representing The Australia Institute's position, though.

Mr Grudnoff : David and I are economists. What we are most interested in is the fairness and the efficiency of the tax system, so we advocate for changes within the tax system. Sometimes that is to increase taxes. Sometimes it's to change how taxes are applied and who will pay them. As Dave said earlier, there are some times where we advocate that certain sections of the population should pay less tax and there are some times when we advocate that certain portions of the population should pay more tax. We're interested in the efficiency of the tax system.

CHAIR: Have you raised with the Labor Party your concerns about cutting personal income tax rates?

Mr Grudnoff : I haven't met with the Labor Party.

CHAIR: Which taxes do you think need to be increased?

Mr Richardson : We've discussed the top marginal tax rate in our submission. You may be aware that there are good theoretical arguments that the tax rate should be up around 75 to 80 per cent for the top marginal tax rate. This in fact is what Thomas Piketty has been advocating for some time now.

Mr Grudnoff : We've also advocated for more—

CHAIR: Death taxes—

Mr Grudnoff : changes to the petroleum resource rent tax.

CHAIR: You have previously promoted the imposition of a death tax. Is that still one of The Australia Institute's positions?

Mr Grudnoff : We have certainly looked into that issue, yes.

CHAIR: You also have promoted the imposition of a capital gains tax on family homes above a certain value. Is that one of positions of The Australia Institute?

Mr Richardson : When you talk about The Australia Institute's position—

CHAIR: I'm just interested in where they were coming from when we read your submission. I would like to put it into the context of your broader picture.

Mr Richardson : Yes, I for one have argued that in the past.

CHAIR: You have also said that higher debt is a good thing. Is that still The Australia Institute's position?

Mr Grudnoff : Again, debt, like taxation, is not the primary focus. It depends on where you are in the business cycle, it depends on what's happening in the economy and it depends on the priorities of the government. I don't think higher or lower debt is, in itself—that would depend on what was going on in the economy. Certainly, if we were, for example—

CHAIR: It depends whose policies you're analysing. All right. Thank you very much. Senator Ketter.

Senator KETTER: I think it is more efficient for us to take our questions as a block.

CHAIR: You are more than welcome to take your 15 minutes as a block.

Senator KETTER: Mr Grudnoff, your submission takes us through each of the three stages and the graphs—figures 1, 2 and 3—are pretty illustrative of the impact of the tax cuts. Can you take us through that? I know you touched on this in your opening statement, but just which deciles stand to gain the most from the initial parts of the tax package?

Mr Grudnoff : The initial stage 1 is mostly focused on middle income and low income. Low income earners, which are defined as the bottom 30 per cent, will get about 21 per cent of the benefit of the tax cut; the top high income earners, which we define as the top 20 per cent, will get only about 7 per cent of the tax cut; and the remaining 50 per cent will get 70 per cent of the tax cut. So, the first phase is focused on low and middle income earners.

Senator KETTER: Phase two?

Mr Grudnoff : Phases 2 and 3, the top end tax cuts, overwhelmingly go to high income earners: 80 per cent of the benefit will go to the top 20 per cent—those high income earners—and the bottom 60 per cent will get nothing at all.

Senator KETTER: Going through you recent work, you have concerns that the element in stage 2, which lifts the 37 per cent threshold to $120,000, combined with stage 3, is unfair. Can you take us through that?

Mr Grudnoff : I certainly think that that stage will increase inequality in Australia. The tax and transfer system is one of the strongest systems we have for reducing inequality. If we choose to flatten the income tax scales, as this plan does, and that part of the plan in particular does, that will mean that, after this has been introduced, the share of tax paid by the top 20 per cent will go down and the share of tax paid by the other 80 per cent will go up. So, we'll effectively have a less-progressive tax system.

Senator KETTER: What about the rest of the package—stages 1 and 2, the change to the 37 per cent threshold, and stage 3—outside of those changes?

Mr Grudnoff : That is far more targeted on middle and lower income earners—70 per cent of it goes to that middle 50 per cent.

Senator KETTER: Can you take us through your estimates about what's going to happen if wage growth is lower than expected?

Mr Grudnoff : Wage growth is an important part of the predictions about how much income tax, which is the largest tax that the government collects, and if wages don't grow as fast as the government is predicting then they won't get as much income tax revenue. Therefore, they will have to adjust how large the surplus or deficit is.

Senator KETTER: What will happen to the budget position as a result of that?

Mr Grudnoff : It would depend on how far it was out. We haven't done specific calculations about the dollar change, but the predictions of wages growth within the budget are fairly widely considered to be particularly optimistic. We're supposed to have wages growth well above three per cent by next year. That seems unlikely in the current circumstances. That kind of wages growth is what's driving revenue increases in this budget, and if that doesn't come about then we're not going to see those revenues increase.

Mr Richardson : Can I just add there: when you look beyond the budget year itself and the following year, everything else in the forward estimates is, in fact, projections. They're based not on forecasts but assumptions that things get back to normal—that economic growth gets back to the long-term average, unemployment gets back to five per cent, and things like that. So, going out 10 years, all these estimates are in fact not estimates but projections.

We've seen in the past how those projections often fail—for example, the first Swan budget expected the budget to be in surplus for the next four years, which, unfortunately, didn't happen. But almost every budget since then has projected an early return to surplus, and it still hasn't happened. The things that the budget is based on, when we go out that far, are very hairy.

Mr Grudnoff : That's particularly relevant because this plan is quite unusual in that this is the first income tax cut that is projected outside the forward estimates—that is, it's projected over seven years rather than four. The boffins at the Treasury have enough trouble predicting four years out. To suggest that they can predict seven years out and that they can know what's going to happen to revenue and spending out there—the margins of error when you get out to there are quite large, and it would be very brave to assume that what they are predicting will actually come to pass.

Senator KETTER: Is it prudent to legislate for those income tax cuts now when even the Treasury is saying that, because they're not releasing costings year on year for the medium term, it's hard to predict? How prudent is it to legislate for those stage 3 tax cuts?

Mr Grudnoff : I think it's good that the government are, and the government should be commended for, laying out a plan over the longer term. I think often in politics the focus is too short-term. That said, I think that the government can say, 'This is where we want to go,' but they don't have to legislate it. Every year the government have an opportunity to change taxes in their budget. I don't think that we should be legislating out beyond the forward estimates; but certainly the government could announce that this is where they intend to go, and, as we get closer to that time, they can then legislate, having a better idea of what the economy is doing and where the economy is going.

Senator KETTER: What are the potential options for a government if there is a downturn that occurs in that medium-term period?

Mr Grudnoff : If revenues were to be downgraded, as they've been in every budget except for the current one since the GFC, then the government would have to reassess whether or not they wanted to hand out these kinds of tax cuts. If it were a small downturn, they may wish to delay them. If they've announced ahead of time, 'This is where we intend to go,' but they haven't legislated, they might delay them or they might decide to scrap them altogether or they might decide to change them.

Senator KETTER: I'll defer to Senator McAllister at this point.

Senator McALLISTER: Mr Grudnoff, you wrote the report that said income tax cuts in the 2018 budget will largely benefit men. That's your document?

Mr Grudnoff : That's right.

Senator McALLISTER: I wanted to ask you about the material in your submission that goes to the differential impacts on men and women. There's a graph on page 10 of your submission that sets out the idea that men get twice the tax cut compared to women. When you say 'twice', do you mean twice as many? Do you mean twice as much money? What are you referring to?

Mr Grudnoff : I'm talking about the dollar value. For every one dollar of tax cut women get, men will get two dollars. That's primarily because men overwhelmingly make up high-income earners, and the later stage of this tax cut, or the bulk of this tax cut, is designed to go to high-income earners. Therefore, those high-income men are going to get, in dollar value, a significantly larger amount. Because there are less women in those high-income deciles, not as much benefit will go to women.

Senator McALLISTER: Figure 4 is a figure which works across the whole package when fully implemented in 2024-25?

Mr Grudnoff : That's correct. The first year that the plan is fully implemented, that will be the distributional analysis in that year.

Senator McALLISTER: Similarly, on page 12, figure 7 refers again to the benefits that flow in a single year and it refers to just one part of the plan—

Mr Grudnoff : That's right.

Senator McALLISTER: which is the removal of that 37 per cent tax bracket?

Mr Grudnoff : And the increasing of the top threshold from 180 to 200.

Senator McALLISTER: So, it combines those two measures?

Mr Grudnoff : That's right. It's all of stage 3 and most of stage 2.

Senator McALLISTER: Are you aware of the PBO analysis that's been released this morning that canvasses similar issues?

Mr Grudnoff : I just saw it before I came here, yes.

Senator McALLISTER: It produces quite a similar result. The PBO find that, overall, when you total the value of the allocation across the tax package, 63 per cent of the package flows to men and 36 per cent to women across the 10 years.

Mr Grudnoff : Yes.

Senator McALLISTER: And that final stage of the package, in those five years from 2024-25 onwards—again, the value of that flows 26 per cent to women and 73 per cent to men. They're very big numbers. Percentages are hard to grapple with, but the PBO suggests that $91 billion will go to men and $52 billion will go to women.

Mr Grudnoff : That's right. Because the tax cut, particularly over 10 years, is so large—particularly in those later years after the forward estimates, in the fifth year and beyond—and because a significant proportion of it is going to men compared to women, you get particularly large amounts going to men compared to women.

Senator McALLISTER: Some people might say, 'That's fair enough; if men are paying more tax, they're the ones in more need of a tax cut.' Do you think the distribution of cuts between men and women is fair in this package?

Mr Grudnoff : I think the problem is that we already have a gender divide in pay in a lot of areas, and, because we don't often focus on this gender distribution, we tend to make policies, unwittingly, that make this worse, not better. I think that this kind of information is really important because it focuses policymakers' minds on this particular issue when they might've just passed the tax cut and not thought about the gender implications at all.

It's also important, I think, because, when we cut tax, we tend to cut tax to high-income men. But, if we have a budget deficit, we tend to try and cut spending, and women rely on services more than men. So, effectively, the benefit when the budget is doing well goes to men and, when the budget is not doing well and we need to cut spending, the majority of that is borne by women. We did some analysis of the 2014 budget, which wasn't fully implemented, but, if it had been fully implemented, 55 per cent of the cuts would've been borne by women and 45 per cent by men. We have this thing where, over the business cycle, if you like, we're making the situation worse by handing out the benefits of a budget largesse to men and the cost to women.

Mr Richardson : Can I just add to that?

Senator McALLISTER: If you don't mind, Mr Richardson—it's very difficult when Treasury doesn't undertake that analysis. It is a question I have put to Treasury officials many times since becoming a senator. I did ask Mr Fraser why they didn't undertake analysis on the gender impacts of these cuts. He said, 'That's because this tax package is gender neutral.' Do you think Mr Fraser was correct?

Mr Grudnoff : I think that, when the tax package was put together, it wasn't designed to benefit one gender or another, but the outcome of it—that is clearly not the case. If you just do gender analysis when the policy is deliberately designed to impact one gender or another, you miss the whole point, and that is that these policies impact men and women differently. It's important when we're making decisions about whether to go with these kinds of policies or not, or how we're going to do it, that that sort of information is available to those decision-makers.

Senator McALLISTER: The Treasurer has spoken, in introducing this package, about the need to incentivise people to work. Which parts of the workforce would benefit most from additional financial incentives to work, if we are interested in increasing productivity and labour productivity in particular?

Mr Richardson : All the evidence is that it's the second income earner in the household, especially women returning to work. That's where the big problem is, and the poverty traps that are facing them are not just the tax scales, of course, but possibly loss of other benefits—social security benefits, family tax benefit, childcare expenses and transport expenses. That was going to be my interjection before. This is the really serious part of the incentive structure in our tax system. It's one of the things that's been offered as the explanation of why participation among Australian women, especially in that demographic, is much lower in Australia than other comparable OECD countries.

Mr Grudnoff : If the government were seriously interested in incentivising and increasing participation then it would be far better off taking the billions of dollars that it's planning to give to high-income earners and sticking it into something like childcare. You would get far more bang for your buck and have far more impact on participation by doing that.

Senator McALLISTER: On a separate question, Senator Cormann tabled a document in estimates last week which is ostensibly an analysis of Australian occupations and the ways that particular classes of Australian worker will benefit, or not, from the proposed personal income tax package. Are you familiar with that document?

Mr Grudnoff : Is that the one that was in The Australian last week?

Senator McALLISTER: It was the basis for the commentary in The Australian, as I understand it.

Mr Grudnoff : Yes.

Senator McALLISTER: Do you have any remarks to make about the extent to which the list of occupations and associated salaries in that table are or are not representative of the Australian workforce?

Mr Grudnoff : They're representative of high-income earners. If you look at the list, I think he has 30 different occupations there. All of them are in the top third of income earners.

Senator McALLISTER: All of them?

Mr Grudnoff : All 30 occupations are in the top third. About two-thirds of them are in the top 20 per cent, and almost half of them are in the top 10 per cent. They're a good representative sample of the top end of income earners and therefore they're a good representative of the kind of people that will benefit from this. These top-end tax cuts—as I said, 80 per cent of the benefit will go to the top 20 per cent of income earners. I think they had people in there earning $200,000 a year. These are people who are going to get the most from this tax cut.

Senator McALLISTER: This is a range of salaries. The smallest is in the base year 2018-19, $86,000 a year, and the highest is $204,000 a year. How does that compare to the average and median wages in Australia?

Mr Grudnoff : The average full-time wage in Australia is $82,000. But if you earned $82,000, you would be in about the top 25 per cent of income earners. Firstly, we're only dealing with full-time, we're not dealing with all income earners. The average is distorted by high-income earners; there are a few people at the very top who are earning considerable amounts of money and that drags the average up. The median, which is a better measure of income, for all income earners, by comparison, is $55,000 a year. That is to say that half of Australians earn more than $55,000 a year and half of Australians earn less than $55,000 a year. If you're talking about what middle-income people are earning, $55,000 is where the middle is.

Senator McALLISTER: Right, so not $204,000?

Mr Grudnoff : No, that's four times the median.

Senator McALLISTER: Thank you. Chair, Labor senators do have more questions and I'm conscious we have a little more time, but perhaps we should go to the crossbench and we could come back.


Senator HANSON-YOUNG: Thank you. I'm interested to hear the analysis around the gender split in relation to this and, obviously, you've answered some questions from Senator McAllister already in relation to this. It seems that if women are getting half the benefit, plus the compounding effect of less revenue to be spent then on public services—essential services—whether those are education, health or child care, as you pointed out, then this tax cut is pretty sexist. Would you agree?

Mr Grudnoff : I don't think it was set out, as I said, to advantage one gender or another. But, certainly, the result of the tax cut could be characterised as sexist. But, that said, I don't think that was the intent.

Senator HANSON-YOUNG: They just didn't think about it. They just don't really think about women?

Mr Grudnoff : Treasury don't produce a gender split for most of these policies so, therefore, I don't think that the impact on gender is considered when making these decisions at all.

Senator HANSON-YOUNG: And probably not across the board. Could I go to the issue in relation to the flattening of the tax system? Has our tax system become more or less progressive over time?

Mr Richardson : Much less progressive.

Senator HANSON-YOUNG: Much less progressive.

Mr Richardson : Yes. If we go back, soon after World War II the top marginal tax rate in Australia was 75 per cent. And throughout the whole Menzies era, the top marginal tax rate was never under 67 per cent.

Senator HANSON-YOUNG: Did that coincide with economic growth or reduction? What was the impact of that?

Mr Richardson : Sometimes conditions weren't all that good—for example, when unemployment almost reached two per cent in 1961. That was regarded as a disaster! But—oh, boy!—generally, that was a period characterised by Australia having the highest living standards in the world and economic growth booming. Everyone who wanted a job got a job. I'm from South Australia, and at one stage we got unemployment down to a quarter of one per cent.

Senator HANSON-YOUNG: We'd like that in South Australia now!

Mr Grudnoff : Yes! That's right. We all knew that guy, almost! The lesson we draw from this, though, is that while people tell us that if we improve incentives and we all work harder then the economy will improve, we've seen in our own history that things were much better off when we had higher tax rates and a more progressive income tax system—and a bunch of other things, by the way, when company tax rates were much higher. So, whenever people talk about the need for tax cuts for these sorts of purposes, you have to take that with a big grain of salt. And it tends to be, too, that it's not the poor saying we need to 'lower income tax rates in order for us to get a job'; it's the rich saying we need to 'lower all sorts of tax rates in order that we will give them a job'. You suspect that a lot of the sentiment is not backed up with any evidence, although the people who say it may genuinely believe: 'If you lower my taxes, I'll work harder and generate greater economic activity for the benefit of everybody else.' But there's no evidence to support that.

Senator HANSON-YOUNG: What's the opportunity cost of all of this? There are figures out today suggesting that the second stage could cost as much as a revenue loss of $80 billion. Overall we're still waiting for the real figures to be released from the government. They don't want to tell people what all of this is actually costing the budget. What's the actual economic impact of cutting that amount of money out of government revenue?

Mr Richardson : Exactly. We know that there's a massive amount of money that we could spend in Australia on infrastructure, which would benefit the economy. It would benefit society generally. We also know, for example, that, if you look at things that seriously contribute to living standards throughout the world, they are things like spending on education. A much more educated workforce in Australia is going to mean better jobs and all those sorts of things. The evidence is very clear on that: increases in education and infrastructure and things like health are going to pay off in terms of economic growth. We shouldn't look at everything just through the lens of economic growth, because the social benefits of all that are also very important.

Senator HANSON-YOUNG: You're suggesting that these tax cuts won't have a positive impact on economic growth?

Mr Richardson : Yes, to the extent that there's some tax relief especially among the lower-income groups, there will be additional spending. At the moment, with 5½ per cent official unemployment and a lot more unofficial, we could use that boost. But whether—

Senator HANSON-YOUNG: That's the economy crashing down around us as we spend all the money?

Mr Richardson : Yes.

Mr Grudnoff : The question about economic growth is—

Senator HANSON-YOUNG: It's no money for public infrastructure—

Mr Grudnoff : If you wanted to improve economic growth through government, whether it's cutting taxes or increasing spending, where would you get the most bang for your buck? Handing out high-income tax cuts is probably the least benefit per dollar spent. If you want to hand out tax cuts, low-income people spend a larger proportion of their income, so you get more benefit that way. If you want to put it into infrastructure or government services, you will also get more benefit as far as economic growth goes than handing income tax cuts to high-income earners.

Senator HANSON-YOUNG: Things like lifting the rate of Newstart or the minimum wage, you're saying, would have a bigger bang for the buck?

Mr Grudnoff : Definitely, because people on Newstart and people on the minimum wage spend pretty much all of their income, whereas people on $200,000 a year or more save a proportion of their income, so they don't spend all of their income. So every dollar that you put into Newstart or the minimum wage is likely to generate economic growth, whereas handing it out to those on high incomes is less likely to generate as much growth.

Mr Richardson : It's also important to distinguish between these sorts of Keynesian impacts following, for example, increases in after-tax income for low-income earners. Those Keynesian impacts, important as they are, are distinct from the sorts of supply-side impacts you get from additional spending on infrastructure, education and those sorts of areas, which increase the capacity of the economy as a whole, whether you're at unemployment, full employment or whatever. So, while assistance at the bottom of the income scale is going to have an important effect in increasing spending, for long-term living-standards purposes you would want also the education and those other things.

Senator HANSON-YOUNG: Can I ask what your view is on the government's projected wages growth figures?

Mr Richardson : Matt mentioned that in the immediate future they look very optimistic. You can't help agreeing with that.

Senator HANSON-YOUNG: 'Optimistic' as in pie in the sky?

Mr Richardson : Yes. But for the future, as I mentioned, these are just projections. The Treasury papers themselves warn us against taking projections seriously, but we all do. The projections involve wages growth going back to the historic norms, which are inflation plus a bit for productivity, which puts you at around 3½ per cent wages growth. We're seeing nothing like that at the moment and no signs that things are improving.

Mr Grudnoff : It's interesting. The wages growth prediction for the financial year that we're currently in—2017-18, which is about to end next month—are usually fairly accurate because we're quite close to them, so we're able to get a good handle on them. It's highly likely that even they will be too optimistic, unless in this last quarter, which we haven't got—we've got data for the first three quarters of the financial year but not the last quarter. Unless there's a massive spike in wages, they will actually even miss this financial year's projection for wages growth.

Senator HANSON-YOUNG: That seems pretty irresponsible of the government.

Mr Grudnoff : Certainly it's unusual. I haven't seen a missing of those projections so close to where we are. Obviously, the further out in time you go, the harder it is to predict what's going to happen, but usually they get the projections for the current year that we're in fairly well.

Senator HANSON-YOUNG: But not currently.

CHAIR: Last question, Senator Hanson-Young.

Senator HANSON-YOUNG: My last question is in relation to economic inequality because it's obviously growing. You don't have to be an economist or a researcher to know that; you just have to go and hang out at the local supermarket or have a chat to parents in the schoolyard. More and more it's becoming difficult for people to cover the costs of life and household bills, yet they're seeing massive profits being banked by corporate Australia, big banks in particular. How does this bill that's before us tackle inequality, or indeed does it make it worse?

Mr Grudnoff : I think it certainly doesn't tackle inequality, and it will make it worse. As I said before about the tax and transfer system, the tax system is one of the strongest tools we have for fighting inequality. It takes income from high-income earners, and it gives it to low-income earners. It reduces inequality. When we flatten the tax rates, when we make the income tax system less progressive, we're increasing the burden on those on low incomes and lessening the burden of those on high incomes. So that will make inequality worse, not better.

Senator HANSON-YOUNG: So not only is this a tax package for men; it's a tax package for rich men?

Mr Grudnoff : That's correct, yes. The biggest beneficiaries from this tax package by far are men in the top 10 per cent.

Senator HANSON-YOUNG: No wonder it's being promoted by the Liberal Party!

CHAIR: Can I ask what is 'rich' in The Australia Institute's mind? I'm interested to know. Have you got a dollar figure that you use to decide?

Mr Grudnoff : Actually, I tend to use 'high-income earners'. It's a good question. I use the ABS definition generally, which is that the top 20 per cent are high-income earners; low-income earners are the bottom 30 per cent; and the remaining 50 per cent are middle-income earners.

CHAIR: You haven't answered my question. At what income level are, in The Australia Institute's mind, considered 'rich'?

Mr Grudnoff : Again, I don't use the word 'rich'. We're talking about incomes not wealth. If you are talking about wealth, then 'rich' is the term you would use.

CHAIR: In The Australia Institute's mind, what do you call a 'high-income earner'?

Mr Grudnoff : Somebody in the top 20 per cent of income earners. I would have to take it on notice, but it's about $90,000 to $100,000, I think.

CHAIR: So a schoolteacher is rich, in The Australia Institute's mind?

Mr Grudnoff : No. Again, you're using the word 'rich', and I'm using the words 'high-income earner'.

CHAIR: So the schoolteacher is a high-income earner?

Mr Grudnoff : I don't know how much assets the schoolteacher has, so I don't know whether or not they're rich or wealthy. I'm just talking about their income.

CHAIR: In the document that was referred to—

Senator HANSON-YOUNG: To be fair, Chair, they did say they would take it on notice.

CHAIR: In the document that was referred to earlier by the opposition, it cited a schoolteacher. You said it only used high-income earners, and it referred to a schoolteacher; it referred to a crane operator; it referred to a policeman in Queensland. These are all people that are officially high-income earners? Is that according to The Australia Institute?

Mr Grudnoff : According to the taxation statistics, yes.

CHAIR: All right. So you're suggesting that those high-income earners aren't deserving of a tax cut?

Mr Grudnoff : No, no. I'm simply pointing out that the particular occupations they've got—and they're not talking about regular teachers; they're talking about principals here—

CHAIR: No, it actually says regular teachers: a schoolteacher in the ACT earns $114,667—

Mr Grudnoff : If you earn—

Senator McALLISTER: My question to the witnesses was actually just about whether or not this was representative. There was no question specifically about—

CHAIR: Exactly right. I'm very interested to know.

Senator HANSON-YOUNG: What's the average wage?

Mr Grudnoff : The average full-time wage is $82,000. The average of all wages is $71,000.

CHAIR: I think it's $84,000, isn't it? That's the mean?

Mr Grudnoff : The median full-time wage is $64,000, and the median for all wages is $55,000.

CHAIR: A fourth-year mine apprentice would earn $86,000. They're above average.

Mr Grudnoff : Yes.

CHAIR: That's considered a high-income earner?

Mr Richardson : Above average.

Mr Grudnoff : I don't think $86,000 gets you into the top 20 per cent.

CHAIR: What does get you into the top 20 per cent? Did you say $90,000?

Mr Grudnoff : I think it's between $90,000 and $100,000, but again I'm not sure of the exact figure.

CHAIR: So a labourer on $105,000 would be considered a high-income earner?

Mr Grudnoff : According to the Australian taxation statistics, yes.

CHAIR: A mid-level schoolteacher in New South Wales on $103,000 would be considered a high-income earner? And a primary school principal in New South Wales on $182,000 would be—they're knocking the lights out! Thank you very much. As there are no further questions for The Australia Institute, thank you very much to The Australia Institute for appearing today. We will let you go.