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Thursday , 13 August 1998, 12.30pm: transcript of lock-up press conference [tax reform plan]



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TRANSCRIPT of

HON PETER COSTELLO MP

Treasurer

Lock-up Press Conference

 

Thursday, 13 August 1998

12.30 pm

 

E&OE

 

SUBJECTS: Tax Reform Plan

 

TREASURER:

 

I’m just going to do five slides now on some elements of the package, and then I’ll take any further questions that people want to pick up on. I won’t be doing the seven hour presentation that I did for the Party Room last night, but I want to just go over some of the areas of detail and answer any questions that you might have, including macro-economic questions.

 

If you could not stand in front of the projector, please.

 

The first point that I just want to direct your attention to is the new personal income tax scales. You will note that the feature of these income tax scales is that first of all the tax-free threshold has increased from $5,400 to $6,000. That the first marginal tax rate of 20 per cent is reduced to 17 per cent, that is a very regressive reduction in tax rates. That the middle brackets of both 34 and 43 are combined into one of 30 per cent. Your average Australian wage earner today is on a 43 per cent tax rate. Under this plan they will go to 30. That is, 13 cents, nearly one-third of the top marginal tax rate comes off for average earners in Australia under this plan. The threshold for the 40 per cent rate gets pushed out to $75,000, and the top marginal rate does not change. Does not change. There is no reduction in the top marginal income tax rate. That is one of the reasons why this is still a very progressive taxation system.

 

The average family as you’ve seen in the cameos, and I can go to the assumptions if you want to later is $40-50 a week better off. The 10 per cent GST replaces 10 other indirect taxes, as the Prime Minister said. It replaces the wholesale sales tax, financial duties on financial institutions' duties, bad taxes, bed taxes, stamp duties on conveyancing for business, stamp duties on marketable securities, stamp duties on leases and the like. And it is a fundamental reform of Commonwealth/State relations.

 

This rate can only be increased with the unanimous agreement of six States and two Territories and legislation through the Commonwealth Parliament. Now if you figure that Australian State governments are on three and four year election cycles, that means somebody somewhere is always going to be in an election. And that means that somebody somewhere is always going to have an incentive to veto, and any single one of the Premiers or Chief Ministers has the veto, to veto a unanimous agreement. Not only does the agreement have to be unanimous, it then has to be legislated by both the House of Representatives and the Senate.

 

As the Prime Minister said, I can’t imagine how the rate once locked in would rise in political terms. Absence some major crisis. Contrast it with the wholesale sales tax. Nothing locks that in. The wholesale sales tax was introduced at 2.5 per cent and now its general rate is 22 per cent. Secondly, all of the revenue from GST goes to the States. And financial assistance grants are abolished. The Commonwealth is collecting this revenue for the States, it is charging a collection fee, and turning the entire proceeds across to State governments. No longer will State governments be reliant on financial assistance grants. This is the biggest step in improving responsible State/Commonwealth financial relations certainly since the uniform tax income tax arrangements of 1942.

 

And what it does for the States is not only does it fix their base, it gives them access to a growth revenue. Over the period to 2010, based on our estimates, the additional revenue, that is the revenue that will be received by State government over and above the current financial formula, which is the real per capita formula, will be approximately $25 billion. In other words the States will be $25 billion better off over that decade than the maintenance of the current arrangements. And that’s an answer to the question about Queensland. If Queensland were to stay out of this system it would be penalising Queenslanders billions of dollars a year.

 

The private health insurance rebate offers to anybody on the 30 per cent tax rate the effect of full tax deductibility. You get 30 per cent rebate off your tax for the cost of private health insurance. It’s the equivalent of income tax deductibility for 8 1 per cent of Australians, or better. It’s better than full income tax deductibility would be if you were on the 17 cent rate. And to pick up the point that was made over here. Again, it is capped. For 81 per cent of Australians it’s as good as or better than full tax deductibility. If you happen to be on the 40 or 47 cent tax rate, the rebate that you get is capped at 30 per cent. You don’t get the advantage of full income tax deductibility in relation to private health.

 

These are dramatic changes in relation to business taxation and the method of collection for business taxation which simplifies the way in which business taxation will occur in this country. There will only be four reporting dates for 99 per cent of Australian business. It’s the 21 st day of the month after the quarter. The 21 st day of October, in respect of the September quarter. It’s the 21 st day of January, in respect of the December quarter. It’s the 21st day of April, in respect of the March quarter. It’s the 21 st day of July, in respect of the June quarter. At the moment businesses are remitting on the timetable where they have different company tax instalments, different dates for remittance of PAYE, a different year in relation to the fringe benefits tax, and a different remittance period in relation to sales tax.

 

Under this system, all of those payments are amalgamated into one on the 21 st day of the month after the quarter, on one form. On one form. The opportunity to remit pay as you go in relation to company tax, withholding taxes in relation to employees, GST in relation to the quarter, and fringe benefits tax. On one form, four times a year, the amalgamation of those payments. With the introduction of entity taxation we can also do away with enormous complexity in relation to the business tax system.

 

Projected budget surpluses at budget time were a deficit in this year of $1.2 billion. As you know the outcome was better than expected. About $2.4 billion better than expected. The point I made when I announced the outcome earlier this week is you would expect that better than expected result for 1997-98 to have some impact in future years. A positive impact in future years. The cost of tax reform is in its first year, principally the cost of the private health insurance rebate which starts on the 1 st of January, about $1.2 billion, building to a full cost in a full year of about $4.7 billion. Leaving substantial underlying surpluses right across the forward estimates period, 2001-2002, up around $10 billion in underlying terms. But in headline terms much more significant. Because in headline terms the programme of asset sales will also keep the debt reduction programme on track. This is a well judged, carefully costed and affordable package. It is a new tax system.

 

It is a new tax system that fixes Commonwealth/State financial relations. It is a new tax system which ensures that our indirect tax base will not shrink in relation to the economy. It is a new tax system which fixes the interplay between income tax and social security. It is a new tax system that revolutionises the way in which business tax is collected. It is open, it is simple, it is fair and it returns the incentives to work to save and to invest.

 

This is a new tax system. This is the biggest reform of taxation that a Commonwealth Government has ever put forward. Without a shadow of a doubt. This is generational change, major change, a rewriting of the whole of the taxation system in indirect, personal and business taxation. It is a new tax system for a new century.

 

If there are any questions.

 

JOURNALIST:

 

Treasurer will you stand by the figure...

 

TREASURER:

 

Yes we do and we will, as I’ve said on numbers of occasions, update on a mid-year basis or a pre election basis and remember that they will be objectively certified, objectively certified by the Independent Secretaries responsible. I made the point when the outcome for the last financial year was announced that if you expected downward pressure in relation to growth projections you would certainly have to factor in counterveiling and upward pressure in relation to better outcomes. And we haven’t factored into those forward estimates yet, the expected effect of the better outcome in 1997/1998 which would make the fiscal position look stronger.

 

JOURNALIST:

 

Mr Costello this package forces the Government, does it not, to return a surplus each year? I mean the entire compensation package hinges, the tax cuts and everything else, the pension rises, given that all the GST money goes to the States. The Commonwealth must return a surplus, must it not?

 

TREASURER:

 

Look, I think the Commonwealth should return a surplus. I believe the Commonwealth must return a surplus to keep the Australian economy in good shape. But are you asking whether it would theoretically be possible for an irresponsible government to go into deficit in the future? It would be, it would be. Our Government won’t be, because we believe that it’s important to keep the budget in surplus and to retire debt. But what it does do, and I think you’re making this point, is it certainly puts the States on a much more secure footing financially in the future. So that in a decade’s time, the States having a share of a growth revenue and being, over the course of the decade, $25 billion better off, it means that there would be less margin for error for the Commonwealth in relation to its outlays and the revenue base that it keeps.

 

JOURNALIST:

 

Treasurer, presumably the end of Premiers conferences means the end of tied grants and so on. And also this seems the end of the principle that those who spend the money ought to be the ones responsible for raising it.

 

TREASURER:

 

Well, this is a way of making State governments responsible for revenue raising. They are going to be responsible for the GST rate. And if they want more money, they will have to unanimously agree and request a rate rise. They will only get a revenue rise through a rate rise through taking responsibility for additional taxation. Now, in relation to tied grants, there will, of course, be various tied grants that continue — health care funding is one, the five-year agreement that we’ve just entered into in relation to Medicare. So those programmes will continue. But the Commonwealth will no longer be giving general revenue assistance to the States. The general revenue for the States comes from the GST and if the States want more general revenue they will have to agree and campaign for a rate rise. Now, I don’t think it’s going to happen.

 

JOURNALIST:

 

Treasurer, what’s the constitutionality of that? How can the States veto legislation of the Federal Parliament?

 

TREASURER:

 

The Government has announced, and we propose to do this by agreement with the States, that we would only enact or only put legislation to enact a rate rise upon a unanimous request. This is currently happening in relation to the business franchise fees, the mechanism that we put in place when the High Court struck down State business franchise fees, and the States said: for constitutional reasons, will you collect this for us? We said: we will collect it for you but it is a State tax. We will only collect it on the basis that it is unanimously requested and unanimously treated as a State tax and that will provide the ongoing model in relation to GST.

 

JOURNALIST:

 

Mr Costello, surely there’s nothing to stop a future federal government amending that legislation in the Commonwealth Parliament as did Mr Keating with the L-A-W tax cuts.

 

TREASURER:

 

Well, if a future federal government would have to break an inter-governmental agreement with six States and two Territory’s...and I don’t think six States and two Territory’s would let a future government do that.

 

JOURNALIST:

 

Page 35, ‘The First to Reduce Gambling Taxes’, what’s your motivation for giving tax relief to casino operators?

 

TREASURER:

 

We’re not. In relation to gambling, the GST applies to gambling. In relation to gambling, the value add is essentially what you take from lottery tickets or coins in the machine less what you pay-out. You’ve got a fixed return. When you apply a GST to the value add, you would either have to reduce the pay-outs or you would have to reduce State turnover taxes. We think that the States will reduce their turnover taxes to ensure that pay-outs remain constant. And, as a result, assuming that they do reduce their turnover taxes, we have provided for compensation to the States to make up from their reduced taxes. So GST applies to gambling in full. Pay-outs remain constant. State taxes are reduced commensurately and the revenue that comes from the GST compensates that reduction in State gambling turnover taxes.

 

JOURNALIST:

 

Treasurer, I’m just wondering, there’s many ways you can think about how will the numbers add up and which year and combinations. What’s your formulation as to how you pay for all this in terms of the black economy eating into the surplus, fiscal drag and so on? How do you sort of run with those figures in your mind?

 

TREASURER:

 

Well, the Commonwealth will be…from the Commonwealth’s perspective you’d look at it a number of ways, but from the Commonwealth’s perspective, if you want to look at it in VFI type terms, the Commonwealth abolishes financial assistance grants and therefore abolishes wholesale sales tax. The States’ revenues are made up by a GST which compensates them for the abolition of the financial assistance grants. The additional revenues that flow from a broader based, indirect tax — one) because it’s broader based; two) because it brings in the cash economy - is essentially used to fund substantial income tax cuts and about $4 billion of the surplus goes up to make the difference.

 

What’s happening in relation to this package is not a big indirect tax mix switch. What’s happening in relation to this package is that we are, one, correcting the rundown, guaranteeing the continuation of the corrected indirect tax mix and essentially kicking middle income earners out of high marginal tax rates. The design of the income tax changes is not that the top rates came down but that middle income people got kicked out of them. You’ve often heard me — and you’ll see the graph if I can explain it in the document at the beginning of chapter one on page 40. We’ve got a graph there that charts the top marginal tax rate over the period from 1950 to the year 2000. And it will show you that in a funny kind of a way the top marginal tax rate, the top marginal tax rate actually came down. In the 1950s it was about 60 per cent and now it’s 47 per cent. But the red line is showing you what multiple of average weekly earnings you had to be on to pay that top rate. And whereas in the l950s you had to be on a multiple of 18 times average weekly earnings. Today you’ve got to be on a multiple of about 1.2. So the vice that was occurring in relation to the income tax system was not that the top rates were going up but that middle income earners were being kicked into them. You are getting middle income earners that were paying now 43 cents in the dollar — they shouldn’t be paying it. And we’ve said to middle income earners, instead of paying 43 cents in the dollar, you pay 30 cents in the dollar. Now, not only is that fairer but that changes the whole incentive system so that middle income earners now have incentive to go back and to earn overtime and to do extra work. And if you improve its interaction with the social security system you get rid of all of those unfairnesses.

 

JOURNALIST:

 

Will the higher Medicare levy, one per cent levy, you’ve got high income earners not holding private health insurance, will that stay or go? If it stays, given that you are now saying that people on $50,000 a year are actually middle income earners not high income earners, will you change the threshold for that higher...

 

TREASURER:

 

No, we’re not proposing in this document to change that. It’s the surcharge which is, if you like, an incentive to take out private health insurance. And what it says is if you don’t take out private health insurance you face that surcharge and I think that’s right. We have another proposal in this document which is, I think, an even great incentive to take out private health insurance, which is a 30 per cent rebate, but I think the two can work together. I make the point, in relation to the Medicare levy, that we’re not proposing to change the Medicare levy in this package. I know that was reported by some newspapers, but we are not. And the surcharge, of course, is different to the levy.

 

JOURNALIST:

 

Can you guarantee that the income tax won’t rise in the life of the next Parliament?

 

TREASURER:

 

Oh yes. These are the rates of income tax which are shown right across the forward estimates to 2003/2004.

 

JOURNALIST:

 

So you wouldn’t [inaudible]...

 

TREASURER:

 

In the life of the next Parliament we’ll be reducing income tax. I mean, make this clear, reducing it, not increasing it, reducing it because these are proposals that come in in the life of the next Parliament. Now, this is an integrated package. And I make the point that you reform the indirect tax system, you can give tax relief to middle income earners, you can improve the interaction with the social security system. You have the opportunity to fix Commonwealth/State financial relations. But unless you do this as a total rewrite and reform, tax reform doesn’t come off in Australia. You can’t isolate it. You can’t separate it. It hangs together. You either design a modern system and you have a new tax system or you just add ramshackle renovation to a system whose foundations is crumbling. You can’t desegregate here. We either have a new tax system, we either have a good tax system or we have the old one, we have a bad one.

 

JOURNALIST:

 

Mr Costello, what’s the chances of a pre-interest rate hike in monetary policy to offset the inflationary impact of a GST and the stimulus to domestic demand from the tax package?

 

TREASURER:

 

The CPI effect — and I’ll take this as the last question if that’s all right — the CPI effect of this is 1.9 per cent, which is one-off and the Reserve will be well aware that it’s one-off and the Reserve will obviously factor in the fact that this is a one-off change due to tax changes. The second point I make is this, that the Reserve, like the Government, like most economic commentators, believe that a broader base on their income taxation system is a reform worth having. So not only will they understand that it’s a one-off, but they will also understand that it’s a reform worth having for all sorts of decent, economic reasons. So I wouldn’t expect, as a consequence of this, any monetary response. In fact, I would expect, as a result of this, that those who understand the Australian economy will see this as a strengthening of the Australian economy which will aid economic conditions. And I think that is certainly the view of the Government, the Treasury and I would be surprised if it were not the view of the official family as well. But, of course, they are independent and they will speak for themselves.

 

Thanks very much.

ends

 

 

KD