Speech - Tax Reform For An Economy In Transition




"Tax Reform For An Economy In Transition"




Thanks for that kind welcome, and the invitation to speak today. It's great to see some familiar faces like your President, Ken Schurgott, CEO, Noel Rowland, and Senior Tax Counsel Robert Jeremenko. And members of an esteemed Institute that's been around since 1943.

It's a pleasure to continue the conversation many of us were part of at the Tax Forum last October. When it comes to tax, it's an understatement to say we had a big year in 2011. The Tax Forum was one of the big success stories of the year. It brought together 180 of our country's best tax thinkers from right across the community - from business, unions, the third sector, academia - to really thrash out the major challenges we face. But it's one thing to talk tax. It's another to roll up your sleeves and get on with the job of tax reform. That's why I'm pleased to be progressing some really good initiatives that came out of that Forum.

Today, I'd like to talk about the Government's progress on these initiatives, in the context of our broader tax reform agenda. As you know, tax reform is not for the lazy or the faint-hearted. It's always a tough job. It's made that much harder by global economic uncertainty, and a domestic economy that's undergoing transformational change at the dawn of the Asian Century.

The global economy has been a pretty dangerous place in recent years. Many European economies are contracting significantly. Four of the G7 countries contracted as recently as the fourth quarter of 2011. Europe's financial markets are best described as fragile, where sovereign risk remains a substantial issue. In spite of these global challenges, our economic fundamentals remain strong and our prospects bright. We're confident but far from complacent. As Phil Ruthven wrote in BRW when the National Accounts were released last week, the good news for us far outweighs the not-so-good.

We have a strong economy and a AAA credit rating from all three global agencies for the first time in Australia's history. We're on track to deliver a Budget surplus in 2012-13, unlike our peers for most of whom surpluses are a generation away. Our surplus will be delivered in spite of the global financial crisis ripping $140 billion from government revenues. And the key to our sound fiscal management has been a combination of prudent spending and sustainable tax policies. This is a lesson that many European economies are learning too late.

But Australia's fiscal position, enviable though it is, does limit our ability to buy 'big bang' tax reform. Gone are the days when tax reform is accompanied by big bribes that get communities or industries on board. We are also in uncharted waters as we navigate our way through unprecedented changes and big transitional pressures in our economy.

We have the highest terms of trade in over 140 years, thanks largely to our rich endowment of resources, and the demand for these from the emerging giants of Asia. We are on the cusp of the Asian Century - with China and India quadrupling their share of the global economy in the last thirty years, and projected to account for one third of it by 2030. The Asian story goes well beyond these two economies, and well beyond the resources boom.

While the high terms of trade presents challenges for us now, particularly for some trade exposed sectors, the rise of Asian economies also offers tremendous new opportunities. Just imagine - there will be 1.2 billion more middle class customers in the Asia-Pacific by 2020 than there are today. This will lift demand for consumer durables; health, education, business and financial services; and tourism and cultural experiences, all of which we are in a fantastic position to provide. These forces are driving structural changes in our economy, which means that the composition of Australian industries is changing. Our job is to make sure we can adapt successfully to these shifts.

This isn't the first time we've adapted to changes in global demand and production, and shifting centres of gravity. I'm thinking of the floating of the dollar, removal of trade barriers, and competition reforms that enabled us to adapt to increasing globalisation in the 80s and 90s.

Now we've got a new set of challenges and we need to find new ways to adapt and prosper. Central to this, we need to make sure that the tax and transfer system, as well as raising revenue to fund vital services, also rewards hard work and wealth creation, boosts innovation, lifts competitiveness, productivity and participation.

You understand, as I've always believed, that the tax system needs to adjust to allow the economy to reach its full potential. It needs to change with the times. To change as technology changes, opening up new ways of managing problems and streamlining our tax system. To change as the responsiveness of capital, labour and other factors of production change. And to change as our knowledge expands and social values shift, recasting how we think about issues like inequality and the environment. That's why we initiated the Henry Review in our very first budget in 2008 - a root and branch review of the tax system; the most comprehensive ever undertaken. And that's why we've spent so much time and energy and especially political capital on tax reform.

We've now put in place - or are putting in place - more than 30 reforms aligned with the Henry Review; not one or two as some ill-informed people seem to think. It's hard to imagine now, but when we began the Henry Review, the biggest problem we confronted was how to deal with surplus. It was, after all, the halcyon days at the height of mining boom mark I. The community had been conditioned to a lazy approach of shovelling out the proceeds. We wanted to be smarter about tax reform, and I think we have been.

About six months after our first budget, I woke up before dawn on a spring morning in Canberra to a cable from the US with the news that Lehman Brothers had collapsed. This would be the precursor to financial catastrophe on Wall Street and the worst downward global spiral since the Great Depression. Our immediate priority was getting stimulus into the economy - keeping the doors of Australian businesses open, and customers coming through those doors. We did this to protect the jobs and skills of Australian workers, rather than see them waste away.

We then rolled out a nation-building program that was long overdue. It's now widely agreed that those measures helped keep us out of recession unlike most of our developed world peers. We weren't immune to the aftershocks, though, and we saw that in softening growth and evaporating revenue projections. When the smoke cleared, we recognised that while the Commonwealth's revenue stream may have abated, the need for tax reform had not. Sadly, not everyone saw it this way.

In a fiscally constrained environment, it's easy to argue against specific reforms. It's easy to travel the low-road of fear and opportunism, campaigning against the long term reforms we need to maintain our high standards of living. But political opportunism is no substitute for national leadership.

Economic leadership is what the Government showed when it introduced resource tax reform. The central economic thrust of this reform is to use wealth from our booming mining sector to assist those parts of our patchwork economy which are not in the mining boom fast lane. The mining tax does this by moving away from the inefficient royalties based system - much loathed by the mining industry because it has no regard to varying profitability - towards profits-based taxation. This is why most of the mining sector itself now supports this reform. As a result, we are in a position to cut the company tax rate and provide much-needed tax relief to our 2.7 million small businesses. And we are in a position to provide a more secure retirement for 8.4 million of workers. Next week the Senate will vote on this historic economic reform.

I can confidently say I know better than most how hard this reform has been. I can also confidently say the economic community of our country is now overwhelmingly on board. That's because it's a no-brainer to use massive mining profits to help those millions of businesses who aren't in the fast lane.

I can also confidently say that I believe the Australian community is also increasingly on board. That's because Australians want to live in a community characterised by fairness and a reasonable level of equality in living standards. A community in which mineral resources which belong to all of us, are used for the benefit of all of us, to strengthen our whole economy, not just a very small handful, as I've recently written about.

I was absolutely delighted to see the really powerful community debate that my essay sparked. It was the same spirit that underpinned the Tax Forum in a way - Australians who care about their country and their economy getting off the fence and getting into the debate.

Of course ultimately when it comes to our mining tax reforms, history will judge our actions. History will also judge the actions of our political opponents as well. In fact, I suspect history will take a very dim view of the Liberal Party of Menzies and Howard actually opposing tax relief for small business and a lower company tax rate.

As I have said before, in our patchwork economy, it is breathtakingly bad economic policy to be denying this tax relief, and instead writing an 11-figure cheque to booming mining companies instead. Sadly Mr Abbott sees tax reform as an excuse to lower taxes for a favoured few or to make political points about big new taxes. Of course his rhetoric about our tax reform record does not stack up to reality, as the most cursory examination of the budget papers shows.

The Howard-Costello Government was - and remains - the highest taxing Government in Australia's history. We inherited a tax-to-GDP ratio of 23.7 per cent and have kept the tax take substantially lower than that ever since. Stephen Koukoulas recently reminded us that we have never had a tax-to-GDP ratio exceeding this, but Howard and Costello did, in six of their last eight years in Government.

In part, our lower tax take reflects reduced tax receipts following the GFC, but it is projected to remain below the previous Government's record highs even as the economy recovers. If we'd maintained the tax-to-GDP ratio at the level we inherited, then the tax take would be over $21 billion higher in 2012-13. That would give us a surplus of over $23 billion next year. But our government's economic team recognises that tax reform is about more than a single indicator.

How you raise taxes is just as important as how much you raise. Hawke and Keating understood this with their farsighted reforms to the personal income tax base and the company income tax system, in both cases broadening the base and lowering the rate. We've been every bit as courageous on tax reform as our Labor predecessors. It has been central to our efforts to boost productivity and participation, in order to lift living standards and prepare the economy for the future.

Leaving aside the big, hard reforms that everyone could name, like the MRRT and pricing carbon pollution, there are plenty of untold stories among the 30-plus recommendations we've already adopted to mould the tax system to our times.

We're undertaking the biggest reform to the personal tax scales in decades. From 1 July this year, the tax free threshold will triple, jumping from $6,000 to $18,200. This means a million extra Australians will no longer pay tax out of their fortnightly pay. They'll also get to spend more time doing things they value, and less time dealing with the Tax Office.

We've taken important steps to close inefficient holes in the personal tax base. For years, the formula for valuing car fringe benefits has encouraged people to drive longer distances than they need to, simply to qualify for large tax breaks. We changed the formula, so it is no longer tied to how far you drive.

Then there's the Dependent Spouse Tax Offset. This offset is a relic, dating back to the 1936 Income Tax Assessment Act - a time when male breadwinners were expected to maintain a stay-at-home spouse. This offset effectively meant that spouses without children received over $2,300 to stay at home - an amount which included an extra $445 provided in Peter Costello's final budget. And they faced an extremely high effective tax rate on the first $10,000 of income they earned. As part of our drive to lift workforce participation, we are phasing out the Offset. Neither of these reforms was easy. But we recognise that the tax system needs to change with the times.

We're also putting in place simpler, more generous depreciation arrangements for small businesses as a key reform dividend from the mining tax. We've cut the tax bills of small business by allowing them to write off instantly any asset purchased for under $6,500 from 2012-13. This will benefit up to 2.7 million small businesses across the country, irrespective of whether they operate as a sole trader, partnership, trust or company.

Small business will also be able to write-off instantly the first $5,000 of any motor vehicle they purchase. These reforms reflect the needs of small business, unlike the Entrepreneur's Tax Offset which we are abolishing.

Overall, small businesses get a tax cut of around $1 billion per annum, improving their cash flows, making the tax system simpler and encouraging them to invest and grow. I'm proud that we've been able to implement so many of these reforms in what has been, after all, a difficult economic and political environment.

What's made them work has been, in part, the invaluable consultations with had with groups like your own. Consultation was at the heart of the Tax Forum. It was a meeting point for a wide cross-section of perspectives and expertise. Perhaps against the expectations of our critics, I think all agreed that the two days were incredibly valuable. With our wide-ranging, open and constructive discussions, we proved that mature, forward-looking policy debate is still possible, indeed vital.

And I was personally heartened that the fundamentals of our existing reform program found a lot of support in that room. We had some disagreements - that's a natural part of consultation - but they didn't prevent us from nutting out some challenging issues. More detailed consultation continues on many of the outcomes of the forum:

  • The State tax reform plan, which Mike Baird and Andrew Fraser have agreed to lead. They're looking at some of the more inefficient state taxes and will take their plan to COAG later this year.
  • The Not-for-profit Sector Tax Concession Working Group that Mark and David are involved with, which is examining how existing taxation support for the sector can be provided in fairer, simpler and more effective ways;
  • Ongoing consultations with Treasury, ATO and COSBOA on ways to reduce small business compliance costs and red tape;
  • The Superannuation Roundtable that Bill is chairing, delivering on a commitment made at the Tax Forum for the Government to work with industry, community groups and other stakeholders about how best to implement our ambitious reform agenda for superannuation;
  • And finally, the Business Tax Working Group.

Let me speak a bit more about the Business Tax Working Group. While our economy is in better shape than just about any of our peers, we've also been dealing with the challenges of a patchwork economy.

Many sectors are concerned about the security of their businesses and their jobs or those of their friends or family. One avenue that has been on my radar for a little while, and that emerged more clearly through the Tax Forum, involves looking at some of the obstacles the tax system throws up in the slow lane of the economy.

We know some businesses struggle with the tax system, its burdens and complexity. But what we don't recognise enough is that these costs fall disproportionately on struggling businesses, start-ups that should be driving our future economic growth; businesses struggling with the high cost of the dollar and that need to take sensible risks to adjust.

Across the country, there are businesses looking to take advantage of new opportunities, and businesses bunkering down for some tough times as they adjust to economic change. Both start-ups and those adjusting may be posting losses. And both are penalised by our current tax system, which insists on putting off recognition of these investments. These problems will be particularly pronounced for small and medium businesses, without other income and good access to credit during difficult times.

Businesses don't need a hand up, but they do need a better shot at investing and growing through tough times. This is what drove the formation of the BTWG. Businesses have not been getting enough tax recognition for their investments. They are being taxed too much when they are least profitable and have little ability to pay. This harms investment and national economic growth. In particular, we lag many other countries in giving businesses access to their legitimate tax deductions when they are making losses.

In Germany, Ireland and the UK losses can be carried back to the previous year. The Canada and France have allowed three year carry back in recent years. It may make sense for Australia to have a carry back period within this range. Perhaps with a cap, like many of these countries, to protect the integrity of the tax system. The working group will deliver its report on the tax treatment of losses in the next two weeks.

Importantly the BTWG is also consulting on saves. Not all tax breaks are good for investment - some simply distort it. And in a patchwork economy we need to question ineffective or inefficient tax breaks. The Business Tax Working Group is a great opportunity for business and other groups to identify ways that the tax system can support businesses' changing needs.

It was Charles Darwin who said "It is not the strongest that survives, nor the most intelligent, but the one most responsive to change." As the world changes dramatically in the Asian century, we want Australian families and businesses, workers and industries, to be able to respond to those changes and take advantage of the tremendous opportunities they offer.

We want this to be the Australian century in Asia, not just Australia as a passenger in the shifts underway in the world. And with our ambitious tax reform agenda, pursued in partnership with you and the broader the community, I'm confident it will be.

Thank you.