With taxes, we build society
Speech to the Deloitte Tax Symposium
Eight score years ago, about 45 kilometres south-west of where we meet today, people gathered for a conversation about tax. Many of the features of that conversation would be familiar to us here today. Fairness was a key theme, passions were running hot and the debate was political at its core. Not everything was the same though, at the end of my remarks we’ll conduct a civil question session, and have a chat over pastries and coffee. The earlier conversation ended quite differently, with gunfire, bayonets and the death of at least 27 people.
I’m talking of course of the Eureka Rebellion of 1854, the ground zero of Australian tax debate. The source of the anger that led to the Eureka Rebellion was the taxation of miners through a licence, levied regardless of the profitability of a claim. The licence fees were collected by an often corrupt and brutal police force, representing a government that in the view of the miners was failing to provide the infrastructure to support a booming population.
So while I’m sure that Deloitte probably had the boutique spas, fine restaurants and local wines more at the top of mind when they chose Daylesford for this conference, it is apt that we’re meeting here in the heart of the Victorian goldfields for the Deloitte tax symposium.
We’re often tempted into lazy nostalgia for an era of easy reform in Australia that never was—a wonk arcadia where tax policy is made with bipartisan support and electoral glee. It’s good to remind ourselves that tax has always been controversial and that while the dispassionate practitioners in this room might wish it were different, tax is political.
I’d like to speak briefly today about where I think tax reform is up to currently in Australia, my views on ways forward and finally an update on the opposition’s tax policy process. I’m going to keep my remarks relatively free of political commentary, but tax is inherently political. I trust you’ll understand if at times I sound a little less like the economics professor I once was, and a little more like Labor’s Shadow Assistant Treasurer.
The current state of tax reform
When Treasurer Joe Hockey launched his tax white paper he said he wanted to have a conversation with Australia about our tax system. Indeed, discussion question 22 in the white paper asks: ‘How appropriate are the tax arrangements for superannuation in terms of their fairness and complexity? How could they be improved?’
Initially, the Treasurer suggested that there could be some common ground with the Opposition on superannuation tax concessions. But no sooner had this conversation begun than Tony Abbott had shut it down, saying that his government will never change superannuation laws. Flouncing out of the debate about superannuation tax concessions was – as Arthur Sinodinos euphemistically put it yesterday – a ‘strategic decision’. In my view, the Prime Minister was wrong to go for the glib grab over the greater good.
More broadly, I worry about the dwindling commitment to economic reform embodied in the government’s second budget. The government introduces 17 new taxes and raises the tax-to-GDP ratio to the highest level in Australian history. The budget papers call this ‘tax modernisation’. Does anyone else feel like we’re watching an episode of The Hollowmen?
Despite this, I’m actually an optimist about the future of tax reform in Australia. There is a quiet revolution occurring in Australian economic policy development, one which hasn’t really been picked up on by commentators. This revolution is a result of the death of the small-target and the introduction of the Parliamentary Budget Office.
The last time that an opposition announced significant tax reform was over 20 years ago. So far this term Labor has announced two tax policies. These policies are based on extensive research, consultation with experts and informed by Labor principles. They have been independently costed by the Parliamentary Budget Office and released 18 months out from an election. I’ll talk a bit more about the details of these policies in a moment, but let’s just dwell on the mechanics for a moment.
Since John Hewson lost the 1993 election on the back of a 650-page manifesto, the conventional political wisdom in Australia has been that you announce as little policy as possible from opposition. Then when you win government, you blame the previous government for everything and set about implementing your own agenda. In the absence of any agenda you institute a bevy of reviews to make one up.
This small target strategy has proven effective at winning elections. The problem with a policy-free election strategy is that you don’t gain a mandate to implement any policy when you win the election.
But even putting political strategy to one side, oppositions have not had the resources to properly cost policy proposals. This is where the creation of the Parliamentary Budget Office has been such an important development. The Parliamentary Budget Office cost different options, point out potential implementation issues or behavioural responses. They also provide people with the confidence that revenue figures announced will be realised.
So far we have announced two significant tax policies, and I can assure you that we are continuing to work away on the rest of our policy agenda.
Labor intends to use its time in opposition well. We will not succumb to the small-target trap. We will use the resources that we have at our disposal to develop policies. We will announce these policies well out from the election and if we win the election we will implement them.
We recognise that there is a significant fiscal challenge facing Australia. We believe that difficult decisions will be necessary, but we do not believe that these decisions must be unfair. Labor will have more savings than new spending over ten years.
And by the way, Labor’s savings won’t be because we’ve announced an unfair parental leave scheme, put the money in the contingency reserve; and then decided not to go ahead with the scheme and called the result a ‘saving’!
The government would have you believe that the solution to reducing the deficit should come wholly from reductions in spending. This implicitly means hurting those Australians who are less well off. Australia’s social safety net is already well targeted towards disadvantaged Australians. Further cuts to the social safety net tend to hurt the most vulnerable.
The other ever-green tax policy solution is to broaden the base and the rate of the GST. The increased revenue could then be used to remove inefficient state taxes and reduce income tax rates.
The benefits of an increase in the GST are oversold. Recent research by the Treasury has found that the dead-weight loss is broadly equivalent to personal income tax, with marginal excess costs of 19 and 21 cents per dollar of tax respectively, so there does not seem to be a large economic dividend from increasing the GST to cut income tax. An increase in the GST is also regressive.
When it comes to reducing inefficient state taxes, states already have access to an efficient tax base in the form of land tax. I am encouraged by the work that Tom Koutsantonis is doing in South Australia to look at replicating the stamp-duty/land tax switch that the ACT government has put in place.
So while an increase in the GST is often suggested, I don’t believe that it’s the right option for Australia. There is no political consensus to change it and the supposed benefits of increasing the GST can be achieved through other methods.
The two policies that we have announced so far demonstrate our commitment to reducing the deficit, while ensuring that our changes are fair and sustainable. I’d like to into the detail of the multinational tax and superannuation tax changes we’ve announced.
Fairness and multinational taxation
On multinational taxation, Bill Shorten, Chris Bowen and I announced that Labor would make changes to Australia’s thin capitalisation and hybrid mismatch rules as well as an investment in the ATO’s compliance capabilities. The evidence at the recent Senate Corporate Tax Inquiry has shown just how aggressive the tax planning of multinational firms in Australia has become. The community expects companies to pay their fair share, and confidence in our tax system cannot be taken for granted if people see companies getting away with paying very little tax.
Governments around the world are looking hard at their tax systems to see whether these are up to the task of ensuring a sustainable revenue base when business activity is global and finance is increasingly mobile. It’s relatively easy to keep track of how much tax a company should pay when they’re operating exclusively in your own backyard. But that task becomes much harder when companies have a worldwide footprint and an intricate arc of international holdings. That’s why both the G20 and OECD have identified multinational profit shifting as a major challenge for economies like ours.
But while we’re working on getting the international tax framework right, we also need to be thinking about how our rules work here at home. That’s why we announced a package that addresses areas where unilateral action poses little risk to the progress of the OECD BEPS project.
Firstly, we’re proposing to move to a world-wide gearing ratio approach for calculating the amount of debt that companies can claim deductions on in Australia. This continues ongoing efforts by successive governments from both sides of politics to tighten the rules on thin capitalisation.
Under our preferred approach, deductions would be assessed on the third-party debt-to-equity ratio of a company’s entire global operations. We’re proposing to achieve this by eliminating the existing safe-harbour and arms-length tests, and making the world-wide gearing ratio the only test for the level of allowable deductions. This is a shift away from the current safe harbor rules which let companies claim deductions on up to 60 percent of their Australian debt, without needing to show how this debt relates to their real business activity.
Because the 60 percent ratio is an arbitrary figure, it is too generous for some businesses and possibly too strict for others. Our proposal aims to ensure there is strong support through the tax system for companies that have a legitimate need for high levels of debt. Indeed, if your multinational group has a worldwide gearing ratio of 70 percent, then our proposal will see you being able to claim up to 70 percent debt in Australia. For some entities, a worldwide gearing ratio is more generous than the arbitrary 60 percent cap.
Second, we propose to better align Australia’s rules on hybrid entities and instruments with tax laws in other countries. As many of you would know, these are often classified differently around the world, with some jurisdictions treating these instruments as equity, and others as debt. This sometimes creates opportunities for ‘double-dipping’ where companies can claim tax deductions in Australia without having paid tax on the equity elsewhere in the world. Under our preferred approach, the Australian Tax Office would have the power to deny deductions here if tax has not been paid anywhere else.
Third, we propose to bring forward third-party data matching rules to improve compliance outcomes. This builds on work Labor did when last in office to improve transparency about the tax affairs of big corporations. It also supports the OECD’s work on transparency through measures like the Common Reporting Standard and country-by-country reporting.
Just as an aside on transparency, I’m sure you’d have seen that the Abbott Government is looking at rolling back the tax disclosure laws put in place by the Labor Government in 2013. Under these new laws, the Australian Tax Office is set to start releasing basic data about the taxable income and tax paid by companies earning over $100 million in revenue from this year.
Many firms find themselves frustrated when inaccurate tax figures are used in the public debate. In my view, the solution to this is more transparency, not less. The release of this tax transparency data provides an opportunity for companies to start a conversation with your customers and the wider community. It opens the door for you to explain how and why you’re doing the right thing, and set yourselves apart from those which aren’t living up to the community’s expectations. Like the MySchool website, which generated considerable controversy at the time of its launch, the release of appropriate taxation data can lead to a deeper public debate.
Rolling back tax transparency laws will do nothing to alleviate the public’s concern that some companies aren’t paying their fair share. It will not stop the advocacy from community groups and NGOs for a more transparent and accountable corporate tax system. Going backwards on transparency does not seem to us a realistic path given the community’s ongoing concern about corporate taxation.
Returning briefly to our proposed package, Labor also plans to invest new resources in the Australian Tax Office. After major budget cuts under the Abbott Government, we want to ensure the tax office has the resources it needs to effectively carry out the work a future Shorten Labor Government would set for it.
If we don't find ways to address multinational profit shifting, we're turning a blind eye to distortions in the market which will slow economic growth over time. Outdated features in the tax system, loopholes which reward the wrong kind of effort – these function like old-fashioned subsidies. They distort the allocation of resources and give the biggest rewards to those who play the game by testing themselves against the rule book, not their real competition.
We need a tax system that rewards the productive, the innovative, the resilient, the clever and the competitive. We need an economy that rewards hard work in business. Labor wants to see all businesses – big and small, local and international alike – have a fair chance of succeeding because they are competing on a level playing field where the same rules apply to all.
The government’s ‘plan’ for multinational taxation
I’d also like to briefly address the government’s multinational tax changes announced in this year’s budget. Firstly let’s consider a fairly simple criterion for assessing any new tax packages, does it raise any revenue? On the government’s own figures the answer is no. In fact the package raises only $30 million over four years, less than 1/60th of Labor’s package.
The same Treasurer who called multinationals ‘thieves’ proposes a multinational tax package to raise just $30 million. On the back of having voted against Labor’s multinational tax package in the last parliamentary term, and having given a $1.1 billion tax break to the sector shortly after coming to office, it’s tempting to conclude that the Treasurer is more concerned with the front page than the bottom line.
Mr Hockey has a somewhat troubled relationship with our general anti-avoidance rule. When the previous Labor government tightened Part IV A in 2013—which the coalition voted against—Joe Hockey’s responded by saying that our move was:
‘An unnecessary overreaction. More red tape for business—when is it ever going to stop? More compliance costs for business—when is it ever going to stop?’
I’m left bemused as to where Joe Hockey really stands on tightening Part IVA. Does he believe it’s a vital part of our multinational tax approach, or an unnecessary overreaction?
The growth in superannuation tax concessions
Before the budget, Chris Bowen announced changes to ensure the fairness and sustainability of our superannuation tax concessions. The cost of the tax concession on superannuation earnings is set to double from $11b per year to $22b by 2017-18. In fact, superannuation is the fastest growing tax concession in the Federal budget.
The rate of growth of the cost of super tax concessions is greater than that of the aged pension. As Chris Bowen noted in his Press Club address yesterday, Joe Hockey’s own budget papers show the cost of the concession will double over just the next four years.
The cost of total superannuation tax concessions will be greater than the cost of the Age Pension by the end of the forward estimates period.
These concessions overwhelmingly benefit the wealthiest Australians. The top 1 percent get a bigger share of the superannuation tax concessions than the bottom 40 percent. At a time where we need to find savings to reduce the deficit, this is neither fair nor sustainable.
It’s not just Labor that believes this. John Fraser, Joe Hockey’s new Treasury secretary, has also raised concerns with the level of superannuation tax concessions, noting in February this year that:
‘An important criterion for a well-functioning tax system is fairness, where there are some contentious and important issues that need to be explored.
‘For example, substantial tax assistance is provided to superannuation savings.
‘We need to consider whether the level and distribution of these concessions remains appropriate.’
This is why Labor will reduce the threshold at which the High Income Superannuation Contribution begins to apply to $250,000 and we will introduce a tax on earnings of 15 percent on earnings above $75,000 in the pension phase. These are modest changes that will assist in ensuring that our retirement income system continues to provide support to those who need it.
The total improvement in the budget bottom line as a result of these changes is $14.3 billion over the decade. When combined with our multinational tax policy, we have policies which improve the budget bottom line by more than $20 billion over the next decade.
Labor believes in acting in a responsible manner when it comes to budget savings. We are happy to work with the Coalition where we can find common ground.
That’s why Chris Bowen announced yesterday an initial position on some of the savings measures contained in the budget.
Where a measure is sensible and fair, we will support it, even if the Government hasn’t gone about it in the way we would have chosen to.
Accordingly, the opposition will support following measures:
- The change to taxation of holders of Work and Holiday visa holders
- The abolition of the large family bonus
- The removal of the zone tax offset for fly-in fly out workers
- Changes to work-related car expense deduction methods
- The implementation of the ‘No Jab, No pay’ policy.
In total, these measures add $2.4 billion to the budget bottom line over the forward estimates. This shows Labor’s commitment to restoring the budget, providing it is not done at the expense of those Australians who are less well off.
When I wrote my PhD, my main piece of research was on the US Earned Income Tax Credit, a tax policy that aims to boost labour supply and reduce poverty. After graduating, I worked as an economist at the Australian National University, where I continued researching the effect of the tax system, looking at the effect of taxes on house prices, mobility, educational attainment and inequality. I passionately believe – as I’m sure you do – that getting the tax system right is a central issue for Australia’s future prosperity.
I’m an optimist about the prospect for tax reform in Australia. Drawing on expertise from academia, business, thinktanks, and the Parliamentary Budget Office, Labor is using this time in opposition to develop a comprehensive economic agenda. This includes a tax system which will help to grow our economy and pay for the essential services Australians expect. Labor’s policies will be built on the principles of supporting economic growth while ensuring that all Australians benefit from increased prosperity.
We don’t expect it to be easy. Past efforts at tax reform in Australia are littered with false starts and abandoned changes. We in Labor are committed to ensuring that we have a considered and comprehensive agenda. It goes without saying that we need to reduce the budget deficit – but as you know, most economists would not regard that as the paramount test of good economic management.
A good budget also supports economic growth and creates opportunities for young people to break into the labour market. A good budget is crafted to reduce inequality, now as high as it has been in three-quarters of a century. A good budget boosts entrepreneurship, encouraging science and innovation that must be at the heart of new business formation. A good budget tackles the challenge of climate change – one of the toughest intergenerational challenges of our era.
Big challenges demand bold thinking. Labor will not shirk the task. You have seen plenty of ideas from Bill Shorten and the team this year, and you can expect more over coming months. Between now and the next election, we will engage with the business community, and outline our economic program to the Australian people – so that if we are fortunate enough to win, we are ready to go.
MEDIA CONTACT: JENNIFER RAYNER 0428 214 856