FEDERAL-STATE RELATIONS COMMITTEE
Inquiry into overlap and duplication of
roles and responsibilities
Minutes of evidence
Melbourne - 23 February 1998
Members
| Mr A. Andrianopoulos | Mr M. John |
| Mr G. B. Ashman | Ms L. J. Kosky |
| Ms L. T. Burke | Mr B. T. Pullen |
| Mr D. Dollis | Ms W. I. Smith |
| Mr K. S. Jasper |
Chairman: Mr M. John
Deputy Chairman: Mr B. T. Pullen
Staff
Executive Officer: Ms L. Topic
Office Manager: Ms N. Papal
Research Officer: Mr P. Emerton
Open forum
(with the participation of Ms A. Sherry, Westpac Bank (affirmed))
Mr PULLEN - I could ask this of any of the speakers but I suppose John raised it most directly. Are you in favour of more hypothecation in taxation? You said there is recognition that there could be a tax on roads and you indicated that a tax on petroleum was really a surrogate for that and perhaps close enough. You could argue that at a local government level rates are a land tax which could be related to a reward, if you like, for the amount of infrastructure effort that a region put in. The services that were put in would enhance the value of a person's property and, therefore, there is some sort of link there. Philosophically, do you believe we should take that direction and that we should be considering further hypothecation of taxes than we have at the moment?
Prof. FREEBAIRN - My short answer to that is no, but let me explain some of the issues. One of the interesting ones we have is Medicare, which is a so-called hypothecated case.
Mr PULLEN - It does not line up?
Prof. FREEBAIRN - That is precisely the problem.
Mr PULLEN - But people see it that way?
Prof. FREEBAIRN - That is right. It pays less than a third of the total government expenditure and the way it is added on creates many of the poverty traps we have been talking about. In relation to the roadway I mentioned, I would move it away from taxation, full stop. Just as consumers pay access and annual user fees to use the electricity network, I envisaged that the state would impose a fee on every motorist who uses the roadway and that vehicle usage would not entertain a tax at all. The only thing in favour of hypothecation is that it may make it easier to sell taxes to the community. There seems to be a belief - and I suppose it is an interesting one - that there is in a sense social security in Europe and North America whereas in this country we collect general revenue which provides pensions for the aged, for health, for unemployment and so on. In the Northern Hemisphere you pay a social security tax that is essentially hypothecated to meet old age, unemployment and so on.
However, rather like the Medicare levy in this country, it does not match up properly. I believe when governments analyse their budgets - a dollar is a dollar - they can write a story which says this is the income and this is the expenditure, but really the Treasurer has just put it all in one big pot: 'This is my revenue; this is my expenditure. Now, you smart accountants tell me how I can hide it the best way possible'. I do not believe it is the way to go.
The CHAIRMAN - Mark, do you want to follow that?
Mr PATERSON -Yes. If we consider the aspect of local government saying that rates are a hypothecated land tax, we see that local government spends three times what it collects from rates so its revenue expenditure at the local government level is three times its collection rate, and that is topped up by state and federal governments. To assert, particularly at current levels, that it is a hypothecated land tax or an alternative land tax does not hold up in relation to rates. Hypothecated taxes can be okay at the top end if you properly align them. The fuel excise is a classic example because when the diesel fuel excise was introduced it was a hypothecated tax for road use. Farmers and miners successfully argued that they should be excluded from the application of those diesel fuel excises because it was for off-road use or power generation. So you had a hypothecated case and then argued that a couple of groups of people should be excluded from the application of that tax. But the revenue collected is no longer applied to road use; it goes into general revenue if it is not hypothecated tax.
If we are to have a hypothecated tax it must be real and enduring. Hypothecated taxes are fine in some areas, but what will you do with revenue collections for less attractive things? What about providing defence? What about providing social security? Will you impose on a community a hypothecated tax structure based on providing things that some people say they do not want? There is a tension between having the tax regime and a hybrid hypothecated plus tax regime, and in the end that will be inefficient.
Ms McClelland -It is a difficult situation. We do not talk enough about it. There is no doubt in tax design terms hypothecated taxes are undesirable but the community usually likes them - you only have to see the community's lack of opposition to the gun levy. One thing that was said quite strongly at the tax summit in 1996 by one of the commentators was that the community is more likely to accept a tax expenditure package. Governments do not often think enough about tax expenditure packages because communities will pay tax when they see where the expenditure goes. In relation to hypothecation and the gun levy, we possibly do not look enough at using hypothecated tax when we know there is a short, sharp expenditure need, where it is not enduring. Perhaps - and this is my opinion, not ACOSS's - we should think more about those sorts of situations, and we often have them in times of unemployment.
Mr PULLEN - It seems to me that when you use the word hypothecation it makes economists nervous; yet in a sense you are actually saying user pays. Is not user pays another way of saying the same thing? When people feel comfortable about user pays on things such as paying for the water they use, it is really from an expectation that the tax is linked to the provision of the dams, the services and the infrastructure to provide that water, and the person then feels that is a reasonable charge. I feel that it is a bit blurred and we should think more carefully about the linkage between the charges and the purposes and accept that the public will want to know more about that. I could not quite understand why you were advocating what I thought was a linkage but baulked at the idea of calling it hypothecated.
Prof. FREEBAIRN - I am trying to distinguish between what we call almost a pure private good, where it is clear that an individual consumes it, and almost a pure public good, like defence or welfare support. It seems to me that the hypothecation argument gets less and less tenable the more you move from a private to a public good and so you end up with Mark's story: you could take it some of the way but not all of the way.
Ms BURKE - I guess you are saying that it is coming back to what the public perceives as the core role of government and the core role of the private sector?
Prof. FREEBAIRN - If one were applying a pure role there would be a tendency to say governments should only be involved in the provision of public goods, and private good should be left to the private sector. There you get the interesting argument of how you might fund things such as education and health. You might say that that is straight redistribution - you give people vouchers or whatever and they chose what health and education they buy - whereas we have a society that now decides collectively the state will provide a minimal amount for health, education and housing. You are therefore right to say it is more complicated than the answer I dished out the first time.
Ms BURKE - Alison, you spoke about negative gearing. Does ACOSS have any figures on the effect on housing in the rental market if negative gearing is removed?
Ms McClelland - We have those figures but unfortunately I do not have them with me. We have some figures showing the proportion of people investing in the private rental market who are negatively gearing - I think it might be a third. That is the high test. It might be even a fair bit below that. The evidence we have examined shows that most of those are investing at the higher end of the market and not in low-cost housing. I believe an analysis issued by the New South Wales Department of Housing, which has done a fair bit of the work on that, confirms there has been considerable dispute about whether the correct action was taken in the late 1980s when negative gearing was reintroduced as a result of the cost of housing heating up, and that was actually the result of other things such as the property market boom and high inflation rather than the quarantine of negative gearing.
One thing is now recognised: that were the quarantining of negative gearing to be introduced it should not be confined only to property. That provision was too narrow when introduced in the mid-1980s. It should also include share purchases. You may be aware of the substantial advertisements now appearing in the pages of the financial newspapers about reducing after-tax liability through negative gearing share purchases. That is now happening to a considerable extent.
Ms BURKE - Would the proportion of percentages figures you gave us involve the rental assistance program in the low-cost housing sector?
Ms McClelland - We are concerned to improve incentives to invest in the private sector, but negative gearing is a non-targeted and bad way to do it. More could be done by changing the aggregation of land tax liability, and we will be publishing a paper about that. We support tax changes that are geared to encouraging better institutional investment in low-cost rental housing.
Ms BURKE - You do not think the land tax would go onto the rents?
Ms McClelland - I can provide that information to the committee because I have it in my office. At the moment the institutional investor's land tax liability is aggregated. It is all about disaggregating that as a way of encouraging investment - aggregating it per investor rather than per property. I would need to check that.
The CHAIRMAN - I invite questions or comments from the audience.
Dr WELLS - Today methods of revenue raising and revenue distribution are popular public whipping horses. We hear too little about the total tax take nationally. John Freebairn today said, 'Let's not worry about the total quantum' despite the fact that in some nations the tax take is two to three times the tax per taxpayer than those nations raise. Also, Mark Paterson said there were economic inefficiencies in Australia, particularly in business tax, which must be reduced even though the average tax payable shortly will be the marginal tax rate. I understood Ms McClelland to say there had been a reduction in the last few years in the tax take.
My impression is that in the past 30 years taxes have inexorably increased in Australia. My questions are: is that true? If so, are there no economic inefficiencies in tax distribution in this country? If there is none, why is it that other countries clearly take less tax per person than we do? We are talking about changing hats, not about addressing the problem, which is how to make the economy go on the basis of equity, dignity and fairness in our nation.
Mr PATERSON - I will not answer the numbers position over time; I will leave it to Professor Freebairn to respond. Starting this exercise with the assumption of revenue neutrality was, in our belief, the only chance we had of getting a comprehensive debate and a reasonable chance of an outcome. Previous attempts at talking about tax, as I said, were such that our constituency in the past has said, 'Yes, we want tax reform and we want to pay less'. Ms McClelland's constituency would say, 'We want to have tax reform, to collect more revenue to provide a larger range of services'. In trying to minimise the areas of difference, if you start with the fundamental basis most likely to split you apart you are guaranteed to achieve that outcome.
We thought we could best achieve a broad economy-wide debate and acceptance of the need for reform if we made the assumption of revenue neutrality. That does not mean to say we would not like to see more efficient government or reduced government spending or government out of the business of providing a whole range of business-style services. However, for the purpose of the debate and if you are to refigure a complex mix of federal and state taxes, you have to start with one assumption - that is, revenue neutrality for the purposes of rejigging the package and not for revenue neutrality over time.
Ms McClelland - If you make comparisons, you find Australia is about the third-lowest taxing country of the OECD countries when we look at total taxes, adding together all our governments, as a proportion of gross domestic product. That low level of taxation stays, but if you add the superannuation guarantee you find we are about the sixth or seventh lowest. It is true that, compared with our Asian neighbours and newly developed countries, we are relatively high taxing, but if we want to compare our tax systems with those of Asia we have to decide whether we want to go the way of Bangkok and spend 2 hours fighting the traffic travelling to work there because money is not spent on infrastructure. We have to think carefully about whether we want to compare our tax systems with the rather low tax systems of the Asian countries, which will undoubtedly increase over time.
The same comparison holds if you look at taxes facing average production workers. They are not high in Australia compared with other countries. If you look at changes over the past 30 years you find that certainly Australia's taxes as a proportion of GDP have increased. However, the major concern is that it is not so much the tax as a proportion of GDP that might have undesirable effects but the way we tax things. Professor Freebairn knows more than I do about that subject.
Prof. FREEBAIRN - If we talk about general government - that is, expenditure on health, defence, education and so on - we find that in about 1900 it was 10 per cent of GDP. It picked up a bit during the First World War and significantly picked up in the Second World War. In 1960 the rate was about 25 per cent. Then it grew to about a 36 or 37 per cent peak in 1985. Since then it has levelled out.
In answer to the question, it is really all about the political debate, as Mr Paterson said. To get somewhere on tax reform let us focus on the structure of taxation to collect a certain amount of revenue. That does not remove the observations that maybe governments could operate more efficiently. One of the classic examples is the interface for your committee: who should be handling health and education? Should it be the federal or state governments, or a combination of both? Then we move to the other debate about whether government should or should not be involved in health, education and so on.
If we were to have all that included in a debate you could be absolutely sure we would get nowhere. The hope is that by containing it in a revenue neutral package we might get somewhere on the tax reform issue and you would fight the other ones at another time. That is a judgment which people may make for themselves.
Ms SHERRY - Rather than add anything to the macroeconomic issues, which my colleagues have covered well, I point out that, having worked in federal and state politics at the policy and delivery levels, I know the threshold issues about commonwealth-state responsibilities are not actually about macro tax collection, although that obviously underpins it. It is much to do with the behaviour of government departments and of basic politics, which is more difficult to analyse than the issue of how we collect taxation. Also, in part it is about consumer perspective and what the consumer wants.
The recent federal government debate, or attempt to debate, whatever one likes to call it, about the introduction of charges for entry into nursing homes unleashed an understanding of the expectations of not only that particular group of consumers but also of the extended families who had a different view about economic efficiency than do analysts - about, for example, the value of the family home which is used inefficiently, in many cases, by the elderly in the community. The expectations that families have about that resource create a different political issue than, for example, the analysis would suggest.
There are good analogies in banking where the removal of cross-charging, more transparency and what consumers pay for what services on the face of it suggest that that sort of transparency and consistency provide a better outcome for consumers - except that consumers do not believe that.
Your committee has other points of concern about issues that operate at a more fundamental level than making an analysis of the raising of taxation. I understand why one would start from that point and leave the other stuff out, in a sense, because it will be more difficult to resolve and does not have the same basis of fact and analysis that sits behind how you might generate income at a macro level. Your committee has some difficult tasks ahead in sorting through some of the other issues because they do not all commence on that basis.
Mr PATERSON - Access Economics has looked at political fiscal imbalance and removing as many areas of duplication between the states and the commonwealth as possible. Its estimate is that removing that duplication and the impact of vertical fiscal imbalance (VFI) on duplication would add 1.9 per cent to GDP. That is more than double the impact on GDP of the Asian crisis. It would add that amount every year. That means nearly 2 per cent in GDP would be added by getting rid of the obvious areas of duplication of VFI. We should not ignore that fact.
Ms SHERRY - Doing it is almost 10 times harder than coping with the Asian crisis.
Mr PLOWMAN - My question to all speakers, but particularly to Professor Freebairn, relates to reforming taxation. How do you reform the export industries that are based not only on costs here but income derived from export prices? I must say that the professor was hardly showing sympathy for the rural or mining sectors when he talked about imposing a tax for all off-road fuel, a charge for road usage, a broad-based tax for consumption and about reducing income tax - which is at a minimum anyway - while applying a broad land tax, a wealth tax and a death tax, all of which we have been fighting to eliminate.
My question is a little more basic. If that is the case, Professor, would you suggest we fund a relocation of the farmers we will push off their land or, as in Europe, will we subsidise their commodity prices? Or maybe you could advise how we join the drugs, sex and home repair businesses together and get into the black economy?
Prof. FREEBAIRN - I thought farmers were one of the best exploiters of the black economy, anyway! But I shall take your question seriously. If you were to set fuel tax up as a charge for the use of roads and you had some money left over, which you would, and put that on a broad-based green tax, work done by the Australian Bureau of Agriculture and Resource Economics (ABARE) would suggest that farmers would be winners and that the coalminers and aluminium people would be the losers.
The current tax on road use of fuel would decrease. Farmers are fairly major users of off-road transport. They would pick up tax from their on-farm use of fuel and from having to pay more for their electricity. But the mining industry and consumers in, for example, Melbourne who are using electricity would be paying more green tax than they do at present.
What is also important in this part of the game is what happens to the exchange rate. Part of the ABARE analysis is about exports collapsing because of the cost of coal, and aluminium-type products going up with a greenhouse tax. We are then still importing as much as we like. So for exports to be pushed up to the rest of the economy, the currency has to depreciate. That is a major plus for farmers, but is of course a sting for those who import.
The land tax will have substantial one-off asset wealth effects. Essentially you will have to pay this land tax from now on into the future. That means that land values will absolutely collapse -not collapse, but fall substantially. Anybody who holds land now will have a one-off windfall loss. Somebody who buys land in the future will pay the land tax, but the purchase price of the land will have fallen commensurately. It is a redistribution against people who now hold land. I do not deny that that will have a wealth effect; but it really does not have an effect on the use of agricultural land. New people in farming will be able to buy the cheaper land. It will not have an efficiency effect. In that sense I do not worry about it - it is a good tax - but I admit it will have a one-off wealth effect, and I expect all those people affected to complain about it.
However, I also say that if I increase taxes on land I can reduce taxes somewhere else. In general I would reduce taxes on things like business capital and labour and get stimulus elsewhere in the country. I would get redistributive effects, but essentially I would be putting taxes on activities that did not have many distortion effects - yes, it would have wealth effects - and reducing taxes on areas that had distortions as well as wealth effects. Politics is about measuring up those wins and losses. I guess the tyranny of the status quo is a strong argument. It is not just farmers - residential people in Toorak and so on are getting off scot-free. So you will have some friends to support you.
The CHAIRMAN - Mark, do you want to say something else?
Mr PATERSON - It is worth making the point that under the existing system, because of the series of distortions and exemptions that apply - we talked a lot about the wholesale sales tax earlier - generally farmers do not pay wholesale sales tax. They have been politically successful in having an exemption put in place for products used on farming; so they rarely pay payroll tax - one of the bases of state collection of revenue - and they are already in receipt of relocation payments. So getting people off the land is already part of the system.
Mr PLOWMAN - Only once they are broke, though.
Mr PATERSON - Yes, but when other businesses in the economy - small retailers, small manufacturers, small tourist operators or people who run motels or something like that - go broke they do not get paid a relocation allowance to get them out of the business. There are distortions in the existing system. We are not singling out farmers. We are saying that the existing system is distorted, is hidden away because it is on a narrow base and a whole range of exemptions are tucked away in it. We want to try to remove that inefficient system and have one that has a base broad enough so that all those exemptions do not have to be built back into it.
The CHAIRMAN - Thank you, Mark. Any other questions?
Ms CORBETT - I am Lea Corbett from the Department of Premier and Cabinet. My questions to both Alison and John relate to a bold tax proposal that I heard John speak about late last year -the negative income tax proposal - which was presented in the context of reducing unemployment, but which also clearly deals with some of the issues Alison and John raised about the high effective marginal tax rates on people on low incomes in the current system.
John, can you comment on how you see that proposal fitting in with the discussion here today in terms of radical or bold tax reform given that it would require a substantial change in the way the commonwealth works, and what impact there would be on that on that if income taxes were handed to the states, or they got some sort of fixed share,? Alison, what view do you have on that proposal, again in the context of broader tax reform?
Prof. FREEBAIRN - The negative income tax is really a proposal to come to grips with the interface of the tax and social security system. As we have discussed, one of the problems with the current interface of the tax and social security system is the very high effective tax rates on a lot of low and middle-income people. In its purest and simplest form a negative income tax would operate as follows. If all adult Australians got $20 000 a year as an up-front grant it would be subject to taxation. So if the tax rate were 50 percent, effectively they would get only $10 000 in their pockets. If they were to earn another $10 000 they would get $30 000 - the $20 000 grant plus the $10 000 they earned - lose 50 per cent of it and end up with $15 000 in their pockets. A 50 per cent tax rate seems high, but compared to the 80 and 90 per cent rates in the existing system, it would be a break. It would be some incentive for people to get on and earn their own incomes and organise their own lives. If it were as simple as that, I would have made some simplicity gains: I would have got rid of the three types of family allowances and the complexities of rent assistance, health cards and so on. It turns out that the numbers to get it right are pretty complicated. In fact, a tax rate of about 50 per cent would be needed to make this system work.
Then there would need to be a compromise. I would make the grant conditional upon whom a person was. It may be that if a person were mentally or physically disadvantaged the up-front grant would be $30 000 or $40 000 not $20 000. It may even be that if a person were married to somebody who was rich the grant would be zero. It may even depend upon a person's age, and so on. But then it starts to get as complicated as the mess we are trying to clean up, so we are trying to work out some sort of compromise. It is an idea to try to rationalise the interface of the tax and social security system in a way which will still look after the people at the bottom and which will not have quite the number of disincentives or be quite as complicated as the current system. It is clear we cannot go to the pure one; we have to have some compromises. That is where the current analyses and debate is being developed.
Ms McClelland - There is a case for a negative income tax, but the case is often overstated in terms of the problems it can solve, and it usually costs more than the community realises. We have an issue about whether it is marginal. One of the generators of tax reform is a concern that the average taxpayer might be paying 40 cents, yet to sustain the present system, on a individual basis tax rates would be much higher than that. So that is a problem. The key problems we have with the people we have talked about today are mainly with social security income tests, mainly because tax on family payments -we have topped up the lower wage earners who have families with children, which is very important in reducing poverty in families within Australia - is withdrawn at 50 cents in the dollar. Often it is combined with the withdrawal of Austudy and child care. The key priority in reducing the average tax rates facing those families to a relatively low cost is to ease taper rates - reduce the 50 per cent taper rate - and look at how taper rates interact with each other and how we are withdrawing child care assistance and family payments - and to look at them in the same way as some of the social security beneficiaries are looked at. That is a priority.
We could also look at whether we want to integrate some of the tax relief to families with some of the cash payments - integrate it all on the cash side or integrate it all on the tax side. For design purposes it is better to integrate it all on the cash side, because that will ensure that the payment, if it is a family payment, will go to the carer - usually the mother - on a regular basis, and that it has an assets test. Often the community and politicians like doing things on the tax side, but then some design problems have to be overcome.
The CHAIRMAN - Thank you. We are past the advertised finishing time, but I see that someone from the middle has a question.
Mr DRUMMOND - My name is Mike Drummond. I am in the navy, although I represent myself. Over the past few years I have spent a good deal of time single-mindedly examining and attempting to design the best possible system of government for this country. I do not mean to boast, but I have university medals in mathematics and mechanical engineering from the University of New South Wales; I have studied a bit of law; and I have an MBA, a Dip. Ed. and an arts degree. I think we can come up with an optimum system of government which will address the concerns of people like Ms McClelland and ACOSS - the gap between the rich and poor, unemployment, foreign debt; you name it, everything - in the optimum way and which will not involve having a federal system of government and state governments. They are just not in the equation. It is not that remote. Both Neville Norman and the Business Council of Australia in 1991 and 1994 respectively - or something like that - put out documents that address this option as at the very least being a real option.
I put it to everyone here today that the problems with our tax system are what were the foreseeable and probably inevitable consequences of dysfunctions which were established by the British Parliament and which led to the 1901 Australian Constitution. It has been suggested that vertical fiscal imbalance and so on be addressed. I have been in agreement with all speakers here today that VFI is far from the most problematic issue at stake. The complete problem will not be solved, and your constituents will certainly not be addressed social security-wise, Ms McClelland, by sorting out the tax. It is very much bigger than that.
In relation to what Professor Freebairn said, education and health are duplicated overheads: horizontally among the states and territories, vertically between the states and territories as a whole, and astronomically in the commonwealth. I have estimated $20 billion out of $180 billion in total government outlays and GDPs up around the $500 billion mark - around $40 billion, $60 billion per annum. In addition to government outlays that takes into account compliance costs, regulatory burdens, and so on. As naive as I may be for my 31 years, when I tackle a problem I go straight for the best answer. I do not want to be distracted by assumptions. The solution to the equation X plus 1 equals zero is X equals minus 1. If people are prepared to look only at positive numbers, the best they may come up with is X equals 1. But that is not the solution.
The constitution is making it just about impossible to really solve all these problems. I believe major constitutional reform has to happen if we are to generate any genuine meaningful solutions to all these kinds of problems. I am quite confident that if tomorrow a referendum or Morgan Gallup poll went to the people and asked, 'What do you think about the idea of abolishing the states?'; it may well be that 30 per cent or so would support it - I think we would be surprised that quite a lot would. But if they were asked, 'We will have $30 billion, which we will redistribute just as well as you want it to be redistributed'; my guess is - and this is why I am confident that in 10 or 15 years we will be well down that path; I will certainly do all I can to achieve that - that that 30 per cent would suddenly skyrocket.
My question to the forum is: how much time do I have to spend away from my 14-month old baby and about-to-be born second baby to come up with a case to put on the table that getting rid of the states is one of the options that needs to be looked at?
The CHAIRMAN - You have raised many important issues in your presentation. If you have a submission, on behalf of the committee I invite you to submit it, because the issues you have raised will take a lot longer to consider than the few minutes we have remaining. If you are happy to do that, we will be happy to receive and consider it.
Mr DRUMMOND - The point I was trying to make was that if we can save only 2 per cent of GDP, or $10 billion, maybe it is not worth it. I was trying to gauge at what point people like me are going to be taken really seriously - the people who pay. Maybe we really do have to consider option X, the one which has always been there but which has always been put in the too-hard basket. I just try to live the best I can without the too-hard basket! I will deliver my submission for your consideration, but my estimate is $20 billion in government outlays and around $50 billion of GDP.
The CHAIRMAN - I am happy to accept comments from members of the panel on Mr Drummond's presentation. As we all appreciate, he has raised many issues. As there are no further comments, I draw the proceedings to a close and thank everyone for their forbearance.
I thank the members of the audience for attending and for their contributions. I also thank our guests for giving us their valuable time. The members of the committee appreciate it and will consider carefully everything that has been said today.
Committee adjourned.
23/2
Public Hearing