MICHAEL PASCOE:
Welcome back to Day two of the Tax Reform. I trust you all had further interesting nights working the issues of yesterday and looking forward to today. I saw one media report last night that said apparently discussion of GST and other taxes had been banned, which would make us all very naughty boys and girls as this does remain, of course, a totally open and broad discussion of tax.
There is a lot on our agenda today. It is a very interesting agenda but this is not the only event in Canberra today. There is another one. Treasurer, could you enlighten us?
WAYNE SWAN:
Thanks very much. It is a special day for one of our participants, Everald Crompton, who is 80 today. He has been a friend of mine for a long time but he has also been very active in public life for a very, very long time. I think what motivates him, every day he gets up and every day he has got up over those 80 years he is a real patriot for Australia. You have been a great advocate for many groups in our community, the vulnerable and for the elderly. Thanks for your great contribution to Australia. Happy Birthday.
MICHAEL PASCOE:
What a very fine way to start the morning. Now, to tax. To begin though, we will hear from Dr Ken Henry. He was Chair of something called the Future Tax System Review Panel, which most people have never heard of, but everyone knows about Henry. Ladies and gentlemen, please welcome the Chair of the Henry Report, Ken Henry.
KEN HENRY:
Thank you very much, Michael. It is a great pleasure to be here. Yesterday's discussions I found very encouraging, I have to say. Clearly this forum already has demonstrated that it is a very, very worthwhile exercise.
In yesterday's discussions I sensed a strong desire on the part of most participants to take the debate to the next step. Without knowing precisely the form of that next step, in order to take it to that next step we will need better and more widely shared information. It is clear that impressionistic, ideological, overly abstract or overly theoretical propositions are not going to deliver what is needed in the next phase of the debate.
In putting together the report on Australia's future tax system, we stressed the importance of a better informed public debate. It was for that reason that we framed four specific recommendations relating to monitoring and reporting on the system.
First, we recommended that the government should, every five years, publish a tax and transfer statement that analyses and reports on the overall performance and impact of the system, including with estimates of efficiency costs and distributional impacts.
Second, we recommended that all governments in this federation of ours make freely available for analysis any research data on existing taxes and transfers, including confident tax unit records; that these be made available to researchers.
Third, we recommend that government support one or more institutions to undertake independent policy research relevant to the Australian Tax and Transfer System.
Our fourth recommendation in this group was to the effect that tax expenditures and spending decisions should be treated systematically by governments Commonwealth and State in framing their budgets.
Implementation of these recommendations would go a long way to enhancing the quality of the debate on tax and transfer matters and we need to do this. The awareness that we need a better information base also influenced our thinking about the level of detail in our recommendations. In many cases we stop short of articulating a precise recommendation or of making an especially challenging recommendation because we consider that a better public understanding of an issue or a set of inter-related issues was required and the allowance for the corporate equity proposal that we discussed briefly yesterday morning is but one, if not an important, example of that.
The understanding that new issues take time for absorption and for influence was in part responsible for us emphasising that there is no real imperative for government to seek to legislate immediately a comprehensive tax reform package to implement all of the report's recommendations. We never imagined this. As we said in our report, "This review has aimed to set the strategic directions for the Australian Future Tax and Transfer System. It has not produced a one-off tax policy package and it has not advanced the detailed design or timing of measures. It is not desirable to make these changes too quickly".
There are other practical reasons for taking such a measured approach to the reforms and we set out six of these in our report. We noted there are critical links between tax and transfer policies and the other mainly regulatory and spending policies of government, and that the future implementation of many tax and transfer policies depends on the developments in this broader fabric of policy. That point will, I'm sure, emerge in our discussions this morning.
We note the scope of desirable reforms so broad that it is simply inevitable that some elements will be implemented before others. We noted markets, businesses and households need time to adjust to policy change, and that point was made by several speakers yesterday. We noted time-consuming government agreements, especially covering financial implications of measures would be required for some to appoint some of the views.
We noted that tax reform should not be pursued independently. We said policies that suit in the long run may not necessarily be best implemented in these atypical times, and we made the point that current policy settings have been capitalised in asset prices, at least to some extent, and that any policy change has to confront adjustment costs. That point also was made yesterday.
The point that reforms should not be pursued in one big bang package is worth reprising on an occasion such as this. More important is the general point that good policy outcomes are more likely where there has been high quality debate. Good policy outcomes are much more difficult to secure where visionary ideas, big challenges and creative approaches are floated for the first time in the announcement of a policy decision. The better outcome will usually be achieved when the visionary idea is so well accepted that it seems banal, where the challenges are so broadly accepted that everybody is worried sick by them and when approaches to dealing with those challenges appear merely natural. Still, it can be very hard, even for a seasonal policy adviser, to know just what is a new idea and what is well understood, what is truly unexceptional.
Consider, for example, the discussion we had yesterday about the incidence of the company income tax in Australia. Now, the question of the incidence of the company income tax exercised the minds of public finance academics in 1960. In a case of a relatively small economy like ours, there is no debate in the academic community. There is a strong consensus amongst tax academics that the incidence of the tax falls on labour. That proposition would be considered so obvious it would excite no interest at all. Remarkably, we had no such consensus yesterday. That is one example. Or consider the difference between normal profit and super normal profit. The tax on the former should be expected to affect the pattern of real economic activity.
Our review took for granted that this point was really understood. The authors of the Mirrlees report in the United Kingdom appear to have made the same judgment. The distinction between normal returns and above normal returns is fundamental to several of their more important recommendations, but I have to say, in retrospect, in the Australian setting rather less should have been taken for granted.
There should be no expectation either that public debate will focus on the more important things. In almost two years since the release of our tax rep
ort, up until yesterday - yesterday was a highly significant day for this reason alone - I can't recall there being any serious public discussion of the need to reform some of the worst of the taxes levied in this federation of ours. I am thinking about royalties, insurance taxes, motor vehicle taxes and conveyancing stamp duty.
Yesterday's discussion informed policy-makers and informed policy analysts and it was a high quality discussion. It was very encouraging. But in the absence of an informed public debate, a wider public debate, it is very unlikely that the preconditions for successful reforms in these areas will exist. Yet the case for reform in these areas is strong and growing stronger as each day passes, particularly given the impediment that a number of these taxes pose to Australia's structural adjustment in response to extraordinary external developments. Indeed in the United Kingdom, facing a different set of structural imperatives, the authors of the Mirrlees report have argued for the movement of similar transaction taxes.
Even when the preconditions for good policy outcomes have been established, implementation will still prove difficult. Tax reform, like any other genuine reform, is hard, especially when an articulate vested interest argues that it may be worse off. It is an unfortunate fact of life and public commentary - I am thinking particularly of our media here - find it impossible to distinguish the national interest from vested interest. That is a fact of life but it has always been thus.
So what should we do? What we should do is what we are talking about. We should talk, listen, discuss. We should argue. In short, we should debate not because there can be any reasonable expectation that at the end of the day we will all agree on everything. We won't. Our interests are not always common. But that doesn't mean, as we discovered yesterday, that we can't find common ground. We should debate these matters so that the public at large has a better understanding of where each of us is coming from so that serious commentators are better placed to record the substance of discussions instead of being captivated by their form so that our politicians, the people who have volunteered to take decisions in the national interest - that these people have a realistic understanding of where that national interest lies. This is not a small point. Effective democratic government depends upon it.
Recollecting on the enormous economic reform program undertaken in Australia from 1983, you can think it was universally supported, that there was no vested interest in opposition to it. That temptation should be resisted. It is not true. The truth is, there was no element of the reform program that was not opposed by somebody, no element that was not opposed by some powerful vested interest.
By the way, apart from our truly absurd luxury car tax, I can't recall any tax policy reform initiative of the past 28 years that enjoyed even bipartisan political support. There must have been others but the point is, the measures that participants of this forum would identify as serious reforms were all hotly contested in political debate. A more accurate assessment of the history of tax reform in Australia is that successive governments have exploited windows of opportunity against persistently adversarial political opposition. The fact that notwithstanding that opposition they have had success owes a great deal to their courage. But no matter how courageous or tenacious, even the best of them would not have attempted serious reform without being able to build on the groundwork of a reasonably well informed public debate. In this forum we are starting to put in place the groundwork for the next several phases of serious tax reform.
The final point: in thinking about tax and transfer system requirements for the Australia of the future, it makes sense to identify a set of high level objectives against which various proposals might be assessed. This was the approach the review panel took. But we should not fall into the trap of thinking that absolutely every element of the system has to tick all the boxes against those various objectives. Thus, for example, I heard a number of times yesterday that all taxes, every tax should be fair, that it should be equitable. Well, that proposition really makes no sense. Instead, as other speakers noted, the fairness of a tax and transfer system should be assessed in respect of the incidence of the system as a whole. More importantly, there is a very strong argument for insisting, as the review panel did, that equity objectives should be pursued only through the personal income tax and transfer system obviously taking full account of the incidence of various other components of the tax system but not affecting the design of those other components of the system.
I know that many of you will find that proposition too confronting, but as we go through today's discussion I would ask that you keep it in mind. Because if we could secure agreement on this proposition, we would have a very powerful motivator for addressing tax system complexity. The implications for the Australian tax system would be truly profound. Thank you.