30 March 2015
Speech - #2015010, 2015

Launch of the Tax Discussion Paper

Check against delivery

Thank you so much Cassandra for firstly hosting here and thank you for being someone who does make a very significant contribution to the national debate and policy debate. It is vitally important that ACOSS have a loud voice and they certainly do with Cassandra Goldie. I appreciate all that you have contributed in the last 18 months but also over the years ahead.

Of course we share a commitment to building a more prosperous and productive society that continues to provide high levels of support for families and individuals most in need.

Since I first became involved in public policy formulation 23 years ago, I have always appreciated the thoughtful and considered contributions of ACOSS, as have my colleagues who are here: Josh Frydenberg, Kelly O’Dwyer and Tony Smith. We’ve always appreciated the contribution of ACOSS. 

Now, whilst we might not always agree with each other, there is some genuine conversation that needs to be had about the common purpose. We want every individual and organisation in this great country of ours, in a genuine debate about what is best for Australia’s future.

And I am here today to make a further contribution to that national conversation by releasing the Federal Government’s discussion paper on taxation reform.

The discussion paper, which you have before you, titled Re:think, is a significant step forward in starting the debate about taxation reform in Australia; how do we have a taxation system that copes and delivers for Australia’s future?

Re:think provides information about the challenges in the tax system. It asks ask to think about potential opportunities, and also asks us to think carefully about the trade-offs that may be required for reform.

It is critical that we take into account all considered views about the future structure of our taxation system.

So, why does tax reform matter? It matters because tax reform is one of the most important things we can do to help grow our economy in the future, and encourage greater workforce participation.

Changes to our tax system will foster new opportunities for workers and businesses. It can promote economic growth and help create more jobs.

That is good for society and will continue to ensure we can provide for those most in need.

It is in the DNA of our nation that we care for the disadvantaged and support the vulnerable. But it takes money – and ever-increasing amounts of money – just to maintain the status quo.

For example, the Social Services portfolio alone currently represents over a third of all Commonwealth Government spending – the total cost coming in this year just shy of $150 billion. It is by far our biggest spending portfolio.

By way of illustration, that amount of spending in social services is the equivalent of around 80 per cent of all income tax currently collected from individuals in Australia.

So, effectively, we rely on a range of other much smaller taxes to pay for everything else like health care, education, national security, emergency services, infrastructure and environmental management.

All taxes in Australia are now under increasing structural pressure.

New technology, changing consumer behaviour and increasing global trade are threatening the medium and long term viability of our taxation system.

As a result we must focus our discussions on how revenue is raised, not just how much is raised.

For too long our taxation system has been stretched and retro-fitted to cover changing needs, without ever getting ahead of the curve.

For example, the regular ‘patching’ of the law to fix narrow problems or provide certainty for taxpayers and transactions have not always fully considered the consequences for the system overall.

For too long our taxation system has been reactive, not proactive. In other words, we’ve been fixing the system for past problems, not creating a system for the future.

Unfortunately our taxation system was largely designed before the 1950s for a closed and highly regulated economy.

Our economy was comparatively inflexible and so was our tax system.

But if we want a 21st Century tax system then we must understand how our economy and society are changing.

We need to ‘future proof’ our standard of living and critical to that is having the right structures in place, including a modern tax system.

Earlier this month I released the 2015 Intergenerational Report.

It details the challenges and the opportunities for improving our standard of living over the next 40 years.

Australia’s population is growing and ageing. We are living longer. We are wealthier and we are healthier. That is all great news.

But these demographic developments also bring challenges.

The number of Australians aged below 65 is falling dramatically when compared with the number of Australians aged over 65.

It is the under-65s who traditionally pay the most personal income tax.

So, our heavy reliance on personal income taxes is going to come under more pressure as our society changes.

Among OECD nations, only Denmark raises more revenue from personal and company income taxes than Australia.

In fact, on average, of all tax collected across the OECD around 34 per cent comes from personal and company income taxes. The Australian Government collects over 70 per cent from those revenue sources, and 60 per cent if you take into account state revenue.

This heavy reliance poses some risks.

On the personal income tax front, it means we collect a lot of our tax from a source that is under increasing demographic pressure.

More broadly, to rely on too few revenue sources is risky for our Budget.

For example, company tax has structural risks that are threatening its future.

A corporate takeover, a corporate failure, or a decision to offshore specific operations can have a profound overnight impact on our revenues.

Moreover, changing market dynamics such as falling commodity prices or disruptive technology can have a powerful and rapid impact on our revenue as well.

Nothing illustrates this better than the fall in iron ore prices and its impact on our Budget.

In the previous Government’s last Budget, iron ore, which is our biggest export, was priced at $121 a tonne. Today it is around $50 a tonne. This has formed a large part of the Government’s $70 billion write down in taxation receipts since the last election.

In addition to external risks, high corporate income taxes can also have negative impacts on the economy. They can stifle investment, drive it offshore, and, ultimately, cost Australian jobs.

Most taxation specialists will tell you that lower company tax rates have a more positive economic impact because companies deploy capital for productive activity, including job creation.

That’s why many countries such as the United Kingdom, Canada and New Zealand have dropped their company tax rates in the last few years despite economic adversity. All of these countries now have a company tax rate that is less than that of Australia.

Our tax system will need to adapt to the challenges of the future. It will also need to help Australians better capitalise on our new economic opportunities.

We cannot afford to put this debate off any longer. The global economy will continue to change even if we don’t. 

So, our tax review is looking at how we raise our revenue. 

With this review we also need to consider whether we, as a nation, raise our revenue in a way that does not have a negative impact on economic growth.

We must make sure we are not adversely impacting on growth through either having the tax burden set at the wrong level, or getting the tax mix wrong. 

If we get the balance of the taxation system wrong, we will, inevitably, cost jobs, and no one wants that.

At the same time we need to be looking at what we fund and whether our tax system can support it.

That’s why the Government’s white paper review of Australia’s federation is running in parallel with the tax review.

Just like our tax system, we need to achieve a more efficient and effective federation, and in so doing, improve national productivity.

Considering the operation of the tax system and the federation at the same time provides a ‘once-in-a-lifetime’ opportunity for comprehensive reform of critical national structures. 

In this regard, we have the potential to be a leader, not a follower, in our region.

The global economy has changed significantly in recent decades, and this will continue with increasing pace in the future.

Perhaps the biggest change is in the emergence of significant global economic power right across Asia.

This, coupled with massive technological change, is significantly transforming traditional ways of doing business.

With over 1.5 billion people moving into the middle class in the Asia Pacific region over the next 15 years, these opportunities are real and immediate. 

This Government’s Free Trade Agreements with China, Japan and Korea will facilitate these opportunities for growth. We are also working on a new agreement with India, which in just over a decade will have a population greater than China. 

Our announcement yesterday of participation in the Asian Infrastructure Investment Bank illustrates how rapidly the world economic framework is evolving with an Asia centric emphasis. By 2025 – in just 10 years, around half of all global infrastructure spending will take place in emerging Asia, up from around 30 per cent at the moment. 

So we must be more mindful than ever of evolving external pressures whether they come from our trading partners or our trade competitors.

As a result of these global changes, especially through technology, the Australian economy has changed markedly.

Just think of financial deregulation, the growth of multinational companies using global supply chains and the increasing digitisation of global commerce.

A significant outcome of these changes is how new technology is empowering consumers to the extent that they are breaking down the traditional barriers of distance and also smashing the barrier of regulation.

These changes are disrupting the traditional regulated economy. Governments have less impact on domestic economies than at any time in history.

Nothing illustrates it better than the diminution in the value of traditional government issued licences. Just think about it, a gaming license, a banking license, transport licenses and broadcasting licenses, just to name a few, are being disrupted every day in both value and effect by new technologies.

And the rapid emergence of new global intermediaries has threatened traditional companies and economic structures and, of course, the traditional tax base.

Facebook is now the biggest media company in the world and doesn’t employ a journalist.

Uber is the biggest taxi company in the world and doesn’t own one car.

Airbnb is the largest hotel chain in the world and doesn’t own one hotel room.

And Alibaba is the most diverse retailer in the world and doesn’t have one traditional shopfront.

Globally, consumer sovereignty is marching at a pace that is transforming the global economy and it’s transforming our economy.

Let me give you a good illustration: a friend of mine was visiting me from the United States.

After we had caught up for a coffee, I offered to call him a taxi. And he said, ‘No, no, I’ve got Uber’ - now that’s not exactly surprising anymore. But as he’s driving off in this Uber car I ask myself a few questions: Firstly, where did that transaction occur? Well, he used his American credit card in the United States to procure the service. Secondly, was the guy driving the car charging GST? Thirdly, was the guy driving the car paying tax? And finally, what actually happens to the taxi driver that works so damn hard, is charging GST, paying tax, and has the cost of a taxi plate embedded in the asset value?

So, whilst the consumer may be arguing that they are getting a good deal, what does this mean for our future? What does this mean for our tax base?

Over the last 40 years our investment in knowledge based assets such as patents, trademarks, copyrights, goodwill and branding has been growing much faster than our investment, as nation, in buildings and factories and plant and equipment. 

There are inherent difficulties in valuing intangible assets. Intellectual property can be easily relocated and we see it every day. The growing economic importance of intangibles, particularly software, and the use of multinational investment chains, present challenges for identifying which countries have the right to tax the value, or ‘income’ generated by those assets. And this is something that we spent quite a bit of time on at the G20 under our leadership.

So, how then does our taxation system intersect with an economy trying to operate across time zones and provide goods and services 24/7 to consumers and businesses right around the world? Because if we can sell to people all over the world, we can buy from people all over the world.

So, the new empowerment for individual small businesses is terrific but it also means that there are small businesses all around the world that can compete directly with our traditional taxpayers.

So, as a nation we can’t afford to keep having debates about yesterday, about the old regulations or the old way of doing business. Digital consumers are making the “usual practice” redundant, often regardless of what governments might think.

Capital is more mobile than ever before.

You can operate a company out of any country in the world, virtually. And you can usually provide exactly the same service as if you were sitting right next to your customer.

So, how do we deal with this change?

Today is the start of the conversation and the opportunity for Australians to be part of a reform that will give all of us a better tax system. One that delivers taxes which are lower, simpler, and fairer.

Today we have not only released the first discussion paper, but we are also launching the tax reform website: bettertax.gov.au.

This information will ensure that the upcoming national debate is well informed.

That is why the discussion paper is so heavily focussed on explaining how our tax system works, and the challenges it faces.

The discussion paper covers all Commonwealth and state taxes – because the two systems operate as an integrated system.  Two systems – the same tax payer, no matter what we might think.

Commonwealth, state and local government taxes and levies all contribute to the tax burden faced by individuals and companies – and so they cannot be looked at in isolation.

It is for the same reason that we are facilitating a wide-ranging discussion on all elements of the tax system.

For example, the paper queries: the importance of the company tax rate to investment decisions; the appropriateness of superannuation concessions; how the tax system affects housing; how we respond to complexity in the tax system; how we limit red tape in the system; and what approach we should take to encourage entrepreneurship and small business.

There are clearly many more issues in the discussion paper that we would welcome your input on.

The Government will consider the views you raise in the next stage of the process as we begin to develop options before our final tax plan is released before the next election.

The Government is committed to a comprehensive review of the tax system. We want to look at the system in in its entirety. 

While it can be tempting to do so, we do not want to look at individual taxes in isolation. 

Whilst anyone is welcome to put forward specific suggestions, we are most interested in how the different pieces of our tax system interact with the rest of our economy.

We will also use the process to work on a system that will boost participation and productivity.

In a revenue constrained environment we are interested in suggested trade-offs to improve both participation and productivity by changing the taxation mix.

Now, I can say to you emphatically: we are aware that comprehensive and effective reform is a difficult area, and it’s difficult politically, particularly so in tax.

But if we care about our future as a nation we will walk together to make this sort of reform happen. If we have broad community support, as illustrated over the weekend, you can make change happen for the better.

Australia needs a strong, secure, and effective tax system so that we can continue to provide an adequately funded social safety net. Our tax system must also carry the weight of funding other government priority spending in education, health and national security.

The Government does not support high tax rates to deliver these outcomes. As we have said on numerous occasions, our nation will never be able to tax its way to prosperity.

The challenge then is to reform our tax system so that we can raise necessary revenue without detracting from continued economic growth across the Australian economy.

Our current tax system has served us well, but it has to evolve. We need to have a tax system that is future proof.

We need to re-think our tax system to make sure that we can take advantage of the opportunities the future will bring.

And we need to re-think our tax system to make sure it is raising the revenue we need, for the services we want, with as little complexity as possible.

So, now is the time to start to future proof our economy.

Now is the time to start re-thinking our taxation system.

Thank you very much.