Transcript No. 99/47

Hon Peter Costello MP

7.30 Report

Monday, 28 June 1999

SUBJECT: A New Tax System

O’BRIEN:

It’s the end of one chapter for Treasurer Peter Costello and the start of another.

Having spent a year selling the new tax he now has to introduce it with maximum effect and

minimal fuss. Peter Costello joins me now from Canberra. Peter Costello, originally you

said that a GST without food wouldn’t work. You now say, even with your various

compromises to the Democrats, you’ve got 80 per cent of what you wanted. Is that good

enough to deliver the benefits that you promised all along?

I think the first thing we should say Kerry, is that it is a great day for Australia,

we’re going to get a new tax system. And this is an argument that’s been going

on in the country, I think, for 20, 25 years. Labor had a go at introducing a consumption

tax, John Hewson had a go and it’s great, really great news for Australia that

we’ve managed to get that legislation through the Senate and we’ll be able to

cut income taxes on 1 July. And I just want to pay tribute to all of the people

who’ve worked so hard for tax reform in this country. We said during the course of

the election campaign that the broader the base the better the tax would be. As it turned

out we weren’t able to implement our election policy, but the Australian Democrats,

and I pay tribute to them too, they were prepared to negotiate, compromise. We

weren’t able to introduce 100 per cent of our policy but I think I said 85 per cent,

they got some important wins and the great thing is we did something together for

Australia and we’ve moved this debate on probably 60 or 70 years from where it was

and I just want to thank all of those people that have been part of it.

Okay, even with the compromises, you’re still promising increased growth,

you’re still promising increased employment?

Oh sure. I think the funny thing is, as I recall back at the time of the last election,

the attack on us was that growth would fall away and none of this would be affordable.

We’re now in a situation where the economy is growing faster than nearly anyone

predicted. Some people are saying that you’ll get a surge in the lead up to July of

2000. We’ll have a GST in place on 1 July 2000. We’ll have Olympics visitors

coming in in September, they’ll be making their fair contribution to Australia’s

tax system just like Australians make it to other people’s tax systems when they go

overseas. And on 1 July 2000 people will be getting income tax cuts as well. So to be able

to abolish wholesale sales tax, modernise the indirect tax system, get a new system of

Commonwealth-State relations, cut income taxes, have a timetable for reducing other state

indirect taxes, this is the culmination of enormous personal work and effort and for the

country too, I think, to have put the argument behind us and to face the future with

confidence.

But even allowing for all of your sense of triumph about this, the jury is still out

for a number of other people who are expert in the field and who are not, it would seem,

political. One of Australia’s leading modellers, Professor Peter Dixon from Monash

University, has looked at the latest package, he looked at the original very closely,

he’s looked at the latest package and he says, it’s still based on narrow

analysis, on outdated economic theory with changes not yet subjected to rigorous

modelling.

Well Peter Dixon, I think, was the odd man out in all of this, that’s why

he’s quoted obviously. But we did a comprehensive analysis on Dixon and showed where

his models were wrong and why his assumptions were wrong. But it’s not just the

economists Kerry, I’ve been in IMF meetings and OECD meetings, and when they discuss

the Australian taxation system they’ve always said you’ve got to broaden the

base. Why do you have to broaden the base? Because in a sophisticated economy,

increasingly, part of our economy is services. If you don’t broaden your indirect tax

base two things follow. One, you won’t have enough money to run decent social

services. And to all of those people who are concerned about social services, the good

news is we now have an indirect tax system that will grow in proportion to the economy and

decent social services are secured. The second thing is, if your indirect tax base

isn’t growing you will have high income taxes. And we were getting to a stage where

people on average earnings were staring down the barrel of marginal tax rates of 43 cents

in the dollar, possibly 48 cents in the dollar, we just had to cut income taxes in this

country and give back incentive. The great news is on 1 July 2000, there will be income

tax cuts for everybody.

Victorian Premier Jeff Kennett says quote, “it’s not Howard’s package,

but the Democrats package and I tragically fear we’re going to pay a very high

price.” One of the things he’s talking about there is the cost of compliance to

business, isn’t he?

Well, he’s wrong on that of course and we’ve made that entirely clear. In

relation to people that are running mixed food businesses there is additional

complication. Jeff doesn’t have to run a tax system so he doesn’t have to be up

with all of the details on this, but only in that area is there increased complexity. The

complexity pales in significance compared to wholesale sales tax. And to have made that

agreement with the Democrats in order to abolish wholesale sales tax, cut income taxes,

get new Federal-State relations, increase family benefits and to have a timetable for the

abolition of indirect taxes. This is the biggest tax reform in Australian history.

But you’re also going to be relying, as Neil Warren made the point in Barry

Cassidy’s piece tonight, on 1.6 million new tax collectors.

The obvious thing in relation to this is if you have a simple concept, that is a broad

base. There’s only one area where the base has been changed, food. You can have very

simple returns. We’re actually taking the opportunity that this presents to do

something even bigger, which is we are going to use a GST quarterly return to give

businesses their FBT return, their company tax return, their reportable payment system

return, their prescribed payments system return. We can abolish five tax systems, collapse

them into one, as a consequence of this. And this gives us the next stage, which is having

reformed indirect tax, income tax, Commonwealth-State relations, family assistance, to

move into business tax reform which will give Australia an even better base for economic

growth in the future.

So, with all this radical change which will have to be implemented by the Tax Office,

the Taxation Institute, which is certainly no enemy of the GST, says that the Tax Office

is going to be massively under-resourced to administer the new tax.

And I think you will find the Tax Commissioner will have a letter in the paper tomorrow

saying it’s nonsense, as I did today. Because the cost of collection of GST is paid

for by the States. This is a very important point. I’m in a situation where we are

trying to introduce a tax, not one dollar of which goes to the Commonwealth. All of the

proceeds goes to the States so they can run their hospitals, and their schools and their

transport. Therefore the cost of collection comes out of the revenue that is collected and

the States have a very big interest in ensuring that the tax office is well and truly

equipped to get revenue for who? For the States.

As the clich goes, only time will tell. Peter Costello thanks for talking with us.