commonwealth of australia official committee hansard · 1999. 8. 12. · commonwealth of australia...

COMMONWEALTH OF AUSTRALIA

Official Committee Hansard

SENATESELECT COMMITTEE ON A NEW TAX SYSTEM

Reference: A new tax system

THURSDAY, 8 APRIL 1999

CANBERRA

BY AUTHORITY OF THE SENATE

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SENATE

SELECT COMMITTEE ON A NEW TAX SYSTEM

Thursday, 8 April 1999

Members: Senator Cook(Chair), Senator Ferguson(Deputy Chair), Senators Conroy,Gibson, Murray, O’Chee and Sherry

Substitute members:Senators George Campbell, Mackay or Murphy for Senators Cook,Conroy or Sherry

Participating members: Senators Brown, Colston, Harradine and Margetts

Senators in attendance:Senators Conroy, Cook, Ferguson, Gibson, Harradine, Murray andO’Chee

Terms of reference for the inquiry:

(1) That a select committee, to be known as the Select Committee on a New Tax System, beestablished to inquire into and report, on or before 18 February 1999, on the economic theories,assumptions, calculations, projections, estimates and modelling which underpinned theGovernment’s proposals for taxation reform, contained inTax reform: not a new tax, a new taxsystem.

(2) That, in conducting its inquiry, the committee examine the following matters:

(a) the estimated levels of revenue to be generated or foregone due to the proposed changes,including the estimated level of revenue to be generated by imposing a goods and servicestax (GST) on the basic necessities of life (such as food, clothing, shelter and essentialservices) and books;

(b) the effects of the proposed changes on:

(i) national Gross Domestic Product,(ii) national export performance and national debt,

(iii) the national Consumer Price Index, and(iv) the distribution of wealth in the Australian community;

(c) the effects of the package on future federal budget revenues, expenditures and surpluses,including a critical assessment of the economic assumptions underpinning the Treasury’sprojections in this regard;

(d) the effects of the taxation and compensation package on disposable income and householdspending power for a range of ’cameo profiles’, including but not limited to thosepresented in the proposals, under the following scenarios:

(i) a GST extended to the necessities of life (such as food, clothing, shelter and essentialservices), and

(ii) a GST not extended to the necessities of life (such as food, clothing, shelter andessential services);

(e) with the aim of identifying families and groups who may be disadvantaged by theGovernment’s proposals, focusing on lower and fixed income individuals, families withdependent children or adult members, groups and organisations, and those with specialneeds, such as people with disabilities;

(f) the assumptions made as to consumption and saving patterns and the cost of living for thevarious ’cameo profiles’;

(g) whether the stated objectives of the package can be met by using an alternative and fairerapproach; and

(h) such other matters as the committee considers fall within the scope of this inquiry.

(3) That the committee also inquire into and report, on or before 19 April 1999, on the broadeconomic effects of the Government’s taxation reform legislation proposals with regard to thefairness of the tax system, the living standards of Australian households (especially those onlow incomes), the efficiency of the economy, and future public revenues, including:

(a) the effects on equity, efficiency and compliance costs of including, or not including, foodor other necessities of life in the GST, together with any related adjustments to the packageif food or other necessities of life were GST zero-rated;

(b) the effectiveness of the package in easing the poverty traps facing people on low incomes,and reforming and streamlining tax and income support for families with children, takinginto account the static and life-cycle impacts on families with children;

(c) options for amending the income tax schedule to make it more equitable;

(d) the findings of the Tax Consultative Committee chaired by David Vos;

(e) options for improving the effectiveness and fairness of the tax system and reducinginequitable or unreasonable tax avoidance and minimisation, including consideration ofalternative areas for tax generation, either where there are current tax concessions or whereAustralia’s taxation system does not address major tax potential, and without limiting theforegoing, the consideration of taxation of foreign companies operating in Australia,including the relative merits of resource rent taxes, royalties or land taxes as compared tocompany tax in securing a fair compensation to Australia for use of its resources, whetherthe 150% tax concession for research and development should be restored and whethersmall companies should be allowed to be taxed as partnerships.

(f) the potential for tax avoidance and evasion, including an examination of the effects on thecash economy, and the potential impact of electronic commerce on the future viability of aGST;

(g) the effects on compliance costs;

(h) the potential for reducing payroll tax, including by providing incentives to create long-termemployment and by replacing payroll tax with a carbon tax;

(i) whether there are other means available for rebating or reducing the indirect taxes or

excessive user charges embedded in exporters costs;

(j) excises, including those on fuel, tobacco and alcohol - identifying the industries whichbenefit, and to what extent, from the proposed changes to taxes on fuels;

(k) the effects on interest rates;

(l) the effects on investment, in both physical and human capital formation;

(m) the effects on small business;

(n) the effects on the non-profit sector, including the total amounts of money contributed bythe sector, administrative costs, impacts on the viability of the organisations, and theconsequent effects on the wellbeing of the community;

(o) the effects of the GST on particular industries, including:

(i) key service industries such as tourism,(ii) the Australian automobile and related industries, having particular regard to the

effects of changes to fuel excises,(iii) other ’invisible’ export industries, such as education and financial services, and(iv) the international competitiveness generally of Australian industries;

(p) the implications of not requiring that the GST component of goods and services be itemisedon receipts;

(q) the effects of the taxation reform legislation proposals on rural and regional stakeholders,including:

(i) the effects on particular regions,(ii) the effects on rural and regional communities of different tax regimes on fuel -

especially the cost of transport of goods to rural communities,(iii) the effects on primary industry of replacing the current sales tax exemption on

agricultural machinery with a GST, and(iv) the effects of imposing a GST on food and other necessities of life on remote

communities, including Aboriginal and Islander communities;

(r) the effects of the Government’s taxation reform legislation proposals on state and localgovernment administration, including:

(i) the effects of the package on future federal-state financial relations and thecapacities of state and local governments to adequately finance their respectiveresponsibilities in both the short-term and the long-term, including the effects ofthe proposed transfer of responsibility for local government financial assistance tothe states, and whether it discriminates between states,

(ii) the implications for specific purpose programs,(iii) mechanisms required to lock in commitments made by federal and state

governments with regard to the new arrangements,(iv) the implications for future federal-state financial relations of not extending the GST

to the necessities of life (such as food, clothing, shelter and essential services) andbooks, and any adjustments to the proposed arrangements which would be requiredto federal-state financial relations,

(v) the implications of the package for the quality and affordability of public utilityservices and for the public utility concessions for social security recipients,

(vi) the effects of application of the GST, and of changes to tax status, on localgovernment and its activities, particularly commercial activities,

(vii) the implications for the delivery of Commonwealth Government services, includingemployment services, welfare and other social and cultural services, and

(viii) the extent to which the proposed compensation arrangements are secure fromchange to below adequate levels;

(s) the adequacy of measures to ensure that consumers fully benefit from the abolition ofexisting taxes;

(t) the effects of the taxation reform legislation proposals on legal and constitutional matters,including:

(i) the constitutionality of the proposed mechanism for future changes to the GST,including whether such changes would present a significant hurdle to futureincreases, or reductions if deemed necessary to stimulate the economy,

(ii) the constitutionality of the proposed reorganisation of federal-state tax arrangementsand whether the powers and functions of states and territories are materiallyaffected by this reorganisation, and

(iii) the effects of the proposals on the cost of access to justice; and

(u) options for amending the proposed legislation to improve its fairness or efficiency.

(4) That, in reporting on the matters referred to in paragraph (3), the committee have regard to thereports of the references committees referred to in paragraph (17) and integrate the findings ofthose committees into its final report where relevant.

(5) That the committee consist of 7 senators, 3 nominated by the Leader of the Government in theSenate, 3 nominated by the Leader of the Opposition in the Senate, and 1 nominated by theLeader of the Australian Democrats.

(6) That the committee may proceed to the dispatch of business notwithstanding that not allmembers have been duly nominated and appointed and notwithstanding any vacancy.

(7) That:

(a) senators may be appointed to the committee as substitutes for members of the committee inrespect of particular matters before the committee;

(b) on the nominations of the Greens or independent senators, participating members may beappointed to the committee; and

(c) participating members may participate in hearings of evidence and deliberations of thecommittee, and have all the rights of members of the committee, but may not vote on anyquestions before the committee.

(8) That the committee shall elect as its chair a member nominated by the Leader of theOpposition in the Senate.

(9) That the committee shall elect as its deputy chair, immediately after the election of the chair, amember nominated by the Leader of the Government in the Senate.

(10) That the deputy chair act as chair when there is no chair or the chair is not present at ameeting.

(11) That the committee have power to send for and examine persons and documents, to movefrom place to place, to sit in public or in private, notwithstanding any prorogation of theParliament or dissolution of the House of Representatives, and have leave to report fromtime to time its proceedings and the evidence taken and such interim recommendations as itmay deem fit.

(12) The quorum of the committee shall be a majority of the members of the committee.

(13) The committee set 29 January 1999 as the date for receipt of submissions.

(14) That the committee hold hearings in each state and territory as required.

(15) That the committee be provided with all necessary staff, facilities and resources and beempowered to appoint persons with specialist knowledge for the purposes of the committeewith the approval of the President.

(16) That the committee be empowered to print from day to day such documents and evidenceas may be ordered by it and a daily Hansard be published of such proceedings as takeplace in public.

(17) That the following matters be referred to references committees in accordance with theschedule below for inquiry and report by 31 March 1999, and that in undertaking theseinquiries the committees have regard to the report of the Select Committee referred to inparagraph (1) and consult widely, holding hearings in each state and territory, as required.Submissions to these inquiries are to be made by 29 January 1999.

Committee Matters for InquiryCommunityAffairs

The impacts of the Government’s taxation reformlegislation proposals on the living standards ofAustralian households (especially those on lowincomes), including:(a) the scope and effectiveness of the proposed ar-

rangements on charities, child care services, agedcare services, welfare services, local governmenthuman services and all not-for-profitorganisations in maintaining the quality andaffordability of essential community services,including the implications for the public fundingof these services and the implications for thecommercial activities of these organisations, andwhether unconditional GST-free status shouldapply tobona fidecharities;

(b) a detailed examination of the zero-rating ofhealth services, including an examination ofwhich services should be zero-rated;

(c) the effects on community sector organisations ofchanges to their tax exempt status, and of thecompliance costs of the proposed taxarrangements;

(d) the effects of the proposed private healthinsurance rebate;

(e) the effects on people with disabilities;(f) the effects on public, community and private

housing, including the levels of rents; and

(g) options for amendments to improve the fairnessor efficiency of the proposed legislation.

Employment,Workplace Rela-tions, Small Busi-ness andEducation

The employment incentive and education impacts ofthe Government’s taxation reform legislationproposals, including:

(a) the scope and effectiveness of the proposed zero-rating arrangements for education in maintainingits quality, accessibility and affordability;

(b) the effects on employment;(c) the effects of the proposed GST treatment on the

quality, accessibility and affordability of employ-ment services;

(d) the effects on education of imposing a GST on,or zero-rating or exempting books and associatededucation resources;

(e) the effects on education of imposing a GST onancillary resources, services and commercialactivities, including the effects on overseasstudents;

(f) the effects of the proposed changes to the taxsystem on employment;

(g) the effects on wage costs, particularly if thebasic necessities of life are taxed;

(h) the scope and effectiveness of changing theunemployment benefits, pensions and NewstartAllowance ‘tapers’;

(i) the effects of the proposed changes to the taxsystem on training and adult education; and

(j) options for amendments to improve the fairnessor efficiency of the proposed legislation.

Environment,Communications,Information Tech-nology and theArts

The broad effects of the Government’s taxationreform legislation proposals on the environment, thearts and information technology, including:

(a) the environmental effects, and likely impacts ofchanges to fuel excises, particularly but not onlydiesel, and the replacement of WST with GSTon vehicles and other transport servicesincluding:

(i) possible increases in greenhouse gasemissions,

(ii) increases by amount and type of airpollution,

(iii) the effects on public and rail transport,(iv) the effects on alternative energy use in

transport including, but not limited to,compressed natural gas,

(v) the changed effects on native forests oflogging or woodchipping due to the taxpackage, and

(vi) the changed effects of mining inenvironmentally sensitive areas due to thetax package;

(b) the environmental effects of the replacement ofWholesale Sales Tax by the GST and associatedchanges in fuel excises on electricity and naturalgas;

(c) the impacts of the proposed tax changes on theprices and existing and potential use ofrenewable energy particularly but not only solarenergy technology and energy efficiencyequipment;

(d) the environmental effects of any changes totaxes on exports;

(e) the consistency or otherwise of the proposedchanges in taxation and excise arrangementswith Australia’s international treaty obligations,including its obligations under the FrameworkConvention on Climate Change;

(f) options for a tax system which better achieveenvironmental objectives,including incentives forfuel efficiency and alternative energy sources,such as measures which promote bothenvironmental protection and employmentgeneration;

(g) the extent to which environmental impacts wereconsidered in the drafting and final copy of theGovernment’s tax package;

(h) the scope of any consultation on environmentalmatters with experts in Environment Australia orany other Government departments other thanthe Treasury and Finance departments;

(i) the impact of a GST on ticket sales for the per-forming arts;

(j) the effects of a GST on the transfer of grantmonies for arts projects;

(k) the effects of the tax proposals on sponsorshipprovided by the private sector to individualartists and arts organisations;

(l) the extent to which the package will block con-sideration and introduction of ’ecotaxes’;

(m) the effects of a GST on not-for-profitconservation and arts organisations; and

(n) options for improving the environmental effectsof the package.

(18) That the provisions of the bills implementing the proposed new tax system stand referred tothe previously mentioned committees for inquiry and report in conjunction with the termsof reference authorised by this resolution, as soon as the bills have been introduced in theHouse of Representatives.

(19) That when the bills referred to in paragraph (18) are first introduced in the Senate and amotion is moved for the second reading of the bills, debate on that motion shall beadjourned at the conclusion of the speech of the senator moving the motion and resumptionof the debate shall be made an order of the day for 19 April 1999 without any questionbeing put.

WITNESSES

COMLEY, Mr Blair Robert, Manager, GST Coordination Unit, Indirect Tax andPayment Design Division, Department of the Treasury. . . . . . . . . . . . . . . . . . 2384

DAVIDSON, Mr Peter Andrew Geoffrey, Senior Policy Officer, Australian Councilof Social Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2358

GALLAGHER, Mr Philip Francis, Manager, Retirement and Income ModellingUnit, Department of the Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2384

HAGAN, Dr Jim, General Manager, Industry Policy Division, Budget Policy Group,Department of the Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2384

HARDING, Professor Ann, Director, National Centre for Social and EconomicModelling, University of Canberra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2301

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2401

RAPER, Mr Michael William, President, Australian Council of Social Service . . . 2358

ROBINSON, Mr Martin, Research Fellow, National Centre for Social and EconomicModelling, University of Canberra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2301

SMITH, Mr Gregory John, Executive Director, Budget, Department of the Treasury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2384

SMITH, Mr Gregory John, Executive Director, Budget, Department of the Treasury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2401

TAYLOR, Mr Dehne Alexander, Manager, Household Income and Taxation Unit,Retirement and Personal Income Division, Department of the Treasury . . . . . 2384

TUNE, Mr David John, Executive Director, Department of Family and CommunityServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2384

WARREN, Associate Professor Neil, Associate Professor of Economics, AustralianTaxation Studies Program, University of New South Wales.. . . . . . . . . . . . . . 2301

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2401

Thursday, 8 April 1999 SENATE—Select TAX 2301

Committee met at 9.09 a.m.

HARDING, Professor Ann, Director, National Centre for Social and EconomicModelling, University of Canberra

ROBINSON, Mr Martin, Research Fellow, National Centre for Social and EconomicModelling, University of Canberra

WARREN, Associate Professor Neil, Associate Professor of Economics, AustralianTaxation Studies Program, University of New South Wales.

CHAIR —Today the committee continues its inquiry into the proposed changes to theAustralian taxation system. The Senate referred the inquiry to the committee on 25November last year. This hearing relates to the second stage of the inquiry. In this stage, thecommittee is examining the broad economic effects of the government’s taxation legislationproposals. It will have regard to the fairness of the tax system; the living standards ofAustralian households, especially those on low incomes; the efficiency of the economy; andfuture public revenues. The committee will report on the second stage of its inquiry in just afew weeks, by 19 April this year. This committee called for submissions to be lodged on 29January 1999—in fact, the committee, I am advised, is still accepting submissions—and sofar has received over 1,400.

This is the final public hearing to be held by the committee in Canberra in the course ofthe inquiry and, I think, the final public hearing for the whole of the inquiry. I note forthe record that the committee has agreed to release all of the submissions received in thecourse of the inquiry, except for those submissions marked ‘Confidential’.

For the record, this is a public hearing and, as such, members of the public are welcometo attend. Before we commence taking evidence, let me place on record that all witnesses areprotected by parliamentary privilege with respect to the submissions made to the committeeand evidence given before it. Parliamentary privilege means special rights and immunitiesattached to the parliament or its members and others necessary for the discharge of thefunctions of the parliament without obstruction and without fear of prosecution. Any act byany person who operates to the disadvantage of a witness on account of evidence given byhim or her before the Senate or any committee of the Senate is treated as a breach ofprivilege.

I now welcome Professor Neil Warren, Professor Ann Harding and Mr Martin Robinson.I invite you to make an opening statement. The normal format that we have adopted is thatwe have, of course, received your written research—that is before us and we have had achance to become familiar with it—and we would invite you to provide a short overview ofwhat that contains and then be available for questions from the committee. Do you have anycomments to make on the capacity in which you appear?

Prof. Warren—I am appearing here as one of the co-authors of the study commissionedby the Senate inquiry.

A NEW TAX SYSTEM

TAX 2302 SENATE—Select Thursday, 8 April 1999

Prof. Harding—I am appearing here as a co-author of the report, as is my colleagueMartin Robinson.

CHAIR —I have a question for the committee. This is the document that has beensupplied by our witnesses. Is it the will of the committee to release this document publicly,after the fact it would seem? There being no objection, it is so ordered, and the document isnow published. With those remarks, I invite you to begin.

Prof. Harding—We were going to divide this presentation into six parts. First, I wasgoing to give you an overview of the options that we have modelled. Second, ProfessorWarren was going to describe how the indirect tax changes were modelled in the STATEXcomponent of the STINMOD-STATEX model and how the price effects were calculated.Third, Martin Robinson, from NATSEM, was going to give you an overview of how theincome tax and cash transfer payment changes were modelled in STINMOD. Fourth,Professor Warren was going to compare some of the results for options 1 to 6. Fifth, I wasgoing to compare some of the results for options 3B, 5B and 7. Finally, we were going tomake some concluding comments about what is an extremely long and complicated report.

There are a couple of points I want to make first about the methodology. We havemodelled 10 separate options for the Senate committee. We are looking at the medium-termprice effect, so we are looking effectively at the price effect in year 2, which is 2001-02. Asyou know, it is expected that price effects will be higher in the first year following theintroduction of the GST from July 2000. But the committee asked us to model the medium-term impact because that gives you an indication of whether households are going to makean ongoing loss or gain from the impact of the tax reform package.

As you know already from evidence before this committee, Treasury had estimated thatthe year 1 price effect would be 2.5 per cent and the year 2 price effect would be 1.9 percent. The reason why prices are expected to be higher in the short term is that some of theremoval of indirect taxes does not occur until the second year following the start of the GST.

So it is quite hard to think through conceptually the world that we are modelling, butwith only one exception. At the committee’s request, we have modelled the forecast July2000 world for population benchmarks, for earnings, for the income tax system and for thefamily benefits system proposed by the government, and we have melded onto that theforecast July 2001 indirect tax effects, which is year 2, for the longer-term impact of theindirect tax effects. We have also used the government’s intended longer-term pensionincrease. So, although the government had said in year 1 that it would increase pensions byfour per cent, we have used their longer term estimate of 3.4 per cent, which is where theyintended pensioners to end up in year 2. It is a bit of a mix, but the intent is to give you afeel for what the medium-term impact of this package is likely to be, after a lot oftransitional effects in the first few months have settled down.

Senator CONROY—What is your definition of medium term?

Prof. Harding—Really it is year 2. It is 2001-02, but the income tax system that wemodelled was that proposed by the government for July 2000. If we had not done that, we

A NEW TAX SYSTEM


would have had to index every social security and income tax threshold and so on just forthat short one-year period between July 2000 and July 2001.

Senator CONROY—I just wanted to clarify what you meant by that.

Prof. Harding—We have modelled the effect of the ANTS package on hypothetical orcameo households. There is an alternative methodology that has been used, for example, inthe ACOSS-Melbourne Institute reports, where you use the expenditures and incomes ofhouseholds as actually shown in the ABS household expenditure survey sample. As thiscommittee is aware from papers that have been put before you, there are some problemsassociated with using the HES data to look at savings rates and dissavings rates and to lookat what price changes are likely for small subgroups of the population. Because of theseproblems, the committee asked us to use the HES data to simulate the average price effectsfacing particular types of households and to impose hypothetical dissavings rates just to seehow sensitive the results were to different assumptions about dissaving.

I will just go through the options that we modelled. Option 1 is the government’s optionusing the government’s methodology. So when you are saying how much extra indirect tax ahousehold is going to have to pay, the measure of the price effect of the indirect tax changesis assumed to be the CPI. The CPI measure excludes the impact of the tax changes onhousing and tobacco prices, and that is for reasons that Professor Warren will explain inmore detail. The assumed increase in pensions is 3.4 per cent. This is the same as the figurethe government actually used in the cameo households published in the ANTS document. Soit is their intended ultimate outcome for pensioners.

Senator MURRAY—It is 1.9 plus 1.5 per cent, isn’t it?

Prof. Harding—Yes. There is no dissaving, so when you are answering the question ofhow much extra money a household needs in their pocket to be fully compensated for theprice rises they are facing at the supermarket checkout the Treasury assumption was that youdo not take account of the fact that they might be spending some of their savings. Theassumption was that, when looking at what compensation was required, you just assume thatthe amount of money people were spending was exactly the same as their disposable income.So there was no dissaving occurring and no decline in the purchasing power of the dissavingcomponent of people’s expenditure. These were the two marginal tax rates assumed to applyin those tax bands from $20,000 to $50,000 and from $50,000 to $75,000.

Neil Warren will go into this in more detail, but on the whole, when we replicate theTreasury’s approach and use their methodology, we have matched their numbers very well.So we get very slight differences due to our getting a very slightly different CPI estimate inthe second year from that derived by the Treasury, and we have slight differences becausewe are using more recent CPI and AWE inflators. There are some slight differences in howwe have modelled some of the programs where we believe there were some problems in theoriginal Treasury analysis and we have done it slightly differently. On the whole, our resultsmatch the Treasury results, if you use their methodology. This was the package as run by thegovernment.

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Option 2 was what happened if you just varied one assumption, and that was that tobaccoand housing should not be excluded from the price impact of the indirect tax reforms. Theresult of that, as Neil will discuss, is a higher measured price effect from the indirect taxreform package. That is the only difference between those two options.

Option 3 starts moving further down the chain in that it varies the two key assumptionsmade by Treasury in their modelling which have attracted the most criticism. The firstassumption that Treasury made in their modelling was that the consumer price index wouldprovide an adequate indicator of the impact of the indirect tax reforms on the prices facingall households, irrespective of their income or their family composition. So we varied thatassumption in option 3 and in subsequent options to say that the price effect facinghouseholds is the average price effect for that particular cameo household type. So we have29 different price effects because we have more than 29 different types of households.

I should emphasise again that this is the average price effect for all households withinthat cameo. So, say, for the single person results, the price effect we get for the singleperson household is the average for all single person households. In fact, some of themwould face below average and some would face above average price increases depending ontheir particular expenditure patterns.

The second key assumption that the committee asked us to vary was the assumption thatno-one was dissaving or, if they were dissaving, that no additional compensation wasrequired. So, given the difficulties in trying to estimate exactly how much people aredissaving, we instead just completely arbitrarily imposed a maximum 10 per cent dissavingsrate amongst households who had no private income, and that was just assumed to decreaselineally to reach zero dissaving at $20,000 of private income. I should add that we pulledthose figures out, effectively, from the 1985 draft white paper on tax reform, written by theTreasury, just with the dollars inflated to year 2000 dollars.

One important point is that you should be aware that we have assumed that householdswho are saving do need to be compensated for the decline in the purchasing power of theirsavings. So the only area where we have varied the Treasury assumption is for dissavings.For dissavers we have said you need slightly more compensation than the Treasury hadestimated, but for people who are saving or spending all of their income the approach is thesame as used by the Treasury. It is also important to note that tobacco and housing areincluded within the price effect in option 3.

So option 3 was effectively what happens when you move to own price effects and youstart looking at dissaving and option 4, which the committee asked us to model, was whathappens if you assume there is not 100 per cent shifting of the indirect tax cuts—theremoval of stamp duties, wholesale sales tax and some of the other indirect taxes. Option 4looks at what happens if businesses fail to pass on via lower prices to consumers the fullimpact of the cuts in their existing indirect taxes. In this case we looked at wholesale salestax and stamp duties. It was assumed that they pass on only 70 per cent of the reduction inthose two taxes in that first year.

Options 5 and 6 are the two food out options that the committee asked us to look at, andI note that the committee specified that food was to exclude expenditure on restaurants and

A NEW TAX SYSTEM


takeaway food. Option 5 shows the outcome when food is excluded from the GST revenuebase and the lost $5 billion of revenue is recouped by reducing the generosity of the incometax cuts. You can see the way we have done it here. We essentially followed an option putforward by ACOSS, the peak welfare group, where the government’s proposed 30 per centmarginal tax rate between $20,000 and $50,000 was increased to 33½ per cent and the 40per cent marginal tax rate between $50,000 and $75,000 was increased to 43 per cent. Inessence, we financed food out by reducing the generosity of the income tax cuts.

Option 6 is an alternative way of looking at it, and it says what happens if you take foodout but instead increase the GST rate upon all those other items that are still within the baseof the GST. We estimated that that would require a 12 per cent GST rate. In that case, theincome tax cuts stay as they were originally planned by the government.

Things vary quite a lot from this point on. In all of these first six cases, the assumedincrease in social security pensions has stayed at 3.4 per cent, which was the government’sintended long-term position. Except for option 1, which was the government’s methodology,tobacco and housing price changes have been included in all of those cases within theestimate of the price increases facing households. But both of these assumptions are variedin option 7 and in the 3B options which follow.

Option 7 shows the distributional impact when pensions and allowances are increased bya more generous six per cent but food remains within the base and the slightly highercompensation costs of the slightly higher pension increases are funded through slightlyhigher than planned income tax cuts. The government had planned 30 per cent and 40 percent, but to fund more generous compensation and to keep the package revenue neutral theyhad to go up to 30.5 per cent and 43 per cent marginal tax rates.

In doing this, the impact upon prices is still household specific, so we have not used theCPI, and we still have dissavings within the picture. But we have excluded tobacco andhousing from the measured impact of this tax reform package, and that is also true for all ofthe B options because we believe, for reasons that Professor Warren will explain in moredetail, that there is a case for excluding tobacco and housing from the measured effect of thetax reform package. So option 7 was essentially provided just to give the Senate committee afeel for the likely distributional impact of a food out/income taxes up package versus a foodin/compensation up package.

Finally, when modelling the first lot of options which the committee asked us to model,it was not always clear to us what the most appropriate benchmark or counterfactual shouldbe or what the fairest assumptions were to make. For example, under option 5 we estimatedthat, if food were excluded from the GST base, the impact of the indirect tax reforms on theCPI would fall by 1.1 per cent. So if food is out, prices will increase by less. But if thathappened, would it still be fair to assume that the government would still increase pensionsby the planned 3.4 per cent. So the original 3.4 per cent equalled their expected 1.9 per centCPI effect, plus the 1.5 per cent buffer for pensioners.

So in these B options we have tried to give you a feel for what happens if you maintainthe conceptual integrity of the government’s package in the sense that the increase inpensions in each of these B options is the estimated increase in the CPI, plus the

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government’s intended 1.5 per cent buffer. In each case tobacco and housing are out of thatCPI estimate. In one case, in option 5B, if you increase pensions by the CPI movement, plus1.5 per cent, you have only a 2.3 per cent increase in pensions. That is obviously lower thanthe 3.4 per cent increase in pensions that had been originally envisaged based on the earlierhigher CPI effects. Because that saves money, we just restored some of that money totaxpayers by giving them a tax cut relative to option 5. So there is just a half a per centdifference in the marginal tax rate between $20,000 and $50,000. I will now hand over toProfessor Warren to explain the modelling of indirect tax reforms.

CHAIR —Just before you do, why did you not do all of the work that wascommissioned?

Prof. Harding—To my knowledge, we did. But you feel that is not the case?

CHAIR —No. The terms of reference are on page 42 of the document you havesubmitted and they ask for the first year impact from July 2000. You have reported to usthat you did not do that. I am just wondering why you did not do that.

Prof. Harding—Neil might want to come in here. I think it is pretty hard to work outconceptually what it is that you are modelling. Although we were asked to model it in July2000, the terms of reference did also say that we should assume that all of the indirect taxincreases were there and that all of the indirect tax cuts were there. Some of the indirect taxcuts are not scheduled to come in until 2001-02. So, in a sense, we felt that the brief askedus to abstract from the phasing of the tax reforms issue and try to give you a feel for what itwas going to look like once the dust had settled.

CHAIR —If you had done that, there would have been more losers, wouldn’t there?

Prof. Warren—The answer to that is no. The reason is that we investigated thatparticular option. The thing that concerned me about it was that, in the first instance, we hadto ask what our benchmark was, and we chose to replicate and to test the sensitivity of thecameo results in the ANTS document. I discussed with the secretariat of the committee thatwe should take a benchmark which is a common, accepted one, and that is the one that is inthe ANTS document.

Senator CONROY—Whom did you speak to?

Prof. Warren—To Tas Luttrell, during the preparation of the terms of reference.

Senator CONROY—But when you said you spoke to the secretariat, I just wanted toknow to whom.

CHAIR —He said that it was Tas Luttrell.

Prof. Warren—The point is that, in looking at that year, that 2001-02 focus, that allowsus to test the sensitivity of the results that are reported in the ANTS document and to take alonger term—replicating the Treasury methodology. The question is: what difference does it

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make if you move to July 2000? Subsequent to our presenting this report—I heard thoseconcerns that you are now expressing—

CHAIR —It is just that the terms of reference make it very clear. It is very odd that,when the terms of reference were debated extensively in the committee before they werehanded out, the work was not done.

Senator FERGUSON—Let him finish.

Prof. Warren—Can I tell you what the implications of the results are if you do go toJuly 2000 and that everything we have done does not significantly change?

Senator CONROY—What is the first year inflation rate?

Prof. Warren—The first year inflation rate is higher by 0.7 of a per cent.

Senator CONROY—So that is a 2.7 per cent first year inflation rate.

Prof. Warren—If you are going to add on the tobacco—

Senator CONROY—That is before you add on the tobacco.

Senator FERGUSON—Mr Chairman, I want to raise a procedural matter here. Are wegoing to hear the presentation?

CHAIR —We are going to hear the presentation, but this is a quite serious thresholdpoint.

Senator FERGUSON—Let him answer the question.

CHAIR —Excuse me, I am the chairman here, thank you very much! This is a quiteserious threshold point. The terms of reference are quite explicit. This work was not done. Iunderstand that, if it had been done, it would have shown that there are more losers than infact we now have before us. I am very interested in having an explanation for that. So pleaseproceed, Professor Warren.

Prof. Harding—I would like to make one quick point. I want to point out that, even ifyou used the first year price effect, which Neil is saying is 0.7 per cent higher, it would nothave been appropriate for us to model the 3.4 per cent increase in social security, which iseffectively where the government intends to end up.

Senator CONROY—We did not ask you to make any counterfactuals; you decided tohelp us.

Prof. Harding—But if we had modelled it, we would have modelled a four per centpension increase, which is what they say they also intend to do right on July 2000. So bothof those things would have gone up.

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Prof. Warren—Can I tell you why it makes no difference, which I hope will allay yourconcerns? It makes no difference because the CPI goes up and so does that July 2000compensation. The July 2000 compensation is four per cent. So that is 0.6 of a per centhigher than the 3.4. The price effect of going to July 2000 is 0.7 higher. The issue you aretalking about is about 0.1 of a percentage point. I subsequently looked at that myself, off myown bat, to address that concern because I saw that issue being raised. If everything ratchetsup, the difficulty for us in undertaking that approach is that the benchmark we have taken wenow model on July 2000 with four per cent compensation, a particular income tax schedule,and all the results are no longer comparable to those that are in the ANTS document. As tothe conclusions that we make—sure, the inflation rate will be higher, but the losers you arelooking for will not be there because everything will have moved up by the same amount.

Senator CONROY—That depends on the assumption. Professor Harding, you said thatsomebody at the committee asked you to average out for income. That is not in the terms ofreference, is it?

Prof. Harding—Do you mean for the price effects?

Senator CONROY—Yes.

Prof. Harding—It is in the sense that we were asked to use cameo specific price effects.We understood that to mean that within each cameo group—so within each of the 29household groupings—households would be assumed to face the same price increase as theaverage increase for people within that household grouping.

Senator CONROY—It is just that that is not written in the terms of reference.

Prof. Harding—The cameo specific is in there, isn’t it?

Senator CONROY—Not the averaging question. You actually said in your introductionthat the committee asked you to average out for income. I am just trying to find out whoasked you to average out for income because that is not in the terms of reference.

Prof. Harding—If it is specific to the cameo, then by definition I think it is the averageprice effect for that cameo.

Senator CONROY—When you did the modelling for ACOSS last year and youproduced five decile groupings within each, did they ask you in the same way or were theymuch more specific about it?

Prof. Warren—I did that. The point is that, if you look at the sample depth we areworking with when we move to the 29 cameos, and as we admit in the paper, we are at riskof problems with the sample. If you went to a decile or to a quintile approach, you wouldsimply have unreliable cells, not an adequate sample. So in that piece of work where therewas a deep enough sample you could go to quintiles, but if the sample is not adequate thereis no way in the world you can rely on going to HES and making judgments on the basis offive or 10 people.

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Senator CONROY—We are getting into the substance of the debate, which is not whatI am actually trying to get to. I am happy to come back and discuss that part. I am trying toascertain who it was who said to you to average it out, because you said that the committeeasked you to average it out for income. I am just trying to understand who it was who askedyou to do that, because that is not in the terms of reference.

Prof. Harding—That is what we thought cameo specific CPIs meant.

Prof. Warren—Also there is an issue here about how detailed the terms of reference arebefore you actually ask the person undertaking the study whether they should come back toyou on a dozen different points. I would be very disappointed today if we spent aconsiderable amount of time going through all the little details about the specificassumptions that we made that might err in a particular direction or err in another direction.

There is a possibility that those price inflation rates will vary across the groups, but youhave to rely, when we are looking at those groups, on the professionalism of the researcherswho are undertaking it to make some judgments. We have to make some judgments aboutwhat are appropriate procedures. If in the light of day you do not like those judgments, thenyou raise those judgments and we respond to them in a forum like this. But in undertaking astudy you would not expect the terms of reference to be at that level of detail nor to get intothat kind of discussion with the researchers, who rightly have an authority to make somejudgments as the professionals that they are.

You are now questioning some very specific things that I would have some difficultywith, and we can discuss those, but you to have to defer to us on some things when youcommission a study like this. I have been doing it for 20 years and Ann has been doing itfor a similar amount of time. If I had a deeper sample, we could look at those issues thatyou are talking about.

Senator CONROY—We will come back to that issue. I am trying to ascertain theposition in terms of the work that we thought we commissioned.

Senator FERGUSON—Mr Chairman, I presume we are into questions. Senator Conroyhas had five minutes, so I presume that we can have five minutes as well.

CHAIR —I led off with a question about the threshold and the fact that the terms ofreference were not performed by what we have had produced.

Senator FERGUSON—Senator Conroy has gone on with a whole range of other things.

Senator CONROY—No. It is on the same point.

Senator FERGUSON—I presume we are into questions, that is all.

CHAIR —We can have some questions. I just beat Senator Harradine to the punch and Iam interested in giving him the call, but I am happy to give you the call as well.

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Senator FERGUSON—I think we need to establish what the procedure is going to be. Iunderstood that Professor Harding said when she started that they wanted to give us apresentation, that they would go through the presentation and then we would have questionsafterwards. It seems as though that is not going to be the procedure. I am just wondering, ifwe have questions on the way through, whether in fact we might not even get to the end oftheir presentation.

CHAIR —I do not want people coming back to me later and saying that we did not raisethis question in theHansardat this point and, therefore, your argument fails. I have raised itin the Hansardat this point.

Senator FERGUSON—Mine is not an argument. I am trying to ask what the procedureis, because when we have had other people here sometimes you have allowed questions andsometimes said that we should wait until the presentations have finished.

CHAIR —My preference is to wait until the presentation finishes, but it seemed to methat Professor Harding—to take your point, Mr Deputy Chairman—had presented to us thecameo work that she had done. It seemed to me that at that point it was relevant to ask whyall the work had not been done.

Senator FERGUSON—I am happy for the presentation to go on, but if there are goingto be further questions I think the call should go to this side before it goes to the other side.

CHAIR —Do any of you have any questions?

Senator FERGUSON—I am prepared to let them keep going.

Senator MURRAY—I think they should carry on with the presentation.

Senator HARRADINE—I can ask it later.

CHAIR —Please proceed.

Prof. Warren—In this segment I want to walk through some of the assumptions wemade. I would hope that in the process of doing that some of the concerns that have beenraised will be addressed and can be focused on later on in question time. What I want tofocus on in the first instance is the period that we addressed which is exactly that questionthat Senator Conroy just raised.

We chose that period essentially because it forms a useful benchmark against which toevaluate the sensitivity of other information that is in the public domain on this issue, inparticular, the ANTS document, the government’s cameos. We could have chosen July 2000,but you introduce when you do that a serious of transitional types of issues which relate tofour per cent and the adjustments to the CPI as you move to 3.4 per cent over that period ofthe six to 12 months to when those other indirect taxes come in in July 2001 by the timethey are all in.

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In looking at the fact, as I raised earlier, that there is a 3.4 per cent compensation for a1.9 per cent medium-term price effect, I felt—and I have not discussed this with Ann—thatthe issue of going to 2001-02 seemed to me to be more reasonable, because in the light ofday you would find that it made only a marginal difference because you are dealing with3.4, 1.9, 2.5 and four. I have investigated that subsequently and what I said earlier stands.The general pattern of all the results stands. The inflationary effects will be higher, but thenumber of losers and the nature of those losers remains largely unchanged. No doubt we willdiscuss that further later.

In terms of the indirect taxes, I looked at the 2001-02 reforms and the assumption thatwe made in the first instance was a 100 per cent full shifting forward. Obviously that is acontroversial assumption, and I suppose a qualifier to that is the existence of the ACCC andits particular brief. But to pursue that particular issue we looked at a 70 per cent shiftingassumption for the wholesale sales tax and stamp duties. There was the possibility of lookingat the partial shifting of a range of other indirect taxes which obviously would have alsoinfluenced that number.

You might rightly ask, ‘Why those two taxes? Why not more?’ Again, I defer to ourparticular judgment about what we saw as taxes that would make sense to look at in terms ofa 70 per cent shifting assumption. I did not feel that that would be the case in relation toFID. It obviously would be a case in relation to stamp duties and potentially a case inrelation to wholesale sales tax, because there is so much of those taxes which are embeddedin business inputs. In that sense that assumption more reasonably fits with wholesale salestax and stamp duties. There is obviously an issue there.

There is equally an issue with diesel fuel rebate. We could keep expanding all those onescoming off. The question is: where do we keep coming back and seeking clarification andwhere do we make a judgment? It is quite likely that at the end of day we will have a list ofthings which you would like us to look at in relation to the assumptions that we made.

In terms of the savings ratios, as Ann said earlier, what we did was to walk through andhave a look at the options available to us. Do we try to use HES with all the criticisms thathave been levelled by Treasury and others about using household income versusexpenditure? We decided instead to demonstrate the importance of this particular issue byadopting a procedure used by Treasury in their draft white paper. It was not subsequentlyused by them, but it would throw adequate light on the particular issue.

In terms of the CPIs, the approach we took to measuring household price index, there aretwo ways you can go about it. Senator Conroy has raised the issue of why we did not dohousehold specific price indexes. We chose to go with household group specific priceindexes rather than household quintile specific price indexes. The issues there relate tosample size. If you look at the table in the material, you will see that at times for theaggregate group we ourselves had difficulty with the sample size by itself without dividing itup into quintiles, let alone think about it in terms of deciles.

That is why we chose for modelling and sample reliability reasons to go to the householdgroups own price index. The evidence would indicate—and I have no problem in flaggingthis because of the work that I have done for ACOSS also—that the price index will vary

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across those quintiles, but it was not us hiding anything; it was just really a sample sizeissue and adopting a common methodology across the different approaches that we took.

I am raising here issues of contention in modelling that need to be flagged; some havebeen flagged already. The other issue is in relation to the price index and how it isestimated. We talked about it being a group specific price index. There is also the issueabout using the household expenditure survey for that purpose when the ABS, in competingits own price index, does a fair amount of reweighting to take account of problems relatingto tobacco and alcohol, for example, and underreporting in HES. We have adopted a similarmethodology to that of Treasury. That means that at the end of the day our price index issimilar to that which would be in the 13th CPI, which is the new one which hassubsequently come out.

I will touch on the issue of tobacco and housing. In modelling these various scenarios,you always want to prepare—and we have gone to great lengths—an independent report. Iam a little concerned about the targeting of some of the assumptions, but we have tried togive balance. In a sense, that is why option 7 is there—to make it informative. It isinteresting to see tobacco and new house prices in, but it is also interesting to take them out.So we have presented a range of results which have tobacco and new house prices in and outso that we can provide a more informed picture.

The reason for tobacco out is related to history. It is pertinent to think about history inthis particular case. In the case of Fightback, tobacco was out. In the case of John Dawkins’budget of 1993—some of us who have long memories remember that there was a series ofincreases to tobacco excise during the period—on 17 August 1993 it went up by three percent, in February 1994 by five per cent, in February 1995 by five per cent and in May 1995by 10 per cent. Did the government ever consider compensating people for those exciseincreases? No. Why not? The excise was meant as a tax that people should pay and thatshould alter their behaviour. If that is the case on both sides—we have both Labor and theANTS document taking tobacco out—why are we now wanting to put tobacco in? Yes, it isan issue of interest, but should it be out? We opted to present both options of seeing it inand out because history is on the side of taking it out.

What troubled us in relation to new house prices was that we were only telling half thestory. Half the story was: this is what can potentially happen to new house prices. But wewere not telling the other side of the story about the First Home Owners Scheme and thewealth effect of increases in house prices. So again we erred on the side of doing what we asindependent researchers should do to balance off and present to the committee. That is partof what I call being a responsible, independent consultant—to provide additional informationthat provides light, which is important, and complements what is already there. That is whywe presented tobacco and house prices both in and out.

A lot of attention has been given to the credibility of the household expenditure survey.We have gone to fairly significant lengths to try to distance ourselves from those kinds ofcriticisms. That is why we have created the hypothetical savings ratios and why we havegone to group CPIs rather than across the different quintiles or deciles.

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So that is background to why we did what we did—why we took the 2001-02, why wegave the standard and the B case in a number of the options and why we used the priceindex approach that we took.

I will defer to Martin and then come back to some of the price and distributional effects.Martin can talk about the STINMOD side of it.

Mr Robinson—I will give a very brief overview of how the ANTS package or thecameos were modelled in STINMOD. The version of STINMOD that we were using is anamended version—STINMOD release 97A. We use this version because it is based on thehousehold expenditure survey for 1993-94. This version of STINMOD was given toTreasury, in particular to the Retirement Income Modelling Unit, which made modificationsto the model. The main modification that was made was the adjustment of householdincomes to bring the 1993-94 HES up to the period of analysis, in particular to 2000-01 and2001-02. The 2000-01 file was used for modelling some of the options such as 5, 5B and 7where we had to compensate for food out through increased taxes and we needed to do someestimates of the budgetary impact. The 2001-02 was for Professor Warren to estimate theprice effects in that medium term. Ageing of the household weights was also made by RIM.Again it took the household weights to be representative of those two particular years.

The other major change to the model made by RIM was to implement the ANTS policychanges that required structural changes to the model. Some of the changes proposed underthe ANTS system, such as increases in payment rates, are just simple parameter changes inthe model; other changes, such as the introduction or replacement of family tax benefit withthe family allowance and so forth requires structural change to the code of the model. Thesechanges were made by RIM and subsequently checked thoroughly by NATSEM, as was theadjustment of incomes and household weights.

We also made some changes to the hypothetical component of the model. Thehypothetical component of the model allows us to model the cameos in such a way that wecan specify hypothetical families and at different levels of private income to estimate theirentitlements to government cash transfers and calculate the income tax liability, as wasrequired for the cameo cases. As I said before, the forecast household weights for 2001-02and the incomes for each household were supplied to Professor Warren so that he couldestimate the indirect price effects.

RIM also provided NATSEM with a list of their projected tax and government cashtransfer payment rates on the basis of forecast CPI and AWE. Since the modelling of theANTS package by Treasury, the Australian Bureau of Statistics has released more recentaverage weekly earnings and CPI figures which have subsequently been incorporated intotheir projected payment rates yielding some small discrepancies between the payment ratesused in the ANTS document and the payment rates used in the modelling of cameos byNATSEM. I will leave it there.

Prof. Warren—I will go through some of the price effect issues and then give anoverview of the various results we have.

CHAIR —How much longer do you think you will take?

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Prof. Warren—About 15 to 20 minutes, all up, I would hope.

CHAIR —The purpose of this inquiry is for the committee to inquire into the work youhave done. We have a specified amount of time. That means that the ability of thecommittee to examine you on your report is reduced. That is why I said at the beginning thatI hoped we could have a brief coverage. We have now been going for about three-quarters ofan hour and we are going to take another 20 minutes. Let us proceed and see if we can fit inall the needs of the committee.

Prof. Warren—I will truncate my presentation. Going through the price effects, you willsee from the information in the report that, under the various options, we get close to but notexactly the same outcome as the one in the ANTS document, and this is with option 3,which is the government’s package as at 2001-02. We have a price estimate of two per centwith tobacco and new homes out and 2.7 with them in. If you then go to option 4, which iswith the stamp duties and wholesale sales tax 70 per cent shifted forward to consumers, thenthat jumps by about another 0.9 per cent to 3.6 per cent with tobacco and housing in. I willcome back in a minute to how that impacts on different groups.

With option 5, which is taking food out, it is not surprising that that has a fairlysignificant impact on the consumer price index, taking it down from 2.7, with tobacco andhousing in, to 1.6 per cent, and I will talk about who the beneficiaries are in that case. Thealternative package is option 6 which—instead of taking food out and using income taxchanges to fund that—simply raises the GST rate to 12 per cent. The price effect of that wasa little bit higher than the outcome around 2.9 per cent up from the 2.7 per cent.

It is probably worth looking at the general patterns. We found that prices do not appearto be too different depending on whether or not couples had children. The age of the childappears important but only marginally so. The age of the heads seems to be quite important.What you find, particularly in relation to option 3, which is the government’s package, isthat the groups that are particularly impacted upon are the age pensioners, the self-fundedretirees and those on disability support pension.

Looking at the price impact if food comes out of the GST base—which is option 5versus option 3—you find that sole parents gain more but that the single income couplesgain more than they do with a reduction of 1.5 to 1.6 per cent in their price index. For thoseon pensions, it becomes quite significant. This should come as no surprise because what weare looking at here is the distribution of food and the importance of food within people’sbudgets—with pensioners, the singles 1.9 per cent reduction going to a 10 per cent GST withfood out and 2.1 per cent for married couple pensioners. Self-funded retirees, again aboveaverage, gain 1.4 and disability pensioners around 1.9 per cent. It is quite clear the groupthat such a change is meant to target are beneficiaries.

The beneficiaries of having tobacco and housing in or the people who are impacted mostby having it out are those who seem to be under stress—people on disability pensions, soleparents and the unemployed, typically low income individuals. That is obviously animportant point also.

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When you look at option 4, which is with 70 per cent wholesale sales tax and stampduties with a CPI effective 3.6, it is not surprising that a large number of people are losersfrom that scenario, obviously considerably more than option 3. The key losers in option 3are single age pensioners, the self-funded retirees and those on disability support. They aregeneral observations that we make, given the time constraint which we confront. Maybe it isworth leaving that and going to the 3Bs, 5Bs and 7s because the price effects really domirror the distributional impact which arises from those different scenarios.

Prof. Harding—I will briefly show you four overheads.

Overhead transparencies were then shown—

Prof. Harding—This is the impact of three of the options that we modelled, in this caseon single age pensioner households. In each of these cases, tobacco and housing prices areexcluded from the price effect. These three packages are all revenue neutral, so they aredirectly comparable. Option 3B is the government’s package but with household specificprice effects and saving; so the two key things that the modelling has been criticised for arecorrected in this version. Option 5B is the food out income tax up package and option 7 isthe food in compensation up package, which is the six per cent pension increase.

We did not get any losers on average in any of these three cameos. There was oneapparent exception of self-funded retiree couples in option 7, but that was an error on ourpart and I have distributed the new tables to you today. One of the problems is that for someof the cameo groups the apparent gains are relatively low—one per cent or half a per cent.You have to recall that, when we produce the average price effect for a particular type ofhousehold and income grouping, there would be some people who face a price effect that isabove that average and some who would face a price effect that is below in order to get theaverage. Therefore, where there are very marginal gains, that is a cause for concern.

In this transparency, you can see with option 3B, which is the government’s package,that there are marginal gains for single age pensioners. The food out option helps agepensioners greatly. Option 7, which is the higher six per cent increase in age pension,delivers more assistance right at the bottom end.

I will show you what it looks like for three other types of families. The single personone essentially gives you a feel for the key flavour of all of the results where you comparefood out income taxes up to food in compensation up. The essential thing is that at thebottom end low income people fair better under option 7, which is compensation up, thanthey do under food out. There are higher gains at the top end under option 7 than under foodout, but still the gains are not as high as they are under the government’s original package,which is 3B. There is a zone in the middle where it appears that food out delivers higherbenefits than option 7 which is the compensation up food in package.

There is one other feature as well which is that sometimes at very high income levelsfood out can be seen to deliver higher benefits. So what you see here above about $100,000,in this case for a single income couple with two children aged five to 12 is that option 7delivers lower gains than does food out at this very top end, but the three effects that I spokeabout are also still apparent. Option 7 delivers more assistance at the very bottom end than

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does food out. In the middle, food out is often better. In the upper middle, option 7 usuallydelivers higher gains than does the food out option.

I will make three concluding comments, one being about the adequacy of thecompensation package. The worst case package that we were asked to model was option 4,which had much higher CPI increases and where we assumed that pensions would still onlyincrease by 3.4 per cent. In that case, there were a reasonable number of cameo householdswho were expected to make losses. In most cases, those people had little or no privateincome, but there is another zone for concern which is two-income couples who are in themiddle range of $30,000 to $50,000. Some would argue that the assumptions underlyingoption 4 are too strong, that there is a case for excluding housing and tobacco and that it isnot clear that pensions would still be increased by only 3.4 per cent if there was a higherthan expected CPI result. Nonetheless, even if you look at options 3B, 5B and 7, then thereare gains of less than one per cent for some categories of people, particularly age anddisability support pensioners, some dual income couples and some self-funded retirees.

I think this raises some concern because the average result disguises the fact that, withineach of these cameo household types, some will do better than the average and some will doworse than the average as a result of their different expenditure patterns. I think overall thereare some question marks about the adequacy of the compensation package. On the food infood out issue, it is one of those usual extremely difficult social policy trade-offs. Deliveringhigh compensation under something like option 7 delivers more assistance right at thebottom end, but it looks as though it delivers less assistance at the middle than does foodout, and it delivers more gains at the middle to higher income levels.

Just a final comment, it is not possible for us to model the number of winners andlosers—to say how many winners and losers there are from the package—because of thehypothetical way in which we have modelled these results. We are looking at typical typesof families rather than how many of those families there are in Australia.

Prof. Warren—One of the things that became clear to us is that there are someparameters that are important and some that are not important. We feel the issue of tobaccoand housing is one that has to be considered and taken into account, because it becomes anissue determining the sensitivity of the results, particularly on that line between losers—option 3 versus option 3B. It is important to address that issue, and we have sought to dothat.

We saw the savings issue as important but not critically important. We saw that the ownprice issue is particularly important. It very much influenced the results that we got. Thephasing of the indirect tax, whether you take 2001-02 or July 2000, is not important becauseit is only a matter of ratcheting the whole thing up. So they are the critical issues; the onesthat we saw as important.

CHAIR —Thank you very much. If there are no questions at this stage, we will take abreak. If there are any questions on just the presentation before we go to the broad questions,I am prepared to allow a couple. If not, thank you very much for that presentation.

Proceedings suspended from 10.15 a.m. to 10.33 a.m.

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CHAIR —The time set down in the program for this part of the hearing is 1½ hours. Iintend to divide the questioning as follows: half an hour to the coalition, half an hour to theLabor Party and half an hour between the Democrats and Senator Harradine. If at the end ofthat we still have demands for questioning, I am prepared to run over a short time but not avery long time. I hope we do not have excessive demands for questioning so that we do nothave to run over at all. I ask that the questions be reasonably succinct, and I wouldappreciate if the answers can be to the point.

Senator FERGUSON—I want to go over a few of the key points you have made,particularly in relation to the options as they have been presented. You were asked to do avariety of things. Firstly, option 1 was to do modelling in relation to the government’sANTS package. In the initial part of your report you say:

The estimates of the distributional impact of the package are extremely close to the Treasury’s in almost all cases.

Is it fair to say that as far as option 1 is concerned you confirm the Treasury’s estimates asthey have been laid out in the ANTS document?

Prof. Harding—I think on the whole that is the case. Option 1 is not the first option thatthe committee asked us to model in the sense that they wanted tobacco and housing includedin the first option they asked us to model, but we tried to do an independent audit of theway Treasury had done it with tobacco and housing excluded, which was our option 1. Wefelt that a few minor errors had been made in the modelling, but no doubt we probablysuffer from the same thing. But on the whole the numbers were reasonably close. We had aslightly different price effect, which Neil might talk about. We had a 2.0 per cent priceeffect versus the Treasury’s 1.9 per cent. We had very slightly different social securitypayment rates because there is now more recent estimates about what AWE and CPImovements will be and have been over the recent past. In a couple of areas there were somemodelling differences. But on the whole the numbers were a reasonable match.

Senator FERGUSON—That 0.1 per cent could come about because of the differentfigures you have used because of more recent estimates that are available?

Prof. Warren—Not necessarily. It could just arise from different modelling methodologyand so on at the margin. That kind of size is just an error that you are going to have.

Senator FERGUSON—There is a margin of error anyway, I presume, and 0.1 per centdoes not seem to be very much. You have explained in detail why you do not think tobaccoand new home prices should be included. You explained that in detail. Option 2 is just aninclusion of those on top of the variations of option 1. You have an option 3 and an option3B, which does exclude tobacco and housing. I think you say on page 25 of your report that,for reasons you noted earlier, the methodology adopted in option 3B where tobacco and newhome prices are excluded is probably the most appropriate. Can you expand a little on whyyou think option 3B is the most appropriate?

Prof. Warren—The two issues are in relation to tobacco and new homes. In relation totobacco, it is really a question about what it is you are trying to achieve with tobaccotaxation. If you look at what the government is doing in relation to what is causing the

A NEW TAX SYSTEM


tobacco price to increase, it is moving from a weight based excise to a per stick excisebecause of concerns about the industry developing technology to make extremely lightcigarettes—for the same cigarette to have less tobacco—and therefore giving one company aprice advantage over another. A per stick system is where a lot of other countries have gone,so there is rationale for that.

Also the issue about increasing the excise is one, for example, that the National HeartFoundation and other organisations have argued for for a long time and made varioussubmissions. I think they made submissions to Brian Gibson’s committee on moving to perstick and raising the level of excise. It is all an issue about the negative externalitiesassociated with tobacco smoking.

It would be contradictory of that move to then say that, having moved to a per sticksystem and moving in the direction of the Heart Foundation and other organisationsconcerned with the impact of tobacco smoking, people should be compensated for thatincrease. That is not logical. If you told the Heart Foundation that that is what you aresubsequently going to do, having accepted their case—a case that they put for a long time—it would just be anathema to the whole thing. That is in relation to tobacco. In the Dawkinschanges back in 1993, stretching through to 1995, there was never really any considerationthat people should be compensated for what were at that stage significant increases intobacco taxation.

In relation to new homes, new homes is a complicated one because, as we move betweenthe 12th series and the 13th series, CPI housing is treated quite differently between thosetwo series. That in itself is an appendix. That in itself is a complicated issue because it isgoing to have implications for the price effects of this whole package anyway. There is anissue there in that if house prices go up those people who are currently home owners do gaina certain wealth effect as a consequence of that. The question then is whether youcompensate them again for what those home owners already have. So it is an issue aboutcompensating them twice. Obviously for those people who are not home owners there is anissue that they have missed out. The government has argued that it is introducing a firsthome owners scheme, and we were unable to model that. But, to do this properly, you wouldhave to take account of the benefits for current owners in the first home owners scheme.

It is without doubt an issue for one group—that is, those people who will never own ahome, the renters. That is, if you like, the area in which we do have some concern. You canstart to address those kinds of issues by the way you design your compensation package withrent assistance and so on, but there clearly is an issue. That is why standards 3 and 3B arethere. There clearly is an issue in relation to renters, and we will not deny that. While themajority of people are owner occupiers and the first home owners scheme exists, if youassume that everybody ultimately becomes a home owner, which is probably an unreasonableassumption, then we have erred one way. Putting it all in is erring we feel disproportionatelythe other way. So that is why.

Senator FERGUSON—Bearing in mind that you say that option 3B, where you excludetobacco and new homes, is probably the most appropriate, is it not a fact that under the 3Bscenario every group modelled will be better off under the government’s tax plan?

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Prof. Warren—It does result in no individuals confronting price effects which aregreater than 3.4 per cent, which is the compensation in that long-term period. That is anoutcome from that. As Ann said in her conclusion, there are obviously always issues aboutthe price indexes across different income groups. So in a sense, yes, but there is a questionof the adequacy of the compensation—that is, the adequacy issue. You can sail close to thewind. How close are you sailing? You are on the positive side but you are extremely close.What is clear from what we have done is that you can change your assumptions and you canpush yourself over that line.

Senator FERGUSON—Rather than saying that everybody will be better off, would it befair to say that, on average, at least under option 3B no-one will be worse off?

Prof. Warren—With the methodology that has been adopted and the assumptions made,yes.

Senator FERGUSON—On Wednesday in theSydney Morning HeraldPaul Cleary wrotean interesting article. He might have thought it was interesting because he must have got allof this information from somewhere. He makes a couple of observations which I want you tocomment on. He said:

The most comprehensive study on the Government’s GST—

he is talking about the most comprehensive study—

has found that up to 31 income groups will be made worse off by up to $7 a week, including pensioners, self-fundedretirees and low- to middle-income families with children.

A summary of the key results of the study, obtained by theHerald, demolishes once and for all the Government’spivotal claim that no-one will be made worse off by tax reform.

If he had read the whole of this report, which includes option 3B, is that a fair assessment ofyour report to this committee?

Prof. Harding—I think what we have shown quite clearly is that the expected gains orlosses depend critically upon the assumptions you make. The dissaving issue and the extentof apparent dissaving did not appear to have such a big impact on whether people werewinners or losers, but the estimated increase in the prices facing them turned out to be anabsolutely critical issue. Because there is some uncertainty attached to the estimation of theprice increases facing each of the cameo household groups and because we are dealing withimperfect data in an imperfect world, this goes to Neil’s point about sailing close to thewind—that is, some of the modelling assumptions we were asked to make tip people overthe line from being apparent winners to apparent losers.

What we would emphasise is that you should not treat any of these numbers as otherthan broadly indicative. I do not think you can say, for example, that a household of thisparticular type will be better off by exactly $2.10 a week, which is what could be impliedfrom a first reading of the tables. The science of the modelling is not accurate down to thatsort of detail. What you are looking for is where there appears to be possible potentialproblem areas, in particular with regard to the adequacy of the compensation.

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Senator FERGUSON—I have to make a confession that I have not read all of thesecond half of your report which has hundreds of pages of tables, but in any of those tablesunder the headings do you use the word ‘profiteering’ at all?

Prof. Harding—No.

Senator FERGUSON—In this same article there is a set of tables which has ‘Source:NATSEM’ on the bottom. The top of it says ‘Option 4. Option 3. Plus high inflation fromprofiteering’. It would appear as though this is one of your tables that has been put in thepaper and yet you say you have never used that word.

Prof. Harding—No, we did not use the word ‘profiteering’.

Prof. Warren—Not in the tables. It is used in reference to those kinds of issues in thetext in relation to option 4.

Senator FERGUSON—But it is not used as a reproduction of a table. This looks like areproduction of a table headed ‘Howard’s GST losers’ which says ‘Source: NATSEM’ on thebottom, as though it is a replicated table from your report. I guess the only thing I can do isshow it to you and you can tell me whether or not it is a replicated table. If it is not, it is amisrepresentation of your work.

Prof. Harding—He was leaked the summary tables, but not by any of us on this side ofthe table. He obviously just extracted selected figures from that in order to produce that tablein the Herald.

Senator FERGUSON—So it was sort of selected quoting.

Prof. Harding—Yes.

Senator FERGUSON—You also mention the work on dissaving where you say thatbecause of the tight time frame it is not possible to make a comprehensive analysis ofdissaving rates. So you just made an assumption of your own in relation to dissavingsbecause you felt that that was the only way you could give a proper analysis.

Prof. Harding—The time that we had to undertake this study was extraordinarily shortfor a study of such magnitude. To look at dissaving you would probably want to dosomething like the Treasury had done when it prepared the earlier draft white paperestimates, and has done subsequently, where they adjust all the HES data in detail so that theaggregate matches the sorts of savings rates that are apparent in the national accounts. At themoment if you look at the average household in the household expenditure survey, they aredissaving. That contrasts quite sharply with the savings shown in the national accounts.There is effectively a discrepancy between the micro-data and the macro-data, and trying tocorrect for that will take a considerable period of time. In that event, we assumed thatTreasury had undertaken all of that research when preparing the draft white paper and justborrowed their assumptions but increased their dollar values by the CPI to forecast 2000dollar values.

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Senator FERGUSON—I want to move to the 70 per cent scenario of pass-through. Youwere asked to model that as an assumption by the committee; it is not a choice of yours. Itdoes seem as though in the body of your report that you do not believe that a 70 per centscenario is a realistic one and that it should not be viewed as a standard case. Do you haveany opinions on pass-through that you would care to share with the committee?

Prof. Warren—The issue of shifting is a highly controversial one. Various attempts havebeen made to try to see what happens when other countries have introduced reforms likeGSTs. The difficulty is that every case is unique. The New Zealand case was unique. Thiscase in Australia is unique. It is unique for a number of reasons. One of the most significantI suppose is the ACCC’s brief in terms of companies and the potential they might have fornot passing on price cuts as a result of indirect tax cuts. If you see that as a potential checkand balance, which we did, obviously that is going to become an issue. Large corporationswhich will be driving the price setting will be extremely mindful because the ACCC wouldobviously be viewing the large players rather than the small players as the ones to provecertain things in terms of rules.

So our view was that it is important. There is an issue of the transition, and the 70 percent is an issue you cannot overlook. But the period before that washes out is extremelydifficult to know. It is really how effective the education program is. It is how effective theACCC is. It is all of those kinds of issues. It is something you need to look at andsomething you need to be mindful of. It is another issue that does influence the adequacy ofcompensation. Where is the buffer if this does actually occur? Those kinds of issues arequite important. So it is, if you like, another one of those issues that adds to our concernabout the adequacy. If you do have that, then it does push people over the line. If you dohave these different assumptions you can create the losers that were said not to be there. Itdoes need to be heeded in that case.

ACTING CHAIR (Senator Ferguson)—I will hand over to Senator Gibson. He has acouple of questions in relation to food and other things.

Senator GIBSON—I would like to explore the question of families—those with childrenversus those without—because there has been concern on the committee through ourinquiries about how adequately families are compensated. I take you to page 26 of yourreport and quote the main paragraph:

Based on the estimates of price changes sho

commonwealth of australia official committee hansard · 1999. 8. 12. · commonwealth of australia...

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