A New Tax System - Additional Statement

A New Tax System - Additional Statement

Senator Dee Margetts
Senator for Western Australia

The Greens (WA)

Problems with the Treasury modelling

The Greens (WA) concerns regarding the economic theories, assumptions, calculations, projections, estimates and modelling which underpinned the Government's proposals for taxation reform can be usefully divided into two broad areas:

  • microeconomic (household/distributional) modelling issues; and
  • macroeconomic (economy wide) modelling issues.

Initial Comments

Before elucidating these specific micro and macroeconomic modelling concerns, it is useful to comment on two broader issues relating to A New Tax System (ANTS) and tax reform:

  • The Review of Business Tax.
  • The Philosophical Issues Underlying the ANTS Package.

Review of Business Tax

The Greens (WA) have major concerns that the Review of Business Tax (the Ralph Review) is not integrated with the Senate's consideration of the rest of the tax package. Last year, I moved a motion to ensure that the results of the Ralph Review were known before the Senate debated the rest of the tax package. This motion, however, was defeated.

The Greens (WA) have strongly argued that business tax should not be siphoned off into a separate review for the following reasons.

  • Implications for Modelling: Despite the requirement that any changes in the business tax arena are revenue neutral, the Ralph Review may result in significant changes that have implications for the economic modelling process.
  • Holistic analysis: It is difficult for the Senate to examine the proposed changes to the tax system as a whole and assess its merits.
  • Access: It is difficult for lobby groups, especially those with stretched financial and human resources, to engage comprehensively in two reviews.
  • Transparency: It is difficult for the Senate to assess and compare the Government's concessions and subsidies in the business tax arena versus other changes that may benefit low income people, charities, community organisations or the environment. This point is especially relevant in light of the Treasurer's threats to abandon the whole tax package if the Senate makes any substantive changes.

Philosophical Issues Underlying the ANTS Package

The Greens (WA) have consistently argued that `economic' decisions need to be made holistically rather than on narrow conception of `economics'. Concepts of ecological sustainability (ESD) and equity need to be valued as highly as narrow and traditional economic views to highlight the fact that we don't live in an economy, but we live in a society which is established in the natural environment. Concepts of ESD and equity need to be fully integrated into the consultation and policy making process rather than assessed as mere afterthoughts or forgotten entirely.

There have been many criticisms both domestically and internationally of the narrow economic approach that underscores the ANTS package. The focus on economic growth and the use of the narrow economic indicator, gross domestic product (GDP) or gross national product (GNP) as a primary measure of national well-being has been widely attacked as inadequate and reductionist.

The flaws in GDP have generated international moves to develop a better index to measure national well being. Most international work is aimed at developing the Index of Sustainable Economic Welfare (also known as the Genuine Progress Indicator) that appropriately incorporates concepts of environmental sustainability and social justice alongside economic progress. Indeed, the Government has paid at least lip service to this concept by developing Green Accounting systems in the Australian Bureau of Statistics that the Greens (WA) were active in promoting.

The Committee has received significant amounts of evidence regarding narrow, economic measures of GDP, CPI, export performance, national debt, distribution of wealth, budget revenues, expenditures and surpluses. The Greens (WA) submit that in order to analyse the full range of impacts on individual, community and national well being it is necessary to analyse a broader range of indicators. Such a major change to our taxation system should have incorporated principles of ESD and social justice from the outset. It seems, however, that the Coalition and Treasury have completely ignored environmental impacts and only marginally considered issues of equity.

The Greens (WA) believe that the taxation system is one of the most powerful policy tools available to the Government to effect positive social, environmental and economic outcomes. In this context, the Greens (WA) are highly concerned about many aspects of the tax package.

Microeconomic modelling issues

The distributional analysis by Treasury in ANTS is presented via 25 cameos to illustrate the different effects of the package on different types of households. The salient assumptions in the cameos and compensation calculations are that all hypothetical family types:

  • have identical expenditure patterns;
  • spend all disposable income therefore do not save or dissave; and
  • face the same rise in prices of 1.9%.

The use of cameos and the underlying assumptions have been strongly criticised by a number of expert witnesses to the Committee [1]. The theme behind their criticisms was that the use of the Household Expenditure Survey (HES) data was a preferable data source than the Consumer Price Index (CPI). Many witnesses acknowledged that there were a number of deficiencies in the HES data, but essentially suggested that with adjustments HES data produced significant advantages, as it was able to provide a more accurate analysis for the following reasons:

  • The CPI measure excludes tobacco prices and the home owners rebate which can distort the distributional effects on low income families. In addition, the CPI relies on a more restricted base of households than HES (essentially only wage earners in capital cities) thus it is less representative.
  • HES data can be used to estimate the real extent of dissavings.
  • HES data can take into account household composition and relevant expenditure patterns.
  • Whereas the cameos represent the results for typical or hypothetical families, the use of HES data allows the total number of winners and loser to be modelled [2].

The Greens (WA) share these concerns with the limitations of cameos and the calculations behind the `compensation'. The Greens (WA) place high importance on issues of social justice, equity and reducing the gap between the rich and poor in Australia. Consequently, the Greens (WA) are particularly concerned by the view expressed by a number of welfare organisations that the deficiencies in the Treasury's distributional analysis underestimate the impact on those who can least afford it - low income earners [3].

In light of the exposed inadequacies in Treasury's cameo/CPI based approach, further distributional analysis based on HES is to be presented to the Committee by Professor Harding and Professor Warren in the near future. The Greens (WA) will monitor this analysis in light of the principles of social justice and equity.

Macroeconomic modelling issues

The Greens (WA) broadly agree with the Democrats comments on macroeconomic modelling in relation to the account of the evidence on tourism, housing, the flow-on issue and wage growth, and do not seek to duplicate these comments.

There are two main issues, however, worthy of brief discussion:

  • the impact on employment; and
  • the impact on the environment.

The macroeconomic or economy wide modelling done by Treasury was completely inadequate. In evidence to the Committee, the Treasury admitted that it had not comprehensively modelled any macroeconomic variables except the CPI [4].

Consequently, the Committee has had to fund an independent macroeconomic modeller, Professor Peter Dixon to undertake certain aspects of this analysis.

Employment

In evidence to the committee, Treasury officials admitted that the Treasury had not modelled the impact of ANTS on employment [5]. Rather, in assuming no change to employment, the Treasury, in its own words, was "simply hitting that broad direction of change" [6].

It seems extraordinary that the Treasury did not consider employment impacts to be worthy of comprehensive modelling when the ANTS package imposed a tax on the employment oriented service industries.

Professor Dixon highlights that the impact on employment is sensitive to two critical issues:

  • whether businesses pass on indirect tax reductions; and
  • wage bargaining/growth [7].

Despite the ACCC's policing role, there was considerable doubt expressed as to whether there would be full flow through in taxation reduction from business [8]. For instance, the National Farmers' Federation President, Mr Donges expressed considerable doubt in the following exchange.

    Senator CONROY—I probably have not explained myself clearly. You are saying that farms are going to have all these extra cost savings. What I am asking is: are you not passing them onto your consumers?

    Mr Donges—We would like to, but it is not that simple. We live in a competitive environment [9].

In addition, Ms Jenny George, President of the ACTU suggested that if workers have a sense of injustice, unfairness and inequality as a result of any tax changes it is likely that they will bargain for wage increases. She highlighted that it would be likely that workers would see the changes as unfair by saying,

First of all, they know that the impact is going to be more than 1.9 per cent on prices and, secondly, I think the average punter does not believe that the compensation will be permanent or will be sufficient to offset the price increases. But they do know, quite clearly, and my constituency know because I have told them, that the highest beneficiaries are those that are at the top end of the income scale. They know that very clearly [10].

In addition, in a response to a question from Senator Campbell, Ms George indicated that if the ANTS package remained unchanged the union movement would seek wage growth. She said,

To the extent that I have already outlined that this (the ANTS package) is clearly inadequate, we would seek to redress that inadequacy either through arbitral proceedings for those who have no capacity to bargain or through the bargaining mechanism [11].

In light of these comments, the Greens (WA) are not confident that the ANTS package will not involve significant loss of jobs in the short term. The impact of job losses will be magnified in rural and regional areas and for relatively unskilled workers. The Greens (WA) believe that the transitional costs of job losses requires much greater attention by the Government.

Environment

The Treasury modelling did not attempt to model any impacts of the ANTS package on the environment. In addition, the Treasury did not attempt to have this modelling done by either an independent consultant or another Government department.

When questioned as to whether any kind of environmental impact analysis had been undertaken by Treasury, Mr Greg Smith, Executive Director of the Budget Group, claimed that it was up to another Department to do that kind of analysis.

He said,

    I think essentially those are matters that are the portfolio responsibility of others. I think I have heard Senator Hill give answers along those lines, where he says that he and his portfolio are responsible for that type of work. Certainly, the Treasury cannot do all of those things [12].

The Greens (WA) believe that this failure to have any regard for the environmental implications is a fundamental omission. It seems that the Government has forgotten the comments by Senator Hill at a conference and in a subsequent press release as long ago as 30 September 1996,

    ... it is 4 years since the "World Scientists Warning to Humanity" was released. You will recall that this warning was signed by 1700 of the worlds leading scientists, including the majority of Nobel laureates in the sciences. The warning stated that

    "... many of our current practices put at serious risk the future that we wish for human society, ... and may so alter the living world that it will be unable to sustain life in the manner that we know".

    The message that I would leave with you today, is that we are well past the warnings, and we are well past the theoretical arguments. We are now into the most critical phase of all - action and implementation [13].

The Greens (WA) agree with this comment and would like to point out that this omission is also in direct contrast to commitments made by Senator Hill at the same conference and press release. In the press release he announced that the government was committed to linking the environment to the economy through indicators and accounting systems [14]

Senator Hill's commitment on behalf of the Government included an emphasis on the National Strategy for Ecologically Sustainable Development (ESD) that the Commonwealth, all States and Territories and Local Government endorsed in 1992.The primary guiding principles in the National ESD Strategy are:

  • decision making processes should effectively integrate both long and short term economic, environmental, social and equity considerations, and that
  • cost effective and flexible policy instruments, such as improved valuation, pricing and incentive mechanisms should be adopted.

The Treasurer, reaffirmed Senator Hill's commitment to the National Strategy for ESD in a press release announcing the Productivity Commission's Inquiry into the Implementation of Ecologically Sustainable Development by Commonwealth Department's and Agencies. He commented that,

Economic, social and environmental well being are strongly linked. It follows that economic, social and environmental goals must be pursued in an integrated manner [15].

The Greens (WA) believe that the tax reform debate provides the Government with an excellent opportunity to heed the warning of leading scientists around the world and to get on with the job of implementing a tax system which addresses both the economic, social and environmental needs of Australians. The Government has clearly failed to take this opportunity to date.

Other Issues

While not strictly relating to modelling issues, it is important to note two other broad considerations that the Government has failed to take into account when constructing the ANTS package:

  • consistency with international obligations; and
  • consistency with other Government policy initiatives.

International obligations

The Government does not seem to have taken into account whether any changes proposed in ANTS will interfere with the fulfilment of Australia's international obligations. For example, the Australia Institute pointed out that the proposed reductions in diesel excise proposed by ANTS undermines the commitment made in Article 2 of the Kyoto Protocol [16].

Other Government policy initiatives

The Government seems to have disregarded whether elements of the ANTS package are in contradiction with other initiatives. For instance, in September 1998, the Government announced the Living Cities Program as part of its environment platform that it would take to the election. In this program, the Government announced an allocation of $16 million to reduce air pollution in major cities. The inclusion of a reduction in fuel excise is likely to nullify any health or environmental benefits gained [17].

Conclusion

The Greens (WA) will continue to monitor the progress of the Senate Standing Committees that are investigating specific aspects of the Bills and reserve the right to amend the Bills.

Senator Dee Margetts

The Greens (WA)

Footnotes

[1] [1] Professor Peter Saunders Submission 614 p.5; Professor Peter Macdonald Evidence. Hansard, p.307-8; Professor Ann Harding, Evidence. Hansard, p.222, Professor John Quiggin Evidence Hansard, p. 593, ProfessorNeil Warren Evidence pp.91-3, Associate Professor David Johnson Evidence. Hansard, pp.114-5

[2], Professor Ann Harding and Professor Neil Warren, NATSEM Introduction to Tax Reform Microsimulation Models NATSEM 15 December 1998, p26.

[3] Mr Terry McCarthy and Mr John Wicks of St Vincent de Paul, Evidence. Hansard, p257-259, Mr Michael Raper of ACOSS, Evidence. Hansard, p696.

[4]Mr Greg Smith, Evidence. Hansard, p.363

[5]Ibid.

[6]Ibid.

[7] Peter Dixon and Maureen Rimmer, The Government's Tax Package: Analysis based on the MONASH Model. 1998. Centre of Policy Studies, Monash University.

[8] Ray Reagan of the National Tax and Accountants' Association. Media Release, 15 February 1998;

[9] Evidence. Hansard, p246.

[10]Evidence. Hansard, p681.

[11]Evidence. Hansard, p677.

[12]Evidence. Hansard, p. 391.

[13] Hill, Senator Robert, Tracking Progress:linking environment and economy through indicators and accounting systems. 1996 Fenner Conference on the Environment 30 September 1996.

[14] Hill, Senator Robert, Tracking Progress:linking environment and economy through indicators and accounting systems. 1996 Fenner Conference on the Environment 30 September 1996.

[15] Costello, The Hon Mr, Productivity Commission Reference - Inquiry into the Implementation of Ecologically Sustainable Development by Commonwealth Departments and Agencies. Press Release No 83, 24 August 1998

[16] Australia Institute, Submission 120. p. 36.

[17]Australia Institute, GST Package is the real environment issue. Media Release, 24 September 1998.