 Welcome to the Australian National University for the fourth panel discussion in the Vote 2016 federal election series. I'd like to begin by acknowledging and celebrating the first Australians on whose traditional lands we meet tonight and pay my respect to the Ngunnawal people past and present. You didn't like it and get Tony Jones. You've got the poor man's Tony Jones. I'm Stephen Long from the ABC. You might have seen, heard or read my reports over the years on economics and finance. We have here tonight an esteemed panel who I will come to and I just wanted to let you know first that every Tuesday night in this very theater, right up until election day, there will be experts from the ANU meeting from the Crawford School in conjunction with Policy Forum Net to discuss the big issues for the election. As I said, this is the fourth of these discussions. I hear they've been very, very good and I'm hoping that we can match that tonight. There will be a podcast of tonight's panel and every panel in the series and that will be available on the ANU website. If you visit the website and click on 2016 federal election series, there's a big banner. You will find that podcast and I'd like you to join, invite you to join the Twitter conversation, the ubiquitous Twitter conversation these days using the hashtag Ospole or hashtag our ANU. Tonight I am joined by three of the university's leading experts in this field, not all economists by the way to analyze the key tax and economic policies being presented by the major parties during the election. To my immediate right and that's not a reflection at all on her politics is Professor Miranda Stewart who is the director of the Tax and Transfer Policy Institute at the Crawford School of Public Policy. She is an international expert on tax law and policy. Next to her we have Maria Ratianero and that's the last time I'm gonna say that and I hope I got it right. She's here at the ANU, a research school of economics and she's done some pretty fascinating work on incentives around personal income tax and her main field is research in public economic theory with a view to optimal taxation, whatever that means and I guess that means different things to different people. John Huston probably needs no introduction. Former leader of the Liberal Party of Australia, almost prime minister of Australia, the country's loss in that sense is possibly gained to the business community and certainly to academia now where John Huston here at the university is a professor and holds a chair in the Tax and Transfer Policy Institute at the Crawford School of Public Policy. Now, I hope you are all remembering that face, Tax and Transfer Policy Institute at the Crawford School of Public Policy because they are bringing you this event tonight. So please join me in welcoming the panel. Before we get onto the tax issues, I thought I'd just start by looking at the position we're in in terms of the budget. It wasn't so long ago that the mining boom was in full swing. All the talk was about capacity constraints, interest rates were going up, wages were going up and the revenue was just raining down like manner from heaven and all the government felt it had to do was hand over tax cuts. We had seven consecutive years of income tax cuts and there were handouts. It was like the caucus race from Alice in Wonderland. Was it all through the looking glass? I can't remember through the looking glass. So I remember the conclusion was everybody has won and all must have prizes. That seemed to be the fiscal policy of the time and we could still maintain budget surpluses doing that very different times today. Could you give us a sense of those times and how serious they are, John Hueson? Well, I think you're right. I mean, money was raining down and most of it was squandered really in a medium to longer term sense. And the situation today is that we haven't made too much progress in the last several years in terms of budget repair. Governments and oppositions have both committed to return to surplus as fast as possible up until recently and now they've sort of both quietly agreed in the run-up to this campaign will kick the can further down the road and we're now looking at over 10 years or maybe more in order to get budget repair. The bottom line is I think both sides have made very large long-term structural spending commitments that go way beyond the four-year budget period and they're all unfunded in my view and so the challenge for whoever wins is going to be actually to face the reality of two things. One, the forecast on which the current budget is based and the opposition's response is based. We know to be optimistic and they know to be optimistic. Indeed, Chris Bowen in a recent statement to the press club said that he would within 100 days have an honest set of forecasts released done by the parliamentary budget office and then he'd bring down a mini-budget. So that's admitting that when we get in there we'll find out things are worse than we said and change and I think that's a major, a major constraint on them because those forecasts are not going to be achieved and then secondly, of course, the reality of some of the commitments they've made in some areas like national disability for example, where the costs I think will run away in the 2020s with very large expenditure required on health, education, defence, national broadband, infrastructure and so on. I mean, it's a very large task. So my bottom line is it doesn't make a lot of sense to talk about fiscal policy in an election campaign where we have a big structural problem and both of them are sort of ducking it. Miranda Stewart, Treasury's got a lovely graph called the credible path to surplus which seems in some senses more like the incredible path to surplus but certainly there do seem to be some incredible assumptions behind that path to surplus. Can you tell me about some of those? So as John mentioned, I think it has been widely discussed in the press, there are assumptions about economic growth, there are assumptions about wage growth and so on and that those probably are at the optimistic end but actually the budget also contains what has been less widely discussed leaving aside company tax rate cuts which we might come back to is actually very high projections of corporate tax revenue over the next few years. In fact, an increase of as much as 10% from one year to the next, 7%, 10%, another 11%, another 6% each year. And it's really, I don't think fixing base erosion is going to get us this increase. So they're projecting that we're going to see company tax grow well, like multiples and multiples of GDP. The projection depends on quite high projections of corporate profit, basically, of corporate profit and we've already seen the current year softening of corporate profit in the mining sector and the non-mining. So I guess it does incorporate this projection of substantial growth in corporate profit in the sort of next three, four years. Do you have any thoughts on that, Maria? No, not at all. Okay, we'll come to you on personal. One of the issues might be gas and I don't know if there's people in the honest but natural gas exports. Oh, I thought you meant gas in the projections. Yeah. I'll make no comment on that. But I do think, I guess the bottom line is that these projections are optimistic and we all agree on that. And in fact, the Treasuries Aeronautics are pretty good. Just going to add one quick point to that. I mean, the only way you're going to get that sort of profitability is to have very significant business investment. And the business investment numbers in the budget don't support that. There's a cap that we've fallen off of. One's release recently beyond the budget numbers suggests that the hole is even bigger than we thought. I mean, most policy authorities today are fascinated that with zero to negative interest rates and a fair bit of fiscal stimulus that we haven't had a significant boom in business investment and indeed it's been flat. Most of the earnings numbers on stock markets around the world have been achieved by cutting costs rather than growing the top line and you can't grow the revenue line if you don't invest. So investments are key to this. Okay, so company tax, very, very optimistic projections. But I also recall that they were seeing a return to very high rates of nominal economic growth and wages recovering. And we've got wages growth, the lowest it's been during the time we've had the wage price index. And I was trying to get a sense from some figures today and I spoke to a couple of economists and the views seem to be that in nominal terms, this is the lowest wages growth we've seen since the 1960s. It's quite incredible. And again, that affects how much revenue we're going to have in the budget. In the personal income tax. So that wage growth or wage flattening, of course it's all nominal and that is going to affect the personal tax collection substantially. Well, it's all about... Your point about nominal GDP is right. I mean, if you go back to the last budget, they predicted a 1.75 percentage point increase in the growth of nominal GDP. We didn't get it, so they've repredicted it this year. And it's just sliding out because nominal GDP is not coming back as has been predicted over about the last four or five years. If they keep on predicting it, it'll be a sure thing one day. Some economists rely on the fact that you... I feel a bit worried, though, because the audience wants to know about which party to vote for. Yeah. I gather. Both parties are not talking about this longer-term structural challenge. And, you know, we're going to have to come back to it. We're just sitting around here. It's actually quite interesting that in the pre-election fiscal outlook, when the head of Treasury and the head of finance actually get a chance to have their say without the document being interfered with by the politicians, these were the issues they're warning of, that we would have to have the highest level of taxation higher than the average of the past 30 years, or spending cuts that we haven't seen to get to that credible path to surplus. And on top of that, we'd have to have major gains in productivity that would require reform and a trend rate of growth when we're significantly below it. But anyway, look, it is about jobs and growth. We've heard that over and over again in the election. I like to call it the JAG election, the Jobs and Growth election. And according to the coalition, the path to jobs and growth, over the long term at least, is cutting company tax. Now, let's have a look at that. Will it work? Does it make sense as a path to jobs and growth? Miranda Stewart. Okay. So, it might not be the most popular view, but in the longer term, I think there is probably a very strong argument that we have to cut the company tax rate. And it is quite hard to sheet home the reasoning for that to any one model or any one assertion about one bit of the economy growing. The biggest reason for it, and I don't want to say it's the vibe, but the biggest reason is because that's where the rest of the world is. We've got a race to the bottom on company tax. So, not necessarily the bottom, right? So, but the rest of the world leaving aside the United States, right? So, the US is a very big trading partner, a very important investor, very important, very influential. But everywhere else in the world, the new normal, I would say is 25. I mean, it might even be 20. So, the question here is not so much should we do it this year, should we do it in 10 years? There's a question of the fiscal cost. It's a big and important question. How do we fund this shift in the economic situation? Let's get to the funding, which is very, very important in just a second. But I'd just like to raise an issue about this assumption that we have to do it. It's a good thing. If you look at the Treasury's own modelling, they come up with fairly trivial gains over the long term from a tax cut from our current rate of 30% to 25%. So, they come up with a 0.1% increase in employment over the very long term. The welfare gains from households on the best case scenario 0.7, and that's on the assumption that if you cut government spending to fund the tax cut, households don't suffer any detriment. Therefore, their welfare rises because the government spending is wasteful. So, that's a pretty big assumption. And the biggest boost is wages 1.4% over the very long term on their best case scenario, but they don't look at distribution, how they're going to be distributed. And there's also the fact that they're projecting that most of the gains are going to go to wages when the Labor share of national income has actually been falling throughout the OECD. So, even in the long term on the Treasury modelling, it seems to me the gains are fairly minimal. So, is it worth it? Look, again, I'm sure the others have views, but again, my approach is not so much is it worth it, but can Australia exist in the global economy being the only country with a high rate? Now, sure, there are unique features about our corporate shareholder tax system. We have this effective imputation system that many European countries wish they had. They had to abolish it because of decision of the European Court of Justice, not because countries wanted to abolish that system. The US is actually looking at an imputation system, but I bet if they do it, they combine it with a lower corporate tax rate. So, the bigger question is really, companies are not people. Companies do not bear that tax. The incidence of that tax is unclear, difficult to understand. But that only affects domestic companies because the imputation system, to really simplify it, for those who don't understand, effectively means that if the company is paying tax, you don't pay that tax on your personal tax rate when you get a dividend from the company as an investor. You get a credit. The corporate tax taxes are withholding tax for personal investors in Australia and super funds in Australia. But not, so therefore it kind of falls on foreign investors. So, foreign investment, attracting foreign investments, what it's all about. John Hussin, I was going to ask you to explain dividend and imputation because you'd probably do it better than me. But, I think people get it, so we'll move on to... What's your view? Is it actually the best path to jobs and growth cutting company tax? Look, I think the problem is that we're looking at that tax measure in isolation. I mean, what we really need is broad-based tax reform, a part of which would be a lower company tax rate. Although, as you've just said, when you allow for imputation, a 30 cent rate in Australia is like a 20 cent rate to those who are domestic investors. And the benefit of a tax cut will therefore flow predominantly to foreign and multinationals who we recognise don't pay much tax in this country anyway. So, it's rather an unusual set of circumstances. And to pick up Miranda's point, I don't think we know academically enough about the incidence of corporate tax to actually make some definitive conclusions. If you look at the Treasury model, which you've looked at, or whichever model you like, today everybody's got a model. I think they start with a conclusion and build a model to give them the conclusion they want. Start with a conclusion and then come up with the assumptions to make a work. So, you've got two quite different assessments politically in ours to whether this will work or not. But my great disappointment is we aren't getting broad-based tax reform, where the issue of how you might be financing that is an important part of... It's not just the cutting corporate tax, it's how is it financed? And of course, the Henry Tax Review, which recommended a cut to 25% in the company tax rate, also recommended a resources rent tax and a broad-based land tax. And probably a carbon tax. That's right, of taxing capital income and asset values. If we cut that corporate tax rate, we have to think of it in the context of the broader system and the other taxes in the system. Okay, so... All right, so there's a debate about whether it's the best way to our JAG, our jobs and growth economy. But even if we assume it is, how are we going to pay for it, John Hueson? I just want to point about how we got this decision. I'm very cynical about this. I think the big end of town were pretty annoyed with the government and the effects test that they introduced in competition policy. So, you give them a nod by promising a tax cut, but not giving it to them for 10 years. Sort of gets them off your back during an election campaign, but knowing for well, you probably can't afford it going into the middle 2020s. But that's very cynical for you. To answer your question, I think that the way it's being financed in the numbers that we've got for four years is hanging on the bracket creep, which I'm sure you can say something about. Delaying the childcare introduction, things like that, which politically is a pretty difficult set of circumstances to sell. You know, you're going to maintain bracket creep and you're going to delay childcare, whereas my wife keeps telling me, you know, whispering in my ear that the first government to offer free childcare will be in government forever. She sees it as a very, very important issue. You've got one. Behind these numbers are decisions like that. Can we afford it? How do we pay for it? How do you think we can pay for it? You might have been asking, what do you think, Marie? What do you think, Maria? Put your body on the line. No, I don't think it can be afforded. And as John suggested, when you look at the tax system, you have to look at the overall tax system, not on different parts. Now that you've said that you believe the company tax is going to be financed out of the delay in the bracket creep arrangements, I understand a little bit more why they have gone ahead with the kind of personnel that don't make any sense to me, because they are not really doing the... Okay, so let's talk about that, Maria. And in the federal budget, we heard in the lead up to it from the Treasurer how important bracket creep was and what a terrible thing it was. And to protect middle income earners, they have cut the threshold on a tax rate I forget exactly where it kicks in, but, Adi, you can tell us. Okay, so they have moved the threshold in which the 37% marginal tax rate gets in from 80,000 to 87,000. Now, this would affect at most 30% of the high income earners. It has been portrayed as a relief to middle income taxpayers, but middle income taxpayers are further below in the income distribution. So to make it crystal clear, all of the gains go to the top 30%. Top 30%, even less than so, because we are only talking about those with a taxable income. It is less than that if you take the full population. And in terms of taxable income, on the analysis I saw, 75% of the gains go to the top 10%. Now, business leaders have told me that we need to cut tax rates for people up the top because otherwise we'd get a brain drain overseas. You've done some actual serious academic work on this issue about incentives around work. Is it true that cutting higher tax rates actually increases incentive to work? Well, I've looked through the evidence and there is no evidence that cutting tax at the top particularly gives incentives to labor supply. So most of the original research focused on labor supply elasticity is how people respond to the tax rates through their work hours. The argument that is put forward to reduce tax at the top, marginal tax rate at the top is that it will encourage more labor supply, but the evidence on labor supply elasticity is that they are very low and there is no complete evidence that the labor supply elasticity is larger at the top than for lower income. It kind of makes sense that they'd be larger at the bottom. Or doesn't it? And precisely, and this is what the point I wanted to make on families on the second earner, which is mostly partner working mothers. These are the ones that have the high elasticity and with the current system are getting the highest marginal tax rates. Or the order of 50%, 65% depending on where they fold depending on how all these tax transfers that are based on family income kick in. But those tax rates, effective marginal tax rates are much higher than the tax rates that are high in the bill as a pain. Why don't we see the tax relief going to where it will have the most incentive effect? Probably because as we have pointed out, it's cost, they see it as costly, I mean. Fiscal cost. So the median workers and median female workers sit between 40 and 60,000, even lower, of annual income. And there's a lot of them. The tax cut is coming in at 80,000. It's, even though it's a higher rate, it's worth $600 a year maximum to the smaller percentage of workers. So it's cheaper, actually, but it can be sold as delivering a tax cut to the average wage earner. Actually, in a very candid moment, I heard Barnaby Joyce during the election campaign say that it would cost too much to give tax cuts to those down the bottom. Well, he's right. I mean, it's quite transparent, actually, in that regard. So one thing I wanted to say as well, because it's true that sometimes people come and say, ah, but look, the incomes of the higher income individuals do seem to move a lot with marginal tax rates. Now, the recent research looks at how the taxable income moves with tax rates. And then these elasticities of taxable income incorporate all kinds of margins of adjustment, which are the real ones, how you work more, say more, whatever you do, plus all the tax avoidance tax evasion. Tax planning. Tax planning. And this is the biggest way in which they modify their income. Which is a lovely segue to negative gearing. Yes. Indeed. I hope you're all negative gearing. I really, you know, you should be. There were reports in the Australian today from a whole lot of vested interests arguing that, oh, we're going to see a flurry of people coming in negatively gearing now, which I don't think would necessarily be a very wise choice. But what do we make of the debate? Is it going to crash the housing market if Labor wins office and gets rid of negative gearing on existing dwellings? Or will it only have a marginal effect? So Labor's policy is to, yes, only allow negative gearing, using your rental expenses as a loss against other income to shelter other income from tax on new properties. That's right. But they protect people. You're all grandfathers. So if you're negative gearing now, you're fine. And you and 1.2 million other Australians are negatively geared at the moment. I don't think it's going to cause a housing market crash, which is not to say, we might see a housing market. It won't be because of negative gearing. Something else is going on in the market. Do you have a comment, Maria? So what I wanted to point out is that it's not negative gearing in itself, because negative gearing was there for a longer period. Is the capital. The halving of the capital gains tax concessions under the Howard government. When you really saw an intake on people negatively gearing. So it's those two policies combined, yes. So when you have to look at it, I don't think it will take removing the negative gearing or reducing the discount on the capital gains tax. It's going to cause a crash. I think there are many other things that are affecting prices. John Hussain, as a policy in the housing market, as a policy to increase rental supply and provide affordable housing, what's your view of negative gearing? Well, I mean, I think to answer your specific question first, the effects will be marginal. But you've always got to look at the effects in the context of what's already happening. And I think that in terms of the property market, one segment that is very overheated, and where you will get a substantial correction, is in new apartments. Because a lot of people have gone into those, whether they're foreign investors or people with self-managed super funds. And they've expected to get capital gain and strong rent. I suspect they'll get neither. And that will be a bit of a significant down. But Labor's policy will still allow investment in new dwellings. In new dwellings, whether it is in new apartments as well as houses or is it? New construction, I think. Anyway, it's general. I don't think it will smash the housing market, which is the word that's been used. I mean, again, I'd take a broader view. Step back from the whole thing and say, OK, negative gearing is just one of a series of tax expenditures, which totals somewhere over $120 billion. And they're rising faster than traditional government expenditure. And they include housing concessions, superannuation concessions, and GST concessions, predominantly, the bulk of them. And they're very large numbers. So if you're ever going to reform tax and spending, you've got to address tax expenditures. And in that context, starting on negative gearing or doing something about the super concessions, which are overwhelmingly skewed in favor of the wealthy, is a logical place to start. But again, in the context of a total tax reform, not just an isolated measure here and there, because that doesn't necessarily achieve your outcome. Well, let's move on to superannuation. Lo and behold, if you go back to, I think it was a decade, 2007, from memory, you had Peter Costello with this bold new plan that people could sacrifice a million dollars into superannuation. And this would be a great thing for the economy. Well, it was a great thing for creating a tax avoidance and estate planning mechanism for the very wealthy. It was a pretty bad thing in terms of those tax expenditures that John Huston talked about. And now we've seen a conservative government undo it. Is the manner in which it's been undone a good thing? And do you think that there are issues in terms of the talked about retrospectivity, Miranda? So, look, I think it's a good thing that it's been proposed. It hasn't been done yet. It's only in the budget. Well, let's try it. Don't forget. But Labor's got a similar plan. Look, so what Labor has proposed is described quite differently, but actually more or less has the same effect. More or less. So in terms of choosing between the parties on that, they've both, we essentially have bipartisan agreement to shut down that very, very generous exemption and concession for retirement. The way it's been done is a retrospective. I don't think it's retrospective. The measures affect contributions and earnings going forward. Yeah, I agree. Yeah. So this retrospectivity argument, if you were to use that argument, basically government couldn't change anything because anything that impacts on someone's existing situation as seen as retrospective, you could only have grandfathering if you take that. Yeah. So what do you think, Maria, of the policy change? As I say, it's good that it's on the table, whether it's exactly the precise optimal way of doing it. It's not, but at least, I think, they are talking about it two or three years ago. There was no question. What is the optimal way? We will have to be a model to look at it, but I think it's clear that the current system is favoring a particular sector of the population. And if I come back to the problem of gender, because it's favoring the high income individuals and the women are very lowly represented in that group, they are being particularly harmed. And the fact that the low income superannuation contribution has not been wiped out as they had originally planned, it's also a positive thing, because it's just redressing a fundamental discrimination that exists in which rich could get benefit, and poor were being taxed more heavily on the money to super than on the income. A real irony with superannuation in general, that you had a labor government introduce this major policy change and do it effectively as a regressive taxation system. Wouldn't it have been made more sense? And I think, can Henry propose this to say superannuation's income, deferred income, treat it as income, tax it at the marginal tax rate with a discount for saving? And wouldn't that be the better way to do it now? You could reverse it, actually. And we have discussed this a bit in a paper at the Institute where you could tax contributions at marginal rates, but then you would exempt earnings and payouts. So it's a kind of a reversed, what you just described, a reverse consumption tax or expenditure tax treatment of that saving. And we actually could transition to that system. And in some ways, the measures of both parties move us a little bit in that direction. You could sex that up by calling it the reverse ferret super tax reform. Look, it's an area that has to be addressed. And in fact, I think we haven't seen the end of it. So some people might be sort of breathing a bit of a sigh relief, okay, we've come to a new stable position. I don't think the super tax system is stable. I think there is more to be done and probably more revenue to be raised from that system. Well, I looked at it about a year ago in detail. And the benefits that I said are heavily skewed in favour of the wealthy, in the sense that at the contributions level, if you're on 20 grand a year, it costs you $118 to get a $100 benefit out of super. If you're on 300 grand a year, it costs you $6250 to get a $100 benefit. So that's massively skewed at the contribution level. We're the only country in the world that gives you a concession on the way in, on the earnings while it's in there, and then you can take it out in some circumstances tax-free. And then there's an army of financial intermediaries who are making a very healthy clip along the way. Just two other quick comments. I mean, the aggregate of that concession is nearly as much as the age pension. But it's rising much faster than the age pension. So there's an area of difficulty. And the second thing is, where has all that special money gone? It's gone into our super industry, a couple of trillion dollars. What do they do with it? They basically hug the stock market index here and overseas. They haven't had very good earnings on that over the last several years, not even allowing for the GFC. So I mean, there are a lot of dimensions to this problem that really do need serious analysis before you make some adjustments. But I was fascinated in the so-called debate the other night. Both of them are asked, are there any, will you guarantee there won't be any further changes to super? Malcolm immediately said yes, and Shorten wouldn't answer the question. But the bottom line is there will be further changes to the system whoever's in there. Because we can't afford to continue it, you know? Plus it's an absurd system if you have a situation where those who need it least get the most benefit and those who need it most aren't getting enough to basically mean that they aren't going to have to rely on public expenditure through the pension. Well, can I just comment? There's nothing wrong with relying on the age pension. So let's just take a step back. Actually, it's actually intended to be there to support the majority of workers are going to need that age pension, regardless of maturity of the superemoration system. Yeah, but how far does it go up that people are reliant? And in that sense, and I'll quickly finish on this because we've got to get to the audience for questions. But it seems to me that, you know, this is a bigger question. Would we have been better off having a system where basically we taxed to pay for a decent pension rather than having a superemoration system? Well, that's a big... Look, we have the system we have. Most countries have a combination of public and private provision. It's not always as obvious or clearly delineated as ours, or it looks different, that the policies look different. Most households actually save those who have enough money to save. Save outside superemoration as well as inside superemoration. So we've always got a hybrid system. I don't think we're going to eliminate that. So I wouldn't... I'm not in favor of that. But I do think we need to fund that age pension. I thought you were an academic and you could answer in abstract terms. Maria, do you have a view? Well, my view is that, yes, the current system has elements that are in other... in the European systems in which you have the... But the payment depends on your contributions. Here we have two very separate systems in which you have a pension which is financed out of general taxes and this superemoration, which is out of private contributions from employers and employees. And this perception that you were putting, that relying on the pension, you are drawing on the general taxes. It's what... Is it stigmatized or something? Stigmatized is the idea of you have a right to a pension and the problem I have with the superemoration is it seems to say the pension becomes marginalized and, well, if we are giving away money in tax super tax concessions, we don't have the money to fund. But let's look on the upside. It's supported jobs and growth in certain sectors of the finance industry and expensive real estate in Mosman and to the East and suburbs of Sydney. Your question actually asks us to see something operating as academics, to see something operating in practice and see if we can make it work in theory. LAUGHTER I did try that exercise back in 93 where instead of compulsory super, system-based on compulsory super, let's see if we could build a system based on concessions. So we've got Darryl Dixon in, who's quite well-known in Canberra. We said, let's assume, let's take all the benefits at the time of five or six billion dollars worth of benefits to super. Let's put them in the pot, blank piece of paper, design a new system based strictly on incentive. And that was lost in 93. So after that, we got the system we're going. Oh, you had a lot of good policies in there in theory. I would say that, yes. LAUGHTER OK, we'll open it up to questions now. Emily's going to take the microphone around. Ellen, Ellen, where did I get Emily? I sort of got volunteer for the first question. My name is Randy. I've lived in Canberra now 10 years. I'm a self-funded retiree at this point, one way or another. You need to tax you, clearly. And basically, I look on the tax system and all the discussions on policy very simply. People want services. Services cost money. Money comes from taxes and revenue. Yet politicians don't seem to see that cycle. They want to cut taxes. They want to deliver services if they can. But nobody ever seems to complete that cycle. It says, if I want to deliver this, I need a way to fund it. So is that a question? The question is, why aren't politicians brave enough? I don't have the answer to that question, John. The answer is, it's one stage worse than what you just said. They not only want to give more in expenditure and reduce tax, but they also want to repair the budget at the same time. So my response to that thought is that I actually think we are in this quite tricky political dynamic at the moment. And we're not alone. Australia, we've got our own unique issues in the fiscal context. But other countries are in the same situation of trying to balance this issue of, what are we trying to pay for? What's it going to cost in the longer term? And are we prepared to raise the revenue we need to do that? It's really a question about the future shape of government. Well, it's a bigger question about the future shape of society, really, isn't it? Because you're right that we need the service. You know, people are demanding public services, or at least we need health care. We need education. There's a whole lot of things that people see as worthwhile and national disability insurance scheme. So either you have to raise the revenue to fund it, or you have to look to more private provision, which has a whole lot of other ramifications and knock-ons. So just to give you a specific example, the Social Security Budget is projected to increase quite drastically in some respects, in the medium term and longer. The biggest driver of that is the National Disability Insurance Scheme. It's not the age pension, actually, for example, even though we're aging. And you'll hear more about this perhaps in another forum. So we've made that decision. I mean, I don't know if you knew what you were voting for three years ago, but that, you know, you voted for this scheme. But objectively, I mean, and we've had, John, you've got views on that as well. I know, but objectively, isn't it a really worthwhile thing to have a national disability insurance? Look, I think it is. And I think that's why you got strong bipartisan support. But that's in principle, putting it into practice is a much more difficult set of circumstances. And one of the warnings that was given in PIFO by both the Secretaries of Treasury and Finance was just to draw attention to one of the risks. And one of the risks just in the four-year budget period was that the number of people eligible for the NDIS is to go from 30,000 to 460,000 in that four-year period. And that's nowhere near dealing with the longer term issue. And what worries me is that, and I'm on the board of a disability group and so on, I'm seeing it happen. People are going out there raising expectations. You get a mother who's got a child with cerebral palsy, and you say, what do you want? I expect them to walk, of course, and I want all the equipment, the carers, the pensions, the physiotherapy, and so on to get that. Those costs, those expectations are running away relative to the capacity to deliver even at a base level. And the reality is that that child may never walk anyway. So you've got unfair assessments being made, expectations being built, and that's what worries me about it. No doubt about people wanting it and communities supporting it. But when you get to look out sort of five, 10, 15 years, whoever's in government is going to be trimming it, targeting it, cutting it back, it's going to be a very, very painful process. Kind of got off track. Next question. Hi, how are you doing? I'm not much of a student of economics. So my question is rather broad. There seems to be two sort of models, one being to lower taxes on the wealthy and business and the other to lower taxes on the middle class to give them more discretionary spending power. I guess my question is that the current liberal model is to lower taxes at the top end. Is that truly going to build the economy more than lowering taxes on the middle class? Okay, in my view, as I said from the evidence, lowering taxes at the top doesn't have any, it has been shown, it doesn't have any economic, any impact on economic activity, no impact on growth. This has been studied for many countries. Now, and the reverse, the reverse is that you mentioned that the impetus of lowering taxes on the middle and the low income individuals to favor spending. I was thinking of lowering taxes on the middle range of the distribution, on the second earners not only to increase spending but to increase labor participation because there is where it has been shown that there is enough response because it is these well-prepared females, most of the time, that are being caught in this trap of family payments that are withdrawn with family income with very, very high effective marginal tax rate, much higher than the high marginal tax rate in the tax tables of the order of 65% in some cases. Can I just come back to something Maria said earlier? And that was about the response is not in work participation, we think, to tax rates, not even at the top, but it is potentially in tax planning. And so what we'd like to see, and it's similar to what John was saying as well, is not just, you might change the rate structure for different reasons, but you need to look at the base of the income tax and the GST, and these bases are kind of full of holes. We talked about superannuation being one of them, the negative gearing capital gains is another, but there are other planning opportunities. So in plain English, tax planning is finding ways to avoid paying tax. Yes, sure. Yes. Well, of course that's what it is. But the point would be that people will potentially, well-advised people who have capacity will respond in reducing their taxes. They don't necessarily stop working or doing business though. I just wanted to call that spade a shovel, Miranda. One point I might make about the personal tax structure is that we have quite a high tax-free threshold. And that has a very practical effect. It means that higher income rates cut in at lower income levels than would otherwise be the case. So if you believe there are incentive effects from tax rates at the margin, then you've made it harder than you need to by having such a high tax-free zone. And when you go up the income scale looking at various income levels, you have to go quite a fair way up, you'll know the number, till you get to where somebody's actually paying net tax. So stimulating people to come off the new start benefit or age person to go back into the workforce or whatever, that's not being addressed by the tax system reforms that are being contemplated. And just to point out on the tax avoidance, there is some very good research coming from the US in which they have looked at this issue and they come up with the results that if you reduce tax avoidance, all the tax avoidance and evasion opportunities, in fact, you could increase the marginal tax rates at the top. So you fix the base, then we can decide as a society what we think the rate should be. If you close all the loopholes and avoid, and then we could actually, yeah, but who's gonna increase marginal tax rates at the top? Well, Abbott did, the Abbott government did, right? They put the temporary budget deficit levy on the top. And now Labor's gonna keep it. Labor say they're gonna keep it, yeah. Now what you could do in corporate tax and a lot of personal taxes, eliminate deductions. All together and just lower the tax rate. That's probably the simplest thing to do. Or in the current fiscal environment, just eliminate the deductions. Just eliminate the deductions, yeah. Because they are the things that get abused by the tax planners. We have a question at the back. I think in some respects, we run the risk of oversimplifying the debate. We need to look at companies that are already located here versus companies that we're trying to attract and invest in Australia and haven't worked for two multi-nationals who pay their fair share of tax who have longstanding operations in Australia. I can say at the end of the day, the quality of the labor force was more important than anything else. And this might have gone to such areas as doing clinical trials and so on. So I just think at times, we need to distinguish between some of these. And what actually led to, in one case, quite a close rationalization and more to do with the rise of China and being closer to the market than anything to do with the corporate tax rate in Australia? I think that that is a very worthwhile point. And it actually goes to the nub of the key political difference in this election. If you wanted to boil it down, you have one side saying the long-term path to a bigger economy, a wealthier society, is cutting company tax to grow growth and jobs. And the other side saying the long-term path is investing in health and education. Do we have a sense of... I mean, if you wanted to simplify it, that's the two pitches, right? And is it the case that... I know it's very much a simplification, but is it the case that we could actually be costing ourselves if we undermine revenue in ways where we can't invest in the skills of the nation and the infrastructure that could attract investment? Sure. I mean, we definitely need the revenue. But we might be able to collect it by broadening the personal income tax base, strengthening the rate, and possibly, again, perhaps unpopular in this audience, raising the GST. And in the longer term, again, I think that debate has not gone away. We're going to have to come back and think about that in terms of funding the full size of government. But just to respond to the gentleman's comment, I think that China's corporate tax rate's 25%, just so we put that on the table. Of course, wages are what is driving business investment. Of course, markets are what is driving it. And skill, labor skills. Yeah, sure. But, I mean, I suspect labor cost might still be on the whole. More might depend very much on the industry arena. So, skilling up that labor supply is obviously a good thing. But I think people, businesses are still responding on the margin. Again, there is some salience evidence, evidence of managerial behavior that shows that businesses do respond to corporate tax rates. But do they just look at the corporate tax rates? Because one of the things that I don't think is considered in this debate is, and you probably know more about it than me, but it struck me that in many countries overseas, there are social security levies of various kind on business that we do not have yet. So, there are social security, they're actually on workers, right? So, the social security taxes of many other countries are taxes on wages collected by business. Australia has a payroll tax, low, relatively low rate, quite important at the state level for revenue. It taxes only half the business base. It exempts a whole lot of workers. It doesn't really operate as a tax on workers here. It operates as a tax on business because it's so kind of incoherent. But social security taxes in most countries are in addition to the tax on wages just like the personal income tax. They're not business taxes at all. Just to continue on, most European countries have lower corporate tax rates than us, but substantial social security taxes on workers. Yes. You agree? I do know they have a larger social security tax because I had a grant that was provided to me in gross, and when I went to Belgium I realized I had less than half of what I thought I was going to get. But I would think that the things that attract businesses is a combination both of the taxes at the margin and the environment in which they can work. Yeah. And the Delicate Balancing Act is how, with, you know, to use a technical economic term, bugger all revenue, we managed to achieve those tax cuts and increase skills spending, if you increase spending on human capital and development of the nation. Well, there's 1.2 million Australians who are getting a little tax cut because they're negatively gearing. Now, maybe you're among that group, and if you are, congratulations, but also, is that appropriate? That's about a quarter or less of the actual investor population and the broader tax-paying population. Yeah, it strikes me as disappointing when you had the current Prime Minister in a treatise on tax that he wrote, what, 10 years or so ago, saying that negative gearing was creating a tax shelter for the well-off, that it was creating economic distortions and a housing bubble. And now we have a situation where we could have had both sides basically look at, advocate some reform on this, because the reality is that 90% of the, or more of the investment has gone into existing dwelling stock. So it hasn't done a lot to increase the amount of housing, but it has bit up the price. So in that sense, if that policy objective was to create more affordable housing, that's an utterly failed policy. You're mounting an argument that a candidate in Malcolm's seat of Wentworth is running. He's running entirely on the fact he'd like the old Malcolm to come back. Yes, well, I think the old Malcolm's, done a Faustian trade-off that was put to him by tech, what are they called, Crosby Techs to win the election. Is that a fair assessment? Yeah, look, if you looked at the so-called debate on Sunday night, and by the way, less than 20% of people actually, of the viewing audience actually watched that, went about half the audience and watched The Voice and House Rules and MasterChef, for example, they got quite specific questions from the journalists. And they didn't answer them. They went out of their way not to answer any of them, but to take your messages, so focus group-driven messages and just keep repeating them, and that's all they do. Another question. In getting the budget back to, well, even to balance rather than even considering surplus, there's obviously the question of expenditure and there's the question of revenue. And we've obviously got both problems on both sides of the budget, but the general conservative view, and Scott Morrison said, that there is no revenue problem in the budget, it's all about expenditure. And this is a general conservative view, and you've seen that with the GAP in the US, that starving the beast is one way to reduce the percentage of the economy that is in the public sector. And there is a general view and it's been brought up as a question, it was brought up in the leaders debate that there is an ideal level of government contribution to the economy that's around 25% or somewhere like that, and we're a bit above that, and the view that it should be lower than that. Does the panel have a view as to whether we have mainly a revenue problem or mainly an expenditure problem? And is there any evidence that there is an optimal percentage for an economy to have in terms of the public-private mix, the government expenditure as a percentage of GDP that produces an efficient and fair economy? Not the answer to the first part, you can answer the first question on that. There are no magic numbers. I think it's more a revenue problem than a spending problem, not saying you can't be more efficient in government spending, but the sort of commitments that both sides are made, going out 10 or 15 years, so it's a significant commitment to expenditure that are going to need to be financed. And then the issue becomes, okay, what's the most effective and fair and so on, simple way to actually finance that? That's the debate, unfortunately, we're not having, which we desperately I think do need to have, because I mean, and look, the numbers percentages to GDP, and I noticed in the leaders' debate, they wouldn't commit to any of those percentages either side, because there's no magic number. I mean, you can use them as a discipline. We'd like to see government spending not go more than 25% of GDP, unless of course the electorate wants more government expenditure, then of course you have to go higher than 25% of GDP. But in fact, both parties do have this sort of rule of thumb, which is a bit number pulled out of the air, which is this 23.9% cap on commonwealths revenue, which is a sort of an average of previous years. But if you look at the, there is no matching across countries. I mean, there are countries that have 50% of GDP in the public domain and have very substantial and wealthy economies and high economic growth. And then there are countries that have 20%, I wouldn't want to go below 20, be really, I mean, when we started as a federation, we came into federation with 5% of GDP in the government. Indonesia has 17%. These are poor countries. So I completely agree that it's more on the revenue side and on the expenditure side. And I think that when it's look expenditure, it's like something that you are putting down the drain. If you see it as an investment in education, in health, I think there is a role to increase the expenditure. I come from a European country in which... Just very quickly though, I think part of the thrust of the gentleman's comment was that on the conservative side of politics, there is basically a sense that we need to squeeze the public sector and that there's a bit of a stalking horse here, that there's an attempt to say, well, we actually want to diminish the role of government in the economy. So therefore, this rhetoric, we have it. It's not just, you can't just do this party right-wing, left-wing thing. I mean, John Howard's government was actually the biggest spending government we've ever had in terms of the size of tax in the economy, the size of expenditure in the economy, then handed back in a bunch of tax cuts. I guess maybe you might say he had a kind of a nation-building mentality, you know, combined with conservative sort of fiscal goals in some ways and conservative social politics. So the question to me is this question of what... Are we in the business of nation-building anymore? That seems to me to be one of the questions that the population needs to have a think about. It'll have to be very quick, John. I'm just gonna say, look, one thing we've got to do is split the budget into two parts. The recurrent expenditure part, which should be financed over the business cycle with tax. And then there's the capital account, mostly infrastructure spending, which you can quite happily finance on a significant percentage of debt. And until we make that distinction and stop clouding that distinction, we won't do much nation-building. And, you know, we'll have this constant false debate about how we can cut expenditure and cut revenue and repair the budget all at the same time. The magic pudding approach. Thank you very much. I found it very stimulating. I hope you have also. And could you please thank our panel? Thank you all for attending. And remember, every Tuesday night, in this venue, right up to the election. Come along.