Chapter 4

Impact on low income groups and compensation

Introduction

4.1 On 13 August 1997 Prime Minister Howard announced five principles of taxation reform:

• That there should be no increase in the overall tax burden;
• That any new taxation system should involve major reductions in personal income tax with special regard to the taxation treatment of families;
• That consideration should be given to a broad-based indirect tax to replace some or all of the existing indirect taxes;
• That there should be appropriate compensation for those deserving of special consideration; and
• That reform of Commonwealth-State financial relations must be addressed. [1]

4.2 Proposed reforms within the income tax system provide significant reductions in personal income tax through an increase in the tax free threshold and decreases in all marginal tax rates except the top rate. The main points in the proposed structure, which apply to low income earners, are:

• increase the tax free threshold from $5,400 to $6,000;
• reduce the 34 per cent and 43 per cent marginal tax rates to 30 per cent, with the result that over 80 per cent of taxpayers will have a top marginal tax rate of 30 per cent or less; and
• reduce the 20 per cent marginal tax rate to 17 per cent. [2]

4.3 Proposed changes to the Family Tax Initiative will double the FTI tax free thresholds, increase the income threshold for family payments from $24,350 to $28,200 and reduce the withdrawal rate of family benefits from 50 per cent to 30 per cent.

4.4 A fundamental aim of the Government's tax package is to overcome perceived disincentives created by the current interaction of the tax and social security systems. High effective marginal tax rates are seen as discouraging Australians from undertaking extra work or training, or increasing personal saving. These types of situations are termed “poverty traps”.

4.5 In his evidence, Dr Michael Keating stated:

… in our view and understanding, there are some important issues of taxation policy beyond a GST. What interests us is the issue of taxation and incentives to work and incentives to save–and particularly incentives to move from welfare to work.

… the difficulty we have in Australia at the moment is that the effective marginal tax rate, after you allow for social security means testing and taxation and the overlap of social security means tests, is that a low income working family typically has an effective marginal tax rate of 85.5 per cent. There are plenty of examples with effective marginal rates higher than 85.5 per cent–and indeed, higher than 100 cents in the dollar. That really does affect the incentive to move from welfare to work–and, for that matter, for a low income family to take on extra work, because many of them are involved in part-time work. [3]

4.6 Dr Keating continued, providing a specific example:

… a low income family with three children is more financially worse off if the mother works between 10 and 24 hours a week than if she works just nine hours per week. The moment she increases her hours per week above nine, the family is financially worse off. By increasing her hours from five to 35 hours per week, the family benefits by just $12 per week. There is really very little or no incentive to work more than about five hours a week. The basic reasons for this is the stacking of means tests in interaction with the tax system.

4.7 Dr Keating did acknowledge that while there is significant alleviation of poverty traps on the government's proposals, they will not be completely eliminated. There will still be poverty traps if the government proposals are adopted. He continued:

My definition of a poverty trap would be an effective marginal tax rate in excess of 80 cents in the dollar, particularly if it applies to people who have a degree of discretion about how much work they undertake. In that respect that means low income people. High income people typically have very little discretion. They do not get paid overtime, they cannot work part time, et cetera. It is low income people who have discretion about their work effort.

4.8 The government states that it will increase rates of assistance to raise the maximum level of all income support payments by more than the impact of the proposed tax changes on prices as measured by the CPI.

4.9 To do this, the government proposes an increase of 4 per cent in the maximum rate of pensions, such as social security, veterans pensions and Commonwealth income support for students. The increase would apply also to additional allowances, such as Child Disability Allowance and Mobility Allowance. A 2.5 per cent increase is planned for income test free areas of social security, veterans and student income support payments.

4.10 The government also proposes a continuation of the commitment to keep the single rate of pension at or above the level of 25 per cent of male total average weekly earnings. The Government has also guaranteed that income support payments will be 1.5 per cent higher than they would be if normal CPI indexation arrangements applied (ie. over and above the CPI effect). [4] In evidence before the Committee on 8 April 1999, Mr Greg Smith, the head of the Commonwealth Treasury Tax group, was questioned about the issue of erosion of compensation:

Senator Conroy: But at some point in the future that increase may converge with MTAWE, the 25 per cent level?

Mr Smith: It is possible. I do not know whether it will or it won't but it is possible that, if in the future in addition another guarantee comes into play, that in addition to having 1.5 per cent above CPI increases in the pension, there may be further increases based on one-quarter of MTAWE. [5]

4.11 It is proposed to ease the income test for pensions. The taper rate at which pensions are reduced by extra income is scheduled to be reduced from 50 per cent to 40 per cent. [6]

4.12 In addition to the proposed 4 per cent increase in age and service pensions and the proposed reduction of the pension income test withdrawal rate from 50 per cent to 40 percent, it is proposed that a one-off untaxed Aged Persons Savings Bonus of up to $1,000 per person be available to retired people over 60 years of age and subject to an income test.

4.13 It is also proposed that an additional untaxed and upfront lump sum Self-Funded Retirees Supplementary Bonus of up to $2,000 for retirees not in receipt of government benefits be available to retirees of age pension age and subject to an income test. [7]

4.14 Both Bonuses are to be targeted to lower income groups with taxable incomes less than $20,000 in 1998-99 or 1999-00 and phasing out between $20,000 and $30,000. [8]

4.15 Various groups representing retirees, both pensioners and self-funded, provided evidence about the savings and supplementary bonuses. Mr Raymond Bricknell, of the Australian Investors Association, provided the following criticism of the Government's proposals:

Firstly, any shift in the system of collecting taxation from income to expenditure impacts on our members effectively as retrospective legislation. Having paid substantial income taxes at the prescribed rates whilst accumulating their savings, any sudden swing from income to expenditure taxation effectively taxes those with savings a second time. Indeed, the savings and standard of living of self funded retirees are effectively reduced by whatever net percentage increase in the cost of their purchases occurs as a result of the introduction of a GST type tax after or close to their retirement. Most of the goods and services consumed by people in their latter years are not currently taxed under the wholesale sales tax system.

Secondly, any compensation offered to those with savings for a net reduction in their purchasing power should be provided in the form of up-front cash so that such compensation cannot be clawed back or whittled away, and should not cut out below, say, $1 million in savings. The $1,000 to $3,000 amounts of means tested compensation proposed in the Government's new tax system are so trifling as to be laughable, if indeed the matter were not so serious. [9]

4.16 In addition, the Committee received a large number of submissions from people who were close to retirement or retired and aged between 55 and 59. This group is not entitled to compensation by way of Bonus payments under the ANTS proposals.

4.17 These people were also greatly concerned about the likely devaluation of their savings and income and believed the GST would significantly disadvantage them in the absence of reasonable compensation. [10]

4.18 In submissions and evidence before the Committee, the main questions raised regarding tax cuts and compensation arrangements were whether:

• taxpayers (particularly low income earners) would be fully recompensed for the impact of the introduction of a GST?
• higher-income earners would receive a more than proportionate share of the benefits from tax cuts and compensation arrangements?
• there could be confidence that the value of the compensation package would be preserved in the future.

Price effects for low income groups

4.19 All charitable, social welfare and church groups rejected the Government's claimed estimates of price increases facing low income groups as a result of the tax reforms. Representatives of all these groups confirmed that the impact on low income groups differs significantly from those facing the population generally. This is because low income people have spending patterns which differ from those on high incomes as they are concentrated on the necessities of life which are currently untaxed.

4.20 The impact of the GST on prices was a major issue for many of those people who lodged submissions with the Committee or gave evidence at public hearings. Many contested the Government's statement that:

Social security recipients and lower income groups will be provided with extra assistance to ensure that they are more than just protected from the impact of tax reform on prices. [11]

4.21 In their paper prepared for the Select Committee and dated 15 December 1998, Professors Harding and Warren noted that:

For example, most food and clothing items are currently not taxed under wholesale sales tax, but will be taxed under the GST. Analysis … suggests that the average Australian household spends 18 per cent of its total current expenditure upon food. However, the picture does differ significantly by income level. Thus households with incomes below $450 a week spend 22.5 per cent of their total current expenditure upon food, while those with incomes above $450 a week spend 17.7 per cent of their total expenditure upon food. [12]

4.22 In evidence to the Committee, Professor Peter McDonald argued that "the model that is proposed and, more particularly, the compensation aspects are unfair to families with children" [13] as "households are indicated in the model by their income only, not in any way by their composition". [14]

4.23 Professor McDonald noted in his submission:

The Government's approach to the calculation of the price effects of the GST on households is flawed because it is based simply on the income of the household and takes no account of the number of people who are supported by that income. This is a problem for any household with dependents, especially families with children. Children are a major cost for families but because they do not earn income, the Government's approach to the calculation of the impact of the GST makes almost no allowance for their existence. That is, at the same level of disposable income, the Government calculates the price effect of the GST to be exactly the same for a single person, for a couple with no children and for a couple with children (any number of children, in fact). [15]

4.24 He concluded:

Obviously, at the same level of disposable income, the more people there are in the household, the greater will be the price impact of the GST. Thus, the number of people in the household should not be ignored. Compensating simply on the basis of income discriminates against larger households and households with dependents. [16]

4.25 In its submission, the Society of St Vincent de Paul questioned Treasury's estimate of the CPI impact, stating:

If the passing on of cost savings does not occur, we can see that prices of essential necessities of life (not just food, but clothing, transport and essential services such as gas and electricity) might rise as much as 15% for 60% of household budgets of low income earners. An additional 30% of housing and household expenditure on goods and services might rise in cost as much as 6%. This could mean a price impact on low income family budgets of 10-11%. The CPI effect used by Treasury in their cameos was estimated at 1.9%.

… a "back of the envelope" calculation suggests it is quite possible that for many households, lower income earners and families, the adverse price impact from a GST package might be as much as five times that estimated by Treasury. [17]

4.26 The Society pointed out how:

… changes in the CPI can underestimate price rises that confront low income earners. These people spend all of their income on essentials and do not derive any benefit from major deflators. An examination of the ABS figures for the year ending September 1998 shows the annual CPI increasing by 1.3%. Anyone who shops at a supermarket knows this is wrong.

The same ABS figures show that most of the essentials are not so low. Some examples for the year ending September 1998:

Fresh vegetables UP 26%
Food generally UP 3.2%
Rents UP 3%
Household supplies UP 2.2%

The overall figure is held down by items of no consequence to the poor:

New cars DOWN 6.3%
Petrol DOWN 4.5%
Audio/Visual/
Computer equipment DOWN 4.9%

… These families [low income earners] will not enjoy the forecast reductions in prices due to the removal of the wholesale sales tax on a number of items including so called luxury items like new motor cars, electronic equipment, jewellery etc. Therefore, any modelling based on the essential needs of low income families must reveal that without these offsetting reductions, the addition of a 10% consumption tax to the already increasing costs of their essential needs, will add well in excess of 1.9% to their cost of living and place in doubt the adequacy of the compensation offered to these families. … No projections of compensation based on a CPI figure can be reliable without adjustments to take account of low income earners. [18]

4.27 The Society stated that "the crucial issue is the method and the degree of compensation that should be implemented" [19]. It continued:

The Australian Government's proposed approach has focused on national aggregate indicators of the burden of a GST, and subsequent application of these averages to specific sections of the Australian community especially the poor where the actual burden diverges substantially from the average, and is in fact significantly higher. As indicated above we believe this is patently bad modelling and has brought about a thoroughly unjust approach to low and middle income earners.

The Society's view is that exemption of, or compensation for the poor from a GST should not be on the basis of any notional national average, but on best estimates of the actual burden that they will be required to bear. [20]

4.28 The Society undertook its own Household Expenditure Survey of 271 households. The results of that survey they said:

… showed similar patterns to those contained in ABS documents for 1986/7 and 1993/94

• 54% of low income earners (40% of Australians) are in deficit;
• Low income earners spend about 27% of their income on food and a further 34% on essentials, utilities, clothing, etc., all of which (61%) will attract a full 10% GST. A further 30% is spent on housing, which is already inflating at 3%, and which will rise further under a GST. The contrast with the wealthy shows for example that they spend only 9% of their income on food.

… the impact of a GST and any compensation package is much wider than just for food. As indicated in the point above, other essentials form an even larger problem for the poor. [21]

4.29 In response to the evidence given by the Society of St Vincent de Paul that the effect on low income people could be five times the amount calculated by Treasury, the Treasury representatives questioned the basis of their estimates. Treasury commented that:

It is reasonable to say that I am not aware of any model that is producing those types of results. As you know, we have put on the public record a HES-based set of results for comparison and for those who believe that the HES provides a reasonable basis. We do not get anything remotely like that. The only group that had a larger price impact was essentially the pensioner group. The difference was nothing like five times. It would be inconceivable to get a five time figure in the aggregate because to do so would imply that essentially we have not abolished any taxes and that we have applied the GST at the 10 per cent rate virtually universally. You would need that type of a result or change to get anything remotely like five times, which is effectively saying that the price impact was nearly the full 10 per cent. I am not aware of anyone producing results of that order using any type of sophisticated model. [22]

4.30 Commenting on the statistical validity of the St Vincent de Paul household survey, the Treasury noted that

In terms of statistical significance, it is worth noting that the only survey I am aware of that is used by social researchers is the household expenditure survey for this type of work. Its sample exceeds 8,000. [23]

4.31 ACOSS condemned the tax package treatment of low income earners as unfair and a threat to their living standards. The ACOSS submission noted that:

We believe that the proposals as they presently stand are seriously flawed and are therefore unacceptable. The Senate has a crucial role, as the House of Review, to inject a greater element of fairness, balance and comprehensiveness into the package. … the package as it stands is unfair and threatens the living standards of low income Australians. … The central flaw of the package is a diabolical trade-off in which higher food prices are paid for by unfair income tax cuts. [24]

4.32 In evidence before the Committee, Mr Raper, representing ACOSS, challenged the basis of the Treasury's modelling. He insisted that the poor would not be fairly treated unless food was excluded from the GST:

So what do we say needs to be done about this problem? The Treasury model is inadequate, the figures therefore are highly questionable and the government cannot honestly assure low income earners that they are definitely okay. The first thing we believe must be done is to fix the structural flaw at the core of the package, to remove the heavy reliance on compensation that this package demands–that is, to remove food from the GST. There is no justification for food at the heart of this package when this package raises some $6 billion more in GST revenue than the consumption taxes that it replaces. It is that tax mix switch, that massive increase in consumption tax, that is actually at the core of the flaw in this package and is why, under this package, low income earners would need to rely far too heavily on compensation in the first place. [25]

4.33 In its submission to the inquiry, the Australian Council of Trade Unions (ACTU) expressed its concern that:

The methodology used to calculate changes in the cost of living arising from the GST package systematically understates the price increases for low income groups and exaggerates it for high income groups, because it suppresses differences between them in savings propensities and consumption patterns. [26]

4.34 In relation to the compensation package, the ACTU commented that:

The compensation package must be assessed after allowance for bracket creep (fiscal drag) since the tax schedules were last adjusted. Though the specific adjustment to be applied is arguable, the consequence is unambiguous - the compensation offered for full-time workers earning less than $28,000 to $30,000 a year is insufficient to compensate even for bracket creep, leaving this group unambiguously worse off with imposition of the GST. Full-time workers earning between about $30,000 and $50,000 a year fall in a 'grey zone', with the compensation proposed falling short of full protection against bracket creep plus the GST price effects. On any measure, full-time workers earning more than $55,000 a year are more than compensated for both factors under the proposed package, and the biggest 'winners' under the package are families with single incomes of $75,000 a year and more; low income individuals employed full-time lose out substantially under the proposed package. [27]

4.35 The ACTU is particularly concerned that the proposed new tax arrangements will impact severely and in unforeseen ways, including:

Its regressive impact in failing to compensate low-income full-time workers even for bracket creep and the uncertain position of all low income groups under the compensation offered given the problematic price effects of the package and the certainty that these are understated in the official documentation. [28]

4.36 In evidence to the Committee, Mr Belchamber representing the ACTU, commented:

There are 3.7 million single income units. The rule of thumb is that around two-thirds of workers earn less than average earnings. That suggests that some two million single income earners are worse off under this package as proposed when allowance is made for the inflationary impact and the real tax cuts that the package promises. [29]

Impact on regional and remote communities

4.37 The Brotherhood of St Laurence was concerned that:

The effect of imposing a GST on basic essentials in areas where the purchase price is very high may actually add to the tax burden of lower-income households in regional areas. The Brotherhood would be very concerned about impacts on those remote communities, including in particular indigenous communities. [30]

4.38 This was also a concern raised by the Goldfields Age Pensioners Association who noted that:

The GST is discriminatory as it will impact more on people in remote areas where costs are higher. For example in Kalgoorlie-Boulder a carton of milk can cost up to 50 cents more at a corner store than at a supermarket so country towns without supermarkets pay top prices (to which GST will be added) at all times. [31]

4.39 In its submission, ATSIC stated that it believed the proposed tax regime and compensation would have significant and potentially serious adverse implications for rural and remote Aboriginal and Torres Strait Islander communities. [32]

4.40 The special economic and socio-cultural characteristics of rural and remote Indigenous communities result in these communities being "possible the most disadvantaged in Australian society and are least able to adjust to any additional costs and disincentives imposed on them". [33]

4.41 These characteristics include

• low levels of income with heavy reliance on social security payments and CDEP income;
• Indigenous people are 2-3 times more likely to be below the poverty line than non-Indigenous people;
• A larger proportion of income is spent on food, clothing and other essential items than is spent by Australian households in general;
• Higher prices of goods and services as a result of high transport costs to remote areas for food, housing and transport.

4.42 ATSIC estimates that the total impact of the proposed tax package will increase the cost of living for rural and remote indigenous communities by 3.74%:

This is nearly double the increase of 1.9% in the cost of living that the government has estimated to flow from the tax package for the whole of the Australian community.

ATSIC, however, considers 3.74% to be still a conservative estimate. [34]

4.43 ATSIC concluded:

For Indigenous people in remote communities, the exemptions [sic] from GST for health, education, child care services as well as the provision of First Home Owners scheme etc are of little or no benefit. The GST is a tax without exception, and is charged at the final point of sale. Therefore its effect is likely to be more adverse for people in high cost areas. [35]

4.44 ATSIC referred to analysis undertaken for it which indicates that:

… an average household would pay an extra $458.12 per annum in Mount Isa and an extra $1302.60 per annum on Thursday Island as compared to Brisbane. It is expected that for low income families and those in even more remote communities, the regression would be worse. [36]

4.45 In her evidence, Commissioner Crawshaw concluded that:

… the compensation measures provided by the government … must be specialised and flexible enough to deal with the unique circumstances in remote indigenous communities. ATSIC urges this committee to recognise the hardship faced by indigenous communities and the precarious knife-edge existence we currently live in … Without that recognition, and without a suitable, tailored package of compensation measures, the proposed GST package will not be tax reform - it will be a tax on our survival. [37]

Compensation and tax cuts

4.46 Two major links in the government's proposed ANTS package are the scheduled income tax cuts and the proposed program of compensation measures to assist those on low incomes.

Personal Income Tax Cuts

4.47 The Government's program is planned to include cuts to personal income tax totalling $13 billion per year, commencing July 2000. The planned program calls for tax cuts to all taxpayers. Reduced marginal tax rates will apply to 95 per cent of individual taxpayers and the tax-free threshold for all taxpayers is to be raised from $5,400 to $6,000. The following table illustrates the planned changes in tax rates [38]:

Today's tax rate New tax rate

* In addition, the $150 low income rebate applies to both the current and new scales.

4.48 The main points in the new structure are:

• the increased tax-free threshold;
• over 80 per cent of taxpayers to face a marginal rate of 30 per cent or less;
• the threshold for introduction of the top tax rate (47 per cent) raised by 50 per cent to $75,000. [39]
•  

Family Tax Benefits

4.49 To supplement the personal income tax cuts, the program includes a revision of the structure and administration of family assistance, designed to simplify arrangements and to reduce confusion and inconsistencies.

4.50 In addition, the Government's plan includes an increase in the income threshold for family payments - from $24,350 to $28,200 - and a reduction in the withdrawal rate of family benefits from 50 per cent to 30 per cent. Also included are improvements to the Family Tax Initiative which will double the FTI tax-free thresholds. [40]

Private Health Insurance

4.51 On 1 January 1999, the Government introduced a 30 per cent tax rebate/benefit on private health insurance premiums - paid either as a rebate on tax or a direct payment from the Government. [41]

Pensions and Benefits

4.52 An increase of 4 per cent in the maximum rate of pensions, such as social security, veterans pensions and Commonwealth income support for students. The increase would apply also to additional allowances, such as Child Disability Allowance and Mobility Allowance. A 2.5 per cent increase is planned for income test free areas of social security, veterans and student income support payments.

4.53 The program includes a continuation of the commitment to keep the single rate of pension at or above the level of 25 per cent of male total average weekly earnings. The Government has also guaranteed that income support payments will be 1.5 per cent higher than they would be if normal indexation arrangements applied (i.e. over and above the CPI effect). [42]

4.54 The income test for pensions is planned to be eased. The taper rate at which pensions are reduced by extra income is scheduled to be reduced from 50 per cent to 40 per cent. [43]

4.55 The issue of the adequacy of the proposed compensation measures was discussed by many of the groups involved in welfare activities. One example was the comment from the Australian Catholic Social Justice Council, which expressed a concern echoed by other groups:

… the so-called compensation in its present form is no compensation at all for lower income groups and is over compensation for the highest income groups. There must be grave doubts about the plight of Australia's poor under these proposals over the medium to longer term.

4.56 The Chamber of Commerce and Industry, Western Australia saw the package differently and indicated that they saw it addressing fundamental deficiencies in the current tax system. On the issue of income tax rates the Chamber commented:

Cuts in personal income tax rates and moves to address poverty traps will reduce the high effective marginal tax rates faced by employees across low and middle income bands, and boost the income of many small business owners. [44]

4.57 The State Chamber of Commerce (NSW) also indicated its support for the tax package. It noted that the reduction of tax rates would assist in overcoming `bracket creep' in the income tax system and reduce what the Chamber called `taxation by stealth'. The Chamber's submission indicated that the tax package was seen as providing much greater equity and efficiency, including a reduction in tax avoidance and evasion. With regard to compensation for those on low incomes the submission noted:

Naturally, an essential tenet of the introduction of a rationalisation of the tax system in such a way would require compensation to lower income earners. Provided this was appropriately managed, the effect would be much greater equity in the spread of the tax burden amongst all taxpayers than is the case with the present system. [45]

4.58 The Combined Pensioners and Superannuants Association of NSW in their submission to the Committee, drew attention to what they saw as an unbalanced level of compensation:

Some people will receive a significant increase in their disposable income as a result of the tax package changes.

People on high incomes benefit considerably more in terms of increases in disposable income than age-pensioners and other low-income retirees. Treasury tables confirm this.

… There are legitimate questions about the overall fairness of the tax package, … [46]

4.59 The Business Coalition for Tax Reform, however, saw the taxation and compensation changes as positive moves contributing to both equity and international competitiveness:

… The reductions in marginal tax rates for all taxpayers with taxable incomes below $75,000 per year and the additional reductions in effective tax rates for age pensioners and for low and middle income families with children;

These measures will improve the relativity between the rates of tax on income in Australia as compared with those in other countries and, accordingly will improve the after-tax incentives Australians confront when facing decisions about working, saving and investing. [47]

4.60 The Business Coalition argued that:

The large number of individual proposals contained in A New Tax System, form an integrated approach to the rebuilding of Australian taxation arrangements. [48]

4.61 The Victorian Employers' Chamber of Commerce and Industry (VECCI) also supported the approach set out in the Government's tax package. VECCI specifically noted the advantages which would flow from the proposed reductions in personal income taxes. The group said that lower tax rates would encourage national saving, which in turn would assist business investment without increasing the current account deficit. They said that unincorporated businesses would also be assisted. For individuals VECCI commented:

Lower personal income taxes enhance the incentive for individuals to work and earn more money without being significantly penalised. Such reform would also avoid the current situation where an individual on an income marginally higher than average weekly earnings can incur the second highest marginal tax rate at 43 per cent. [49]

4.62 In a paper published after the release of the Government's tax package, VECCI said that it believed that the income tax cuts, combined with the rise in social security payments and other increased government expenditures, will have an inflationary effect on consumption.

4.63 VECCI also expressed concern that the cuts in income tax and the increased social security payments were reliant on projected budget surpluses. If recovery of international markets from the Asian currency crisis were more prolonged than expected, VECCI said, those surpluses might be endangered - undermining the Government's ability to meet those commitments. [50]

4.64 The Australian Consumers' Association (ACA) argued in its submission that exclusions from the GST created more security than any form of compensation could provide. The Association pointed out that increasing social security payments would put a further strain on the Government's budget surplus - already being reduced to fund the planned income tax cuts.

4.65 The ACA noted that the trust of the public was needed to make the new tax arrangements work successfully and without distortion. However, the Association said, over the last 15 years the tightening of the criteria for social security payments, restructuring of those payments and the access to them, have undermined the public's trust in the social security system. Of particular concern to the ACA are the difficulties facing people who earn too much to qualify for social security but have too little disposable income to cope with the added burden of a GST.

4.66 The Association's other main concern was that the extensive use of compensation built up a reliance on the welfare system and gave an incentive to stay within it. ACA considers that the use of exclusions from the GST rather than compensation will allow more families to operate independently of the social security system. [51]

4.67 The Small Retailers Association of South Australia were in no doubt that lower and middle income earners would not be relieved of their current difficulties by the tax cuts and other measures in the New Tax System. The Association said in evidence that the tax package will not deliver the equitable tax system that is needed in Australia. The Association representatives said:

We certainly want tax reform and an equitable tax system. I do not think as far as it has gone at the moment that it has been achieved, in any shape or form. I think the middle to lower income people have been sold too short with tax reforms, and I think that also will eventually impact on many industries, and certainly the retail industry. But certainly reform is very much overdue. I have no argument with that.

We deal a lot with those people who are on the lower to lower middle income stream. Many of my staff are in that area, and I ran a test over them of the amount of livable space they had within their income after they had got the tax concessions. They were still on the knife's edge. As much as we can predict prices, et cetera, that will be impacted on by a GST, they were as much on the knife's edge as they were before tax reforms were mooted. I think that, if there is going to be a tax reform in this country, it has to give those people a certain amount of space for mistakes, misfortune, or whatever else it is. This reform, as it is at the present - and given that I do not believe it is going to be a 1.9 per cent increase in price - will not achieve that. Therefore, it is not tax reform; it is holding a situation. It is holding a status quo for many people in this country. [52]

Future erosion of compensation

4.68 The Committee received evidence from noted business economist, Mr Geoff Carmody, of Access Economics, and Mr Mitch Hooke, of the Australian Food and Grocery Council, which confirmed that the proposed compensation to aged, veteran and other pensioners would be eroded over time. Mr Carmody told the Committee:

It takes but a moment's reflection to realise that, if male total average weekly earnings rise faster than the CPI, it is only a matter of time before the real value of the compensation offered in the ANTS package will be eroded to zero. On some of the numbers I have done, that erosion could occur in as little as two to three years. In other words, the compensation package is simply inadequate over time. [53]

4.69 Mr Hooke confirmed Mr Carmody's comments as follows:

So the point is simple that the structure of the arrangements as they are will not, in our view, endure over time. They will be eroded … [54]

4.70 The Committee subsequently questioned other expert witnesses on the issue of the automatic erosion of pension compensation:

• Professor Neil Warren and Professor Ann Harding;
• representatives of ACOSS; and
• Treasury officials.

also confirmed Mr Carmody's analysis.

4.71 In response to a question about the danger of compensation being eroded over time, the group Australian Options responded:

… an adviser to the New Zealand government … makes the point that it is precisely the compensation aspects of the deal which, as you have said, have not kept up with the reality. … You introduce a GST with some compensation but, as years go by, it is the compensation which is not kept in line with the new reality. [55]

4.72 The ACTU also indicated that the average worker did not believe that the value of the compensation package would be maintained over time:

The average person does not believe the compensation will last because there are no other countries, I think - if there are, there are very few - that have introduced a GST that has remained at the same level.

… If you surveyed average opinion out there, I think there would be a high degree of scepticism. 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. [56]

4.73 Similarly, the Australian Catholic Social Justice Council expressed concern at the idea of a taxation policy which requires a program of compensation to overcome its own inequities. The Council also doubted the adequacy of the compensation package for lower income groups, even in the short term. [57]

4.74 One of the main concerns of the Council was with the long-term preservation of the compensation package:

I think there would be significant pressure on any government to see such compensation packages eroded over time. Such packages cannot be enshrined in an unchanging way. I think there is always a temptation for any government.

It would surely be better to have a tax system that does not require such compensation to maintain some semblance of fairness. [58]

4.75 The Director of Lutheran Community Care in Adelaide, Mrs Fitzpatrick, commented that the number of people receiving emergency relief had increased by 20 per cent in one year. She said that even though they will receive an increase, it will not keep pace with their increased expenses and would be unable to cope with even basic needs:

For example, we saw two women who were sharing a pair of spectacles because one could not afford to pay the $20 difference to pick up her new ones from the optician. And that is not an isolated incident. [59]

4.76 Mrs Fitzpatrick said that her organisation was supportive of tax reform but wished to ensure that the gap between rich and poor is not widened and that those in poverty are given no additional burdens.

4.77 ACOSS has argued strongly that compensation to low income earners must be higher than average price increases arising from the GST to allow for statistical inaccuracies and the inability of economic modelling to provide for individual households. ACOSS claimed that the Government's guarantee to pensioners of an additional 1.5% above the CPI effect, is a recognition of this need. [60]

4.78 ACOSS claimed that low income households will, in fact, face higher than average increases in living costs from the GST because of their particular spending and saving patterns. The CPI pictures the spending pattern of a cross-section of the population and is not focussed on the low income sector.

4.79 In addition, ACOSS claimed that it is not clear whether the 4% pension increase is supposed to cover inflationary increases in the year it is applied, as well as price rises caused by the GST. If inflation is also to be absorbed, this will reduce the effective rate of the increase. [61]

4.80 However, ACOSS' main concern is the long-term effect on low-income households. ACOSS argues that it is not possible to judge in advance the economic and political conditions which may face a government in years to come. Consequently, it cannot be said that the compensation package is secure:

Even if the compensation payments were increased, this would be no guarantee that low income households will be adequately protected from the effects of the proposed GST both now and in the future. Compensation packages may look fine on paper, but the political and administrative reality is that they will always fail to reach some groups, will always leave others worse off, and will always be subject to erosion in future budgets. [62]

4.81 In evidence before the Committee, ACOSS gave examples of groups which would not benefit from the proposed compensation program:

The compensation is not comprehensive and cannot be. It does not get to a whole group of people. New migrants in their first two years in Australia, unemployed young people aged 18 to 20 under the new youth allowance arrangements, mature age unemployed people with superannuation assets, self-employed people without children, people on workers compensation, people with a disability or chronic illness and Australians in rural or remote areas, especially remote aboriginal communities, will not get sufficient compensation, nor will many full-time wage earners or self-employed people on very low incomes. [63]

4.82 Rather than arguing against the contents of the compensation package, however, ACOSS said it is arguing that minimising the impact of the GST on poorer households is the only effective way to protect their living standards. [64]

Compensation

4.83 Set out in the following paragraphs are relevant quotes from the report of the References Committee.

4.84 The St Vincent de Paul Society estimates of how much lower income households spend on essentials means that many families and individuals are worse off-up to $21 a week worse off. [65]

Inadequacy of modelling of compensation

4.85 ACOSS identified a number of flaws in the Treasury modelling that gave rise to these results:

It didn't take account of variations in expenditure patterns among different households. Treasury wrongly assumed for the purpose of its modelling that all households spend the same proportion of their household budgets on different goods and services. ACOSS noted that modelling a major change in the structure of consumption taxation that dramatically changes the relative prices of different goods and services is a different exercise from calculating general changes in consumer prices over time.

It does not take account of variations in savings patterns among different households. The Treasury model wrongly assumed that all households spend all of their disposable income. It applied the average price effect from the consumption tax changes to household disposable income, ignoring the fact that many low income households spend more than their income while many high income households spend less than their income. ACOSS argued that Treasury modelling significantly underestimates the price effects of the consumption tax changes for low income households and overestimates those for high income households. [66]

4.86 The St Vincent de Paul Society noted that projections for price increases are `unrealistically low' where they relate to low income earners. People on low incomes spend a disproportionately higher proportion of their incomes on goods which are not subject to wholesale sales tax (WST). The Society noted that the impression is sometimes given that the WST applies to all items, including food, vegetables and clothing –`whereas it affects very little of what low income earners purchase'. [67]

4.87 Evidence indicates that families will be particularly disadvantaged under the new tax arrangements. Professor Peter McDonald argued that the method used by the Government to calculate the price effect of the GST does not give due regard to families with children, particularly middle income families (on incomes between $30,000 and $70,000 per annum). Professor McDonald argued that `the effect is that, at the same income level, families with children fare relatively less well from the proposed tax reform than people without children'. [68]

4.88 No account is taken of the number of people in a household. This is a problem for any household with dependents, especially families with children. Children are a major cost for families but because they do not earn income, the Government's approach to the calculation of the impact of the GST makes almost no allowance for their existence. That is, at the same level of disposable income, the Government calculates the price effect of the GST to be exactly the same for a single person, for a couple with no children and for a couple with children. (p.17)

Inadequacy of compensation

4.89 ACOSS emphasised to the Committee that `we believe that many low income earners will be worse off under the package as it currently stands and that the government cannot give assurances that in fact that is not the case and that everybody is better off'. [69]

4.90 Other community and welfare groups expressed similar concerns. The St Vincent de Paul Society noted that `millions of Australians, mostly families and individuals on lower incomes, could be substantial losers from tax reform if Treasury and its modelling end up getting it wrong as regards the GST impact on the cost of living'. [70]

4.91 Anglicare Australia – `for all of these poverty groups, the imposition of a GST on consumption, especially food will have a substantial effect on their capacity to make ends meet….In the system under consideration, we are concerned that the compensation package is not large enough and will not be enshrined in legislation to prevent its being whittled away in subsequent years'. [71]

4.92 ACA `is very concerned about the potential impact of the tax reforms on people on low incomes, of which a high proportion are older people. ACA recommend that the tax legislation provide protection to maintain the standard of living of people on low incomes, so that the community can be confident that adequate compensation is provided'. [72]

4.93 Many pensioner and other groups questioned whether the measures would adequately compensate pensioners and other social security recipients for the impact of the GST and whether the compensation would be maintained over time.

Footnotes

[1] ANTS, p. 14.

[2] ANTS, p 18-19.

[3] Evidence, p.2192

[4] ANTS, p.56.

[5] Evidence, p.2403.

[6] ANTS, p.20.

[7] ANTS, p.21

[8] ANTS, p.21

[9] Evidence, p.1348.

[10] See, for example, Submission Nos.25, 32, 42, 46, 51-52, 54, 72, 81, 108, 128, 134, 151, 165-66, 211, 245-247, 271, 382, 486, 576.

[11] ANTS, p. 15.

[12] An Introduction to Microsimulation Models of Tax Reform, 15 December 1998, p.28.

[13] Evidence, p. 298.

[14] Evidence, p. 298.

[15] Submission 29, p.1.

[16] Submission 29, p.2.

[17] Submission No. 300, p.30.

[18] Submission No. 300, p.20.

[19] Submission No. 300, p.31.

[20] Submission No. 300, p.32.

[21] Submission No. 300, p.3.

[22] Evidence, p.360.

[23] Evidence, p.362.

[24] Submission No.68B, pp.7-8.

[25] Evidence, p.691.

[26] Submission No.383, p.4

[27] Submission No.383, p.4

[28] Submission No.383, p.5

[29] Evidence, p.670.

[30] Submission No.848, p 26.

[31] Submission No.1304, p.1.

[32] Submission No. 801, p.v

[33] Submission No.801, p.4.

[34] Submission No.801, p.12.

[35] Submission No.801, p.12.

[36] Submission No.801, p.13.

[37] Evidence, p.2023.

[38] The New Tax System: A Simple Guide to the GST, circulated by the Treasurer, the Hon. Peter Costello, MP, August 1998, p.2.

[39] ANTS, pp.18-19.

[40] ANTS, p. 19.

[41] ANTS, pp. 19-20.

[42] ANTS, p.56.

[43] ANTS, p.20.

[44] Submission No. 1045, p.3.

[45] Submission No. 825,pp.3, 9.

[46] Submission No. 850, p.8.

[47] Supplementary Submission No.104A, p.12.

[48] Supplementary Submission:No.104A, p.9.

[49] Supplementary Submission No.122A, p.2.

[50] The Federal Government's Tax Reform Package, VECCI's Assessment, August 1998 (Attachment 2 to Submission No. 122)

[51] Submission No. 928, pp. 14-16.

[52] Evidence, p.1090 and 1094.

[53] Evidence, p.1942.

[54] Evidence, p.1944.

[55] Evidence, p.1065.

[56] Evidence, p.682.

[57] Evidence, p. 1763.

[58] Evidence, p. 1765.

[59] Evidence, pp. 919-20.

[60] Supplementary Submission No. 68B, p.12.

[61] Supplementary Submission No. 68B, pp.11-12.

[62] Supplementary Submission No. 68B, p.13.

[63] Evidence, p. 2375.

[64] Supplementary Submission No. 68B, p.13..

[65] Community Affairs References Committee Report on the GST and a New Tax System, March 1999, p.14.

[66] Supplementary Submission No. 68B, p.13.

[67] Submission No.300, pp.14, 22.

[68] Submission No.79, p.1

[69] Evidence, p.494.

[70] Submission No.300, p.31. See also Submission No.783, pp.9-12; Submission No.1006, p.2; Submission No.483, pp.1-2; Submission No.405, pp.1-4.

[71] Submission No.624, p.4.

[72] Submission No.364, p.3.