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Superannuation reforms

I’ve tried to be generous to the Gillard Government because of the overly critical reaction to it by the Murdoch press – by Ergas, Sloan and the hired lackeys of the IPA etc.  But the way the superannuation issue has been dealt with leaves me with substantial doubts about the political nous of the Government’s reform agenda as well as, its lack of any reasonable basis in clearly articulated principles.

As I understand it superannuation contributions of 9% of income are subject to a uniform 15% tax regardless of incomes – this will increase to 30% for incomes over $300,000.  In addition there is a limit on the amount that can be contributed towards superannuation from pre-tax incomes of $25,000. Income earned by the investments is also taxed at 15% and capital gains at 10%.  There is no tax on payments to a contributor from a superannuation holding.

Nobody knows for sure (this ignorance is a major consequence of the political incompetence) but the main candidate proposal for reform by the current Labor Government seems to be to increase the tax on contributions to superannuation by the “very rich” (probably those with incomes over $300,000 but much lower figures have been suggested) so that most of the concessionary tax benefits don’t end up going to them.  It is difficult to see how this would generate much revenue to the government given the $25,000 limit on contributions and the already announced proposal to increase taxes on contributions to 30% for these very rich.  It would seem that the revenue to the government would be the difference between the top marginal tax rate of 41% and the proposed tax rate of 30% on $25,000 or $2,750 annually per high-income earner.   This won’t yield much revenue in aggregate.

The simplest solution is to tax contributions as income is taxed normally so there is no need for a pre-tax threshold and to retain the tax-free status on payments from a superannuation fund.  This is John Freebairn’s suggestion in the AFR (2/4/2013, subscription required).  This proposal would not make low income earners worse off but would have the desired redistributive effect of capturing more revenue from the well to do. The Treasury estimate of extra income gained from this proposal is apparently $13b.  If this estimate is accurate then the proposal to increase the tax rate to 30% on incomes over $300,000 would require 5.2 million income earners in this range in Australia.  The actual figure would be a tiny fraction of this.

Labor has handled this issue abysmally. A principled approach to the issue of superannuation reform would yield more income to the Government than the ad hoc monster of a proposal that has emerged. It would be politically smarter too to deliver a specific reform rather than a general attempt to attack the rich.  Most people with substantial superannuation are justifiably terrified of a proposed reform that is not clearly articulated.  As with the carbon tax proposal and the proposal to introduce a neutral super-tax on mining the worst enemy of the Government has not been the scurrilous Murdoch press but the Labor Party itself.  It needs to base policies on principle not on poorly thought through revenue grabs and to explain its policies clearly.   Policies such as the carbon tax and the original mining tax proposals were based on sensible principles but, like the poorly articulated proposed superannuation reforms, explanations for policy reform seem to be something it is unable to do.

Update: There is a post and a stream of comments at the Catallaxy website on my post.  Neither the post nor the comments make substantive points at all – it’s the usual abuse and nonsense that one has come to expect from this lot.  One comment that was quite remarkable came from Samuel J a frequent Catallaxy poster.  He criticized me for using ad hominem arguments in a post I made some time back criticizing his view that the world financial crisis was caused by policies addressing climate change! Please judge yourself the depths of the alleged “lunacy” of this view!  Moreover, I cannot see anything ad hominem at all. I would have thought Samuel J might have wanted to forget about this regrettable post but as he doesn’t I am happy to publicize it once again.  Words just fail me! Do Henry Ergas and Judith Sloan (contributors to Catallaxy) endorse these views? I assume (and hope) they don’t but still cannot understand why they would let such a foolish claim stand.  Climate change policies caused the GFC?

Up the Catallaxy page I saw that economics lecturer Steve Kates was discussing the “Prisoners’ Dilemma” in economics. He asks:  “Are there outcomes where from a social perspective we all end up worse off because each person does what is best for themselves?” Well, yes Steve, there are many. In fact this is probably one of the best-known issues in all economics.  A vast array of problems from employees slacking on the job to negotiating international treatments, such as those for nuclear disarmament, are social issues where the social optimum can be thwarted by individual self-interest.  The general issue has been around for hundreds of years and was discussed early by e.g. Hobbes and many others before game theorists formalized discussion.  How can an economist not know this?

I want to avoid the Catallaxy lot but the irritation in seeing brazen stupidity paraded as commentary at times gets the best of me.

25 comments to Superannuation reforms

  • rog

    Once you are over 50 the threshold increases to $50K.

    Using current limits a couple can make tax free contribution of $1M every three years and the earnings from those investments are taxed at a low rate until retirement, when there is no tax at all. Super is a great dodge for the wealthy and a burden to middle and low income earners who ultimately have to carry the tax load.

  • rog

    Another aspect for those who have a SMSF is that franking credits from dividends are paid into the fund. Once you are in pension mode those credits become another source of income.

  • hc

    Rog, Franking credits apply to any equity investment. The idea is that the firm has already paid tax on these earnings.

    I thought the limit was $25,000 across the board:

    http://www.ato.gov.au/individuals/content.aspx?menuid=0&doc=/content/00250233.htm&page=13&H13

    Do you have a reference for the over-50 and the $1m claims?

  • rog

    Over 50s concessional limit is $50K

    http://www.ato.gov.au/super/content.aspx?doc=/content/60489.htm&page=3&H3

    Non concessional cap is $150K pa. You can bring forward 3 years into 1 payment ie $450K

    Therefore a couple can contribute non concessional $900K per 3 years.

    http://www.ato.gov.au/super/content.aspx?menuid=0&doc=/content/60489.htm&page=4&H4

    If you have your own company (Mums n Dad) a couple over 50 can salary sacrifice $100K pa.

    Once it’s in super it is safe from personal and company claims. The SMSF industry in Australia is booming

  • rog

    Ok I see that over 50s was dropped to $25K post FY2012 and that legislation is pending to increase to $50K if the fund is below $500K.

  • rog

    Ross Gittins explains the inequities well

    http://www.smh.com.au/opinion/politics/fat-cats-that-got-cream-in-super-tax-deal-are-breaking-the-bank-20120814-246sp.html

    However judging by the shemozzle of the MRRT it’s doubtful if the alp will be able to pull changes to super off, they appear to be politically inept at reform.

  • I wrote about this a while ago.

    Get rid of all taxes. Then just align the tax on BENEFITS with income tax.

    There nice and easy!

  • Tim

    I reckon “very rich” is going to be $180K income. Because if you’re paying the highest marginal tax rate you are very rich by definition. Aren’t you?

  • rog

    There are all sorts of rorts with super eg once you are over 55 you can draw in super while contributing. This is made worthwhile as super is taxed at a lower rate than income.

    Income is taxed on a sliding scale whereas super is a flat tax. Therefore it is tax effective if you are in a high income tax bracket.

    The tax system is subsidizing retirement of the wealthy, they are not self funded they are tax payer funded.

  • Kingsley

    Rog a person on $300k pays about 14 times the tax of someone on $50k. If you think by putting in $25k into super and then only paying about 13 times the $50k earner that somehow the $50k earner is subsiding the $300k earner the I don’t think we can help you

  • Jeff

    Rog, the non concessional deposits have had tax paid on them. You want them to be taxed again as they enter the fund?

  • rog

    Earnings from non concessional deposits in a superfund are taxed at a lower rate. On retirement beneficiaries can withdraw funds tax free to pay off debts incurred pre retirement. There is no incentive to use super as an annuity.

  • Mark

    “The tax system is subsidizing retirement of the wealthy, they are not self funded they are tax payer funded”

    It’s their own money for heavens sake, earned by training, education and hard work (well most of the time). I earn that because I spent twenty YEARS doing research for a pittance before getting into industry. I may have a great income but no assets and I’m suddenly taxed at >40%.

    Non-concessional contributions are already taxed at >40% then if the earnings are taxed in super at 30% there’s not that much left over for me. With my grandparents living til almost 100 I would just end up on the pension anyway.

    You are relying on the assumption that by default all income belongs to the welfare state and keeping any more than 0% is a concession. What a disaster if this is a common view. Not much hope for enterprise in this country as the population ages and sickens.

  • kingsley

    “Earnings from non concessional deposits in a superfund are taxed at a lower rate” So you want to ban super then? This is the fundamental underlying incentive to put money into a structure you may not be able to withdraw for decades.

  • rog

    It’s worth considering what Peter Costello once said;

    “A major deficiency of the current system is that tax benefits for superannuation are overwhelmingly biased in favour of high income earners. For a person on the top tax rate, superannuation is a 33 percentage point tax concession while a person earning $20 000 receives a 5 percentage point tax concession. High income earners can take added advantage through salary sacrifice arrangements that are not available to lower income earners.

    The Government is remedying this situation.

    From tonight, a surcharge of 15 per cent will apply to future employer superannuation contributions for those whose income (including deductible superannuation contributions) is at or above $85 000. The surcharge will phase in over the income range $70 000 to $85 000. For superannuation contributors with such incomes below $70 000 per annum, there will be no change whatsoever. There is no change to any person’s accrued benefit.

    For high income earners the superannuation contributions will still be highly concessional but are more in line with concessions to middle and low income earners.”

    http://www.budget.gov.au/1996-97/speech.asp

    And then we had Better Super. 

  • mark

    “while a person earning $20 000 receives a 5 percentage point tax concession.”

    Oh spare me. Of course they receive a piddly “concession” (i.e. keeping some of the money they worked for). They pay NO NET TAX. And receive plenty of transfers from the welfare state. The point of super is to make locking your money away attractive. If someone earns almost no money this cannot by definition apply to them. The fact that some tiny number of people earning over 500,000 a year are treated the same in terms of tax deductions as the middle classes is irrelevant unless you are trying to instigate class warfare against them. The rules are there to attract the vast majority of people who are middle income earners that may have spare funds to put into super.

  • John H.

    I want to avoid the Catallaxy lot but the irritation in seeing brazen stupidity paraded as commentary at times gets the best of me.

    They are a weird mob. I got permanently banned from there for questioning the wisdom of allowing a clearly plagiarised article being allowed to stay on their site.

  • WhaleHunt Fun

    Given that many of the fools that caused the GFC by demanding that the worthless be given housing loans are also bleating about global warming being real, it’s not hard to see that the brazen stupidity is not in the pointing out of the link between these two, but in the failure to identify, segregate and punish these economic vandals.

  • brazen stupidity parading as commentary.

    great quote and soo accurate

  • hc

    WhaleHuntFun (Is your personality as ugly as your pseudonym?), The banks awarded the bad loans not supporters of action on climate. With respect to public inducements most of these loans in Australia and the US were taken out during the Bush/Howard era. Try to unscramble your brain before you post at this site or stick to your usual garbage site. Generally its a good idea to seek make logical sense rather than to release childish aggression.

  • Whalehut fun is merely repeating worthless rubbush that has been demolished by not only the Fed a few times but all regional Feds as well.

  • john street

    Harry,
    I agreed with your comments on economic illiteracy but I thought it would be fair to think of a simple economic example. Below is a model which I think captures the essential story of airline economics. Better economists than I have built more realistic ones of course but they get quite complex. Hope you don’t mind me cross-posting from Cat but I am buried there.

    Two airlines, each with 1 aircraft of 100 passenger capacity compete on a route e.g. Sydney to Melbourne. The demand schedule is downward sloping. At $5 per ticket there is a demand from 100 passengers (shared equally between the airlines) which gives each airline a revenue of $250. Fixed costs are $100 per airline and marginal costs are $1 per passenger. So at $5 per ticket, each airline makes $100 (super)profit, and if they collude, they could keep things that way with a socially undesirable outcome of consumers being ripped off. However, each airline has an incentive to cut prices and attract additional passengers. If one airline cuts its price to $4.99 it would attract all the demand and make a huge profit. However, if the airlines compete vigorously they could drive the price down to $1…. at which the demand is for 200 passengers, all the planes are full, but the airlines are making losses of $100 each, which is also a socially undesirable outcome and economically unsustainable. They are caught in a prisoners’ dilemma and the competitive outcome is a Nash equilibrium. One airline will no doubt go out of business and the other can make monopoly profits. But what if the market is contestable and new airlines are enticed to enter? Then the problem becomes one of prisoners dilemma repeated.

  • hc

    John, This is a Cournot equilibrium where oligopolists compete on price. They end up mimicking perfect competition where firms price at marginal cost – or, as you point out, one firm is driven out. Here however a Prisoner’s Dillemma fosters the social optimum rather than a bad outcome. The foolish Catallaxy post asks whether as a consequence of a PD a social sub-optimum could arise. Of course it can and the examples I provide illustrate that.

  • Maggie T

    HC wrote: “This is a Cournot equilibrium where oligopolists compete on price”.

    The example is one of Bertrand equilibrium.

    Under Cournot the oligopolists compete on quantities, not prices.

    editor: You are right the equilibrium is described as Bertrand. The statement made is otherwise exactly correct. The remainder of your comment deleted as irrelevant and insulting.

  • Whalehunt Fun

    Banks oeprate in a financial and legal environment crafted by the legislators. The inanity of providing loans to those without the means to repay derives from tyhat environment, not from the banks that operate within it. The Fed and its analogues cooperated against sound practice in the promulgation of inducements to financial institutions to provide the loans. That they are capable of “debunking” a mess they helped create is unlikely. I see no sackings at the head of the Fed so the Fed has done nothing but help create the mess and continue with the endlessly failing Keynsian nonsense. The spraying money aimlessly around has, unsurprisingly, helped not at all with teh GFC. And spraying money at “sustainable” energy production has achieved the same outcome. The two are not causally linked. They are just two different disasters caused by the same leftist fools.