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.