Increasing the tax on super contributions is yet another ill-conceived ‘budget fix’ idea which attempts to tax our way to prosperity.
The whole point of super is to decrease people’s reliance on aged welfare (which currently amounts to $60.7 billion of spending annually – or 1 in every 7 dollars spent by the federal government). The more super is taxed, the greater the disincentive to save and the more people will rely on welfare in their retirement (shocking stuff, I know). Given that our population is ageing and that around 80% of retirees receive a full or part pension, discouraging even more people from funding their own retirement is something we can ill afford. However, this is precisely what is going to happen, regardless of whether Turnbull or Shorten wins at the upcoming election.
Turnbull out-lefts Labor
Incredibly, it’s Turnbull who wants to tax harder here:
The Turnbull government is preparing to trump Labor in the budget by cracking down harder on high-income superannuation tax concessions to raise four times as much as the opposition’s policy.
Labor has promised to cut the income threshold for more heavily taxing contributions from $300,000 to $250,000. The Coalition now plans to cut it to $180,000.
This has been on Turnbull’s agenda or some time. In November 2015, Turnbull was thinking about changing the super contribution tax rate from a flat 15% to a 15% discount on the contributor’s marginal income tax rate, which would have impacted all workers earning over $36,000 per year:
Current laws apply a 15 per cent tax on all super contributions, which means the advantages are greater for someone paying the top marginal income tax rate of 45 per cent while there is no incentive to save for those on low incomes. Those earning more than $300,000 already pay a 30 per cent contributions tax.
Deloitte Access Economics director Chris Richardson suggested a rebate of 15 per cent, which would see a worker on the top marginal tax rate pay 30 per cent tax on contributions while a worker on the 32.5 per cent income tax rate would pay 17.5 per cent on contributions.
All workers earning more than $36,000 a year would pay more tax on their regular super contributions, according to modelling obtained exclusively by The Australian, highlighting the risks of pursuing the new approach.
However, now that Turnbull has lost too much of his political capital, his super policy has evolved to simply taxing the ‘rich’ – as outlined by Rebecca Weissner in her brilliant article in the Quadrant:
So the news from the bunker that the Turnbull government is toying with doubling taxes on concessional superannuation contributions, raising them from 15 to 30 per cent for those earning more than $200,000 a year*, is troubling indeed. Such a tax grab, on top of existing taxes, would effectively mean that for every dollar savers put aside to support themselves in retirement in forty years time, they could pay around $2 in taxes, adding together the impost on contributions and in particular the impost on the earnings of their deposits over that lengthy period.
Rebecca then crunches some very sobering numbers:
The system already punishes savers. Take a couple who turn sixty-five this year and are entitled to take a full pension. On average, a sixty-five-year-old man will live to 83.7 years and a sixty-five-year-old woman will live to 86.8 years, meaning they will require support for 972 weeks at the couple’s rate of $1307 per week and the single person’s rate of $867 per week for a further 161 weeks, a grand total of $657,559 even without allowing for future pension rises. And this does not take into account the cost of the Commonwealth Seniors Health Card, which is often even more valuable to pensioners and therefore even more costly to taxpayers, giving pensioners access to cheaper prescription medicines, government-funded medical services and other government concessions.
For a couple to get just the same income as the pension through their own savings they would need to have jointly saved at least $1,000,000 in superannuation. What sort of incentive is that to save? If a couple who work, pay taxes and save end up with exactly the same income as a couple who have never worked or paid taxes or saved, one has to wonder for how much longer people will bother to save for their retirement. Yet not only would they end up with the same income as their feckless friends, they are also currently required to pay taxes on the savings which merely replace the pension.
Will Australia be better off overall?
This is the question that should be first and foremost on our politicians’ minds on this issue. Regrettably, it’s not.
Let’s start with some key numbers:
- The aged pension will cost $60.7 billion this financial year.
- This figure is estimated to rise to $63.1 billion in 2016-17 (a 3.95% increase).
- There are about 2.5 million people currently on the aged pension.
- The average annual aged pension is therefore about $24,280 (i.e. made up of full and part pension recipients).
- The government intends to raise around $1.5 billion annually through increased super taxes.
- There are about 400,000 people earning over $180,000 annually.
- On these numbers, it would take around 62,000 of these people (i.e. about 15.5%)** – or people about to become one of these people (think about that for a moment) – to either partly or fully give up on funding their own retirement before the increased aged pension costs alone would equal the tax raised.
Would 15.5% of people earning over $180,000 really do this? Nobody knows and it would be foolish to rely on any government/treasury ‘modelling’ in this respect (remember the mining tax?).
What we do know for certain is that if you give anyone enough incentive to take something for free, they’ll cheerfully take it. People earning over $180,000 aren’t simply going to let the government take $1.5 billion of their money each year. If you really think this would happen, then you need your head read.
Need more convincing? Then go ahead and conduct your own social experiment. All you have to do is set up a stall in a shopping centre, place a chunky pile of $100 notes on a table and attach a note to each one saying ‘free gift – one per person’. Then, sit back and observe what happens. By all means, do a pop quiz on the incomes of those who take up the offer (and those who don’t!). For extra fun, observe the nature of the ‘queue’, how it is formed and the schemes people come up with to land themselves more than one note.
The hidden costs
The raw numbers above don’t even begin to factor in the overall economic impact of:
- further discouraging those earning over $180,000 (i.e. the top 2.7% of earners who already pay 28% of all income taxes) from being as productive as possible; and
- taking $1.5 billion (or whatever the final number really would be) of spending power out of the hands of these people annually and giving it to the government to redistribute through the public service.
I have no doubt you can think of more hidden costs that Turnbull’s policy would result in. The bottom line is that, when you add them all up, the long term welfare and productivity costs would comfortably dwarf the short term revenue drippings raised by the federal government. I say ‘drippings’ because the latest forecast budget deficit for 2015-16 is around the $40 billion dollar mark.
A simple choice
Trickle down may sound ‘unfair’ to some. However, it’s the only sensible option when you consider the tried and failed alternatives of ‘progressives’, communists, socialists and totalitarians – such as the gravitationally challenged ‘trickle-up’ and ever-cheerful ‘no trickle at all’ (the latter is often a consequence of the former).
Using fruit picking as an analogy, governments generally have three options when it comes to matters like this:
- encourage and reward people who take on the effort and risk of climbing the tree to pick as much fruit as possible;
- encourage people to scavenge at the bottom; or
- shoot anyone who climbs the tree.
The first option is consistent with evolution and results in the most good fruit being picked – fruit which is ultimately shared. The second and third options (often used together) feed envy, foolishly fight evolution and result in less for everyone. They also result in no-one being willing to climb the tree and everyone being left to fight for scraps.
That Shorten and Labor would choose to aggressively tax superannuation comes as no surprise. As for Turnbull, I’ll leave you to figure out which of the Liberal party’s principles his policy is consistent with:
In the inalienable rights and freedoms of all peoples; and we work towards a lean government that minimises interference in our daily lives; and maximises individual and private sector initiative.
In government that nurtures and encourages its citizens through incentive, rather than putting limits on people through the punishing disincentives of burdensome taxes and the stifling structures of Labor’s corporate state and bureaucratic red tape.
In those most basic freedoms of parliamentary democracy – the freedom of thought, worship, speech and association.
In a just and humane society in which the importance of the family and the role of law and justice is maintained.
In equal opportunity for all Australians; and the encouragement and facilitation of wealth so that all may enjoy the highest possible standards of living, health, education and social justice.
That, wherever possible, government should not compete with an efficient private sector; and that businesses and individuals – not government – are the true creators of wealth and employment.
In preserving Australia’s natural beauty and the environment for future generations.
That our nation has a constructive role to play in maintaining world peace and democracy through alliance with other free nations.
In short, we simply believe in individual freedom and free enterprise; and if you share this belief, then ours is the Party for you.
(*) Rebecca’s article is the first I have seen which says that the new super tax would apply to incomes over $200,000. For the purpose of this article, I am working with the $180,000 figure used by sites such as The Australian and Sky News.
(**) i.e. $1.5 billion divided by $24,280.