Taxation matters
We need to collect more tax
When someone who has been prominent in the Liberal Party – an opposition leader in fact – says we have to make our tax system fairer and collect more tax, we should pay attention.
On fairness, John Hewson, in his Saturday Paper contribution – We can afford to fight poverty – writes:
Our tax system is very inequitable. It fails to tax some very profitable companies and discriminates in favour of high-income earners in terms of housing, property and superannuation, and capital gains tax concessions. This tax inequity has been compounded by the legislated stage three tax cuts that don’t come into effect until 2024 but favour high-income earners and are estimated will cost about $250 billion a year.
And we need to collect more tax:
The place to begin is to ditch the notion that the Coalition fostered for many years, namely that tax reform is about lower tax.
The reforms he proposes align with those advocated by independent analysts over many years. We can achieve a trifecta of good tax reform – a set of changes to collect more revenue, to collect it more fairly, and to collect it in a way that improves allocative efficiency.
The inequity of superannuation taxation
Much of the inequity in our tax system relates to superannuation. Our present arrangements go back to 1983, when the newly-elected Hawke government started to develop policies related to superannuation, recognizing that superannuation could supplement and in part substitute for the age pension. Since it established nearly universal superannuation, there has been a succession of changes, some to correct anomalies, and many to consolidate political support among older Australians, who have been the Coalition’s electoral base.
The most generous concessions, essentially removing all taxation in the retirement phase of superannuation, were introduced by the Coalition in 2007. As a result many older Australians, retired or nearing retirement, have amassed substantial account balances.
To illustrate the inequity, someone with $1.7 million in their superannuation accounts could be earning $85 000 (assuming conservatively a 5 percent investment), tax-free, and another $19 000 outside superannuation, taking advantage of the tax-free threshold – in total a $104 000 tax-free income. Someone earning that same amount in the workforce would be paying $24 000 in tax.
So a couple living from superannuation income could enjoy a tax-free income of $208 000, around five times the age pension for a couple ($40 000).
Something is seriously wrong.
On last weekend’s Saturday Extra Geraldine Doogue interviewed Jeremy Cooper, former Chair of Retirement Income at Challenger Limited, about these superannuation anomalies: What's the purpose of the superannuation system? (14 minutes)
He explained the basic purpose of superannuation, which is about spreading our income over our lifetime. But it has also become a mechanism for building personal financial wealth, and because of the accumulation of concessions, it has become inequitable.
He notes, however, a public good aspect of these large balances. Historically Australia had a chronic deficit on current account, but since 2019 we have been running a current account surplus. In relation to the rest of the world we have become a net investor. That is a fortuitous by-product of people’s accumulation of large balances.
His tentative suggestion for reform is to limit the amount that can be held in a superannuation account to $5 million, with income from assets above that amount subject to normal rates of tax. At least that makes more sense than disallowing franking credits, which was the dopiest and least well thought-through idea Labor took to the 2019 election. But why $5 million: why allow any concession for income from superannuation balances?
Maybe older Australians would be less inclined to accumulate large balances if they had more confidence in our aged care system and in Medicare.
The novelty of taxation
All the above is about how taxation arrangements can be improved, but to some, the very idea of paying tax may be a novelty.