Here we go again – another budget, another raid on the superannuation honey-pot. The present government has made a mockery of stability and predictability in the superannuation tax system as its nefarious gaze shifts back and forth from contributions caps to contributions tax to benefits tax and now, it is rumoured, to the tax on super fund earnings. This farce is steadily destroying confidence in saving for retirement. Even people who are not affected by the last change are left wondering what will come next.
Let’s be clear: tax concessions for superannuation are not welfare.
The case for taxing savings income more lightly than other income has been made by none other than the Henry tax review. As the review said, ‘The essential reason for treating lifetime, long-term savings more favourably is that income taxation creates a bias against savings, particularly long-term savings.’ There, in a nutshell, is the case for superannuation tax concessions. On this view, such concessions are not even incentives, let alone welfare; they are necessary to remove a disincentive.
None of this denies that concessions can be taken too far. The Henry review thought they were excessive in some respects, and had its own proposals for change, which were duly ignored by the government that initiated the review. But any suggestion that the benchmark should be full taxation of superannuation like other income, and that any concession at all relative to full tax rates is a ‘handout’ or ‘welfare’, should be rejected.
Many experts say the optimal way of taxing superannuation is to exempt both contributions and earnings, and then tax withdrawals at full marginal rates. This is the so-called ‘E,E,T’ system. Australia has never had a system in exactly that form, but approximated it from the late 1980s with the ’15,15,15’ scheme, under which contributions and fund earnings were taxed at 15 per cent and withdrawals were taxed at full marginal rates subject to a 15 per cent rebate to recognise the tax paid on contributions and earnings. This cumbersome variant on the ‘E,E,T’ model was designed to bring forward tax revenue, and in that sense was one of the first tax raids on superannuation.
The ‘15,15,15’ scheme was disturbed by the Howard government’s 15 per cent contributions tax surcharge in 1996 (subsequently abolished and then reimposed in a different form by the Gillard government in 2012), and the change to tax-free withdrawals from age 60 in 2007. As a result of the latter, arguably for most participants the system is now more concessional than the ‘E,E,T’ benchmark.
There lies the kernel of the case the government could make for further change. However, the present government’s Chinese-water-torture approach to reform comes at the cost of undermining confidence in the stability of the superannuation system, brings back some of the complexity that the Howard government reforms swept away in 2007, and raises little additional revenue because the government fears the electoral consequences of across-the-board tightening. The rumoured increase in earnings tax subject to a high threshold, for example, would be an administrative nightmare for super funds and would raise precious little revenue. It appears to be the latest in a series of envy-based symbolic hits to the rich rather than a serious attempt at reform.
Many commentators like to claim that Treasury’s tax expenditure statement shows a massive, growing and unsustainable cost of super tax concessions. This is a red herring. The figure of $45 billion in 2015-16, as Treasury itself says, is not the potential revenue gain from removing the concessions, but the benefit to taxpayers. The potential gain to revenue – which takes into account the behavioural response of taxpayers – is much smaller. In any case, all such estimates are made relative to a full income tax benchmark, which for the reasons explained above is not the appropriate benchmark. In contrast to rubbery estimates of the cost of super tax concessions (which Treasury itself describes as being of ‘medium’ or ‘low’ reliability), the reality is that the government already rakes in more than $8 billion a year from superannuation taxes, and the Treasury projects this to grow by a whopping 58 per cent to $13 billion by 2015-16, making it the fastest growing item of revenue, even without any further tax raids.
Ideally Australia would have a ‘E,E,T’ system as many other countries do. The transition from here to there, even if any government wanted to make it, would be exceedingly complex. We are probably stuck with an imperfect system. But the costs of further tinkering with the current system most likely exceed any benefits. The government must accept that people have responded to the incentive structure in place for many years and should not now be disadvantaged by a new incentive structure applied to past contributions. It should respect the importance of stability and predictability of the tax regime under the rule of law. And it should stop treating superannuation as a target for ad hoc raids to fund its pet programmes.