The payroll tax that dare not speak its name

Milton Friedman's celebrated put-down of American "Social Security" [Barron's, Aug.24, 1998] is mostly applicable to Australia's Superannuation Guarantee (SG),

http://www.hoover.org/publications/hoover-digest/article/6459.

In Friedman's redacted words, the SG is "...a combination of two separate programs, neither of which would have a chance of being enacted on its own. One program is... a flat-rate tax on wages..., a regressive tax imposed at one of the worst places in the economic structure, where it introduces a gap between what the worker receives and what it costs the employer. ...The second component is a... program in which the largest subsidies go to the people who have earned the highest incomes. Yet when you tie the two together you have a sacred cow. I have always said it is one of the greatest marketing miracles..."

Defenders of the SG will triumphantly retort that it isn't a tax, because it isn't payable to any government; it's a compulsory transfer of income from employers to super funds on behalf of workers.

But the key word is "compulsory." That a compulsory transfer doesn't pass through the government's hands doesn't make it any less offensive to liberty, property or economic efficiency, but merely takes it "off-budget," enabling the government to pretend that its economic footprint is smaller than it really is.

In all other respects, Australia's federally mandated, employer-funded 9% superannuation contribution is equivalent to a federally-funded 9% contribution paid for by a 9% federal payroll tax. At least the Americans are honest enough to call their tax a tax.

In as much as the SG is equivalent to a tax-and-transfer program, it defeats its own purpose, namely to reduce public expenditure on social security. Indeed, the effective payroll tax already raises slightly more revenue than the GST, and about twice as much as is needed to pay for the current age pension!

Worse, the effective payroll tax applies to Australian labour embodied in goods and services exported from Australia or competing with imports, but not to foreign labour embodied in goods and services imported into Australia or competing with Australian exports.

Thus it is a tax on Australian jobs, Australian products and Australian competitiveness, hence a tax on Australians' capacity to save for their retirements!

Moreover, because the tax feeds into prices, it is partly paid by the retirees who were meant to benefit from it; that is, it leads to churning.

The mining industry, which is not labour-intensive relative to the value of its output, can probably afford this de-facto tax on its payrolls. The same can't be said for other trade-exposed industries, especially when the high dollar (due in part to the rude health of mining) is damaging their competitiveness - a problem mentioned five times in Wayne Swan's budget speech.

The GST, of course, also feeds into prices. But because it taxes goods and services in the country of consumption rather than the country of production, it doesn't discriminate against Australian products as the SG does.