A number of political and economic commentators have been urging the government to rigorously scrutinise the appropriateness of taxation expenditures in the pursuit of a more balanced budget. In particular focus has been on the two superannuation concessions — the 15% taxation on employer contributions and the 15% taxation of superannuation entity earnings. The figures are indeed staggering: $127 billion over 2013-2017 or more than $30 billion in 2014-15.
Firstly we need to be reminded that the benchmark against which the estimate of tax expenditures is measured is the existing progressive tax scale. The figure is large because the top marginal tax rate is 45% (plus the 2% Medicare levy). If the top marginal tax rate were increased to, say, 60%, the figure would be even more staggering, leading to stronger protests of unfairness. That would be perverse.
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Some may argue that the current progressive tax scheme reflects society’s view about how income should be redistributed from the highly paid to the lower paid, so any concessions are appropriately measured against that benchmark. That has some validity, but I consider that it is better to examine against a “policy neutral” benchmark. If we removed the effects of the progressive tax scale, we would see that it represents a tax transfer of around $25 billion per year from those earning $80,000 or more to those earning less. Almost two-thirds of that transfer goes to those earning between $6000 and $37,000.
An interesting observation is that we have introduced a progressive tax scheme to redistribute wealth, and then negated the effect, and more, by providing concessions for superannuation. That can’t be good public policy.
The average taxation rate in Australia is around 20%. That means that a single tax rate of 20% would generate the same amount of revenue as our current progressive scheme. I am not advocating a single flat rate of tax, but I think it is a more appropriate benchmark.
When the average tax rate is 20%, how can a superannuation concessional rate of 15% be justified? It is clear that the superannuation concessions are highly regressive.
Some commentators propose eliminating all these concessions to reap the boost to revenue of around $30 billion per annum. This is not realistic in the short term because of the upheaval it would create in the broader economy let alone the superannuation industry. However, one doesn’t need a review to know that the concessional rate should be raised from 15% to 20%. No doubt the superannuation industry would not be happy, but would be hard-pressed to defend their cause.
Of course this move would damage the position of workers with incomes below $37,000, where their marginal tax rate is 19% and they get little benefit from the superannuation concession on their employer contributions. Therefore I would propose to reduce the concessional rate of employer contributions to 10% for those with incomes under $37,000. This would significantly advantage these lower paid workers and increase their support for the superannuation guarantee. Any problems with implementing differential concession based on taxable income would, in my view, be surmountable.
Such a reform would increase taxation revenue significantly. It is impossible to accurately estimate the increase based on currently published information; however, one would expect it to be more than $5 billion per annum. When the government is looking to rebalance the budget, ignoring an option that is economically responsible, unarguably fairer than the current system and makes a large contribution to repairing the budget is unconscionable.
There may well be a case for further reform of the superannuation concessions — but that would involve consideration of the role superannuation has in our economy. However, increasing the concessional tax rate to the average rate is a no-brainer and a good start.
Disclosure: The author is a beneficiary of both superannuation concessions and would be adversely affected financially if the recommended option were adopted.
*The author is a senior public servant with extensive experience in a number of economic portfolios, including Finance and relevant post-graduate qualifications.