Matt Cowgill has today published a ripper article in The Guardian decrying the huge amount of tax concessions lavished on wealthy Australians, which are highly inequitable and cost the Budget billions of dollars in foregone revenue:
We do a lot of spending through the tax code. Treasury estimates that all the concessions and deductions in the tax system are worth $115 billion this year, around 7.5% of GDP… much of the spending through the tax code is poorly designed – it distorts the economy and increases inequality…
While we don’t have much middle-class welfare in Australia in the form of direct payments to people, tax expenditures are another story… The tax concessions for superannuation contributions come to mind.
If you earn $40,000 a year, you pay 20.5 cents in tax on the last dollar you earn (including the Medicare levy). If that dollar goes into your superannuation fund instead, you pay 15c. This means you receive a tax concession of 5.5 percentage points. A typical full-time worker on $60,000 a year gets a concession of 19 percentage points, while a high income earner gets a whopping 31.5 points.
This isn’t middle-class welfare, it’s upper-class welfare.
The concession on super contributions cost the budget around $13bn this financial year. Nearly a third of the concession goes to the top 10% of income earners – the top 1% gets over 5% of the tax expenditure on super contributions. The concession distorts behaviour and increases inequality.
…it’s hard to understand the logic of a system that taxes your normal income in a progressive way, so the richest pay more, while taxing super at a flat rate. The Henry tax review agreed…
The government has taken two steps in this direction, by refunding the tax paid on super by low-income earners, and announcing plans to reduce the concession for people who earn over $300,000 a year. But Tony Abbott has pledged to scrap the refund for low-income earners, while the concession reduction for the richest hasn’t yet been legislated.
If politicians want to tackle “the age of entitlement“, they should start with regressive tax expenditures. Paring back the worst excesses in the tax code could reduce the deficit, improve inequality, and make the tax system more efficient. Yet whenever talk turns to trimming tax concessions, commentators cry “class war”.
Bravo. I couldn’t agree with Matt more. The current design of Australia’s superannuation system is a joke, with the lion’s share of tax concessions – a direct hit on the Budget – targeting higher income earners, whilst lower income earners receive little benefit (at least under Tony Abbott’s plan). Yet it is the lower end of the tax scale that are most likely to be reliant on the pension in old age. As such, we have a super system that costs the Budget a fortune – via huge concessions to upper income earners – whilst doing little to relieve the strain on the aged pension, since those most likely to require the pension in old age receive only a tiny share of the superannuation concessions.
As argued previously, a fairer and less costlier approach would be to axe the flat 15% tax on superannuation contributions in favour of a flat 15% concession. This offers the benefits of: 1) providing all taxpayers with the same taxation concession; 2) boosting lower income earners’ super savings and thus reducing reliance on the aged pension; and 3) reducing costs to the budget.
But let’s not kid ourselves. Superannuation is only one areas where tax concessions favour upper income earners. Another is negative gearing of investments, which like most tax concessions provides bigger tax benefits the further one moves up the income tax scale.
According to the latest Australian Taxation Office Statistics, the prevalance of property investment increases significantly as we move up the income scale as do average rental losses on negatively geared properties (see below charts). Therefore, a typical property investor on the highest marginal tax rate not only is claiming bigger rental losses, but they also receive a bigger tax benefit than an investor lower down the tax scale.
Given that negative gearing does nothing to boost the overall supply of housing (since the overwhelming majority of investors purchase pre-existing housing) and therefore does not boost rental affordability or availability (since it simply substitutes homes for sale into homes for let), whilst also making homes less affordable (via increased investor demand), one wonders why the government persists with such an inequitable, distorting, and fiscally expensive policy?
In this regard, it is difficult not to agree with Matt Cowgill’s conclusion:
It’s enough to make a cynic suspect that all the criticism of “middle-class welfare” is just hollow rhetoric designed to mask an assault on social security for the poor.
Anyone truly concerned about needless spending on middle and upper-income households needs to take a hard look at spending through the tax code.
