The Mid-Year Economic and Fiscal Outlook (MYEFO), released yesterday, contained the below table showing the cost of Australia’s largest tax expenditures, the biggest of which are Australia’s superannuation concessions:
As you can see, the concessional taxation of superannuation entity earnings – whereby earnings within super funds are taxed at just 15% before the age of 60 and 0% afterwards – is forecast by the Treasury to cost the Budget a whopping $18,450 million in 2015-15, increasing to $26,950 million by 2017-18.
Similarly, the concessional taxation of employer superannuation contributions, whereby super contributions are taxed at 15% rather than at the employees marginal tax rate, is forecast to cost the Budget $17,800 in 2015-15, increasing to $22,300 million by 2017-18.
Charts showing the dollar cost of theses concessions, as well as their annual percentage growth, are provided below.
As you can see, the cost of the concessional taxation of superannuation earnings is forecast to grow by 13.5% per annum between 2014-15 and 2017-18, whereas the cost of the concessional taxation of employer super contributions is forecast to grow by 7.8% per annum over the same period.
This is why most Budget commentators claim that superannuation already costs almost as much as the Aged Pension, and is growing much faster, making it an increasingly large drain on Budget receipts.
Critics of this type of Budget analysis, such as Paul Keating, argue that Treasury’s tax expenditures measurement is wrong, and that it is incorrect to simply add the costs of the two types of super tax concessions together.
It is true that the actual level of revenue gained if superannuation concessions were axed would be lower than the figures stated above, since people would change their behaviour and likely shift their funds to other tax advantaged investments (such as negatively geared property). It is also incorrect to merely add the two types of costs together, because if employer contributions were taxed more heavily then there would be less in the super funds to create earnings that would be taxed.
However, these complexities of measurement are besides the point. The point is that superannuation concessions are costing the Budget many billions of dollars of revenue foregone. They are also growing rapidly. Even if their true cost is half the amount forecast by Treasury above, their cost to the Budget would still be a ginormous $25 billion by 2017-18!
Even worse, these superannuation concessions are skewed towards high income earners. As noted by former Liberal leader, John Hewson, yesterday:
Those at the bottom of the income scales actually have to pay to get a superannuation benefit, while those at the top enjoy almost obscene benefits. For example, somebody earning $20,000 has to pay about $118 to get a $100 benefit, while somebody earning $250,000 pays only about $62.50.
The reason for this inequity is the way in which superannuation concessions are distributed via the 15% flat tax. As shown below, under this flat tax system, the amount of tax concession received grows as one moves up the income tax scale. For example, a very low income earner earning up to $18,200 effectively pays 15% for their superannuation concession, whereas a high income earner earning $300,000 enjoys a 30% tax benefit.
The bottom line is that superannuation concessions in their current form are both highly inequitable and inefficient, costing the Federal Budget many billions in foregone revenue whilst reducing the progressiveness of the tax system. Any attempt at Budget reform, therefore, must place superannuation concessions front-and-centre.