CIS’ tax concession defence falls flat

By Leith van Onselen

Robert Carling, senior fellow at the Centre for Independent Studies (CIS), has written a piece in The AFR today defending Australia’s world-beating tax concessions.

Let’s dissect Carling’s key arguments:

Tax concessions in areas such as superannuation, capital gains and GST are under attack like never before…

Campaigns for good tax reform are one thing, but the campaign against concessions lacks balance. Concessions contain elements of good policy as well as bad, and the challenge is to differentiate.

On this point, I agree with Carling. While Australia has some of the biggest tax concessions (expenditures) in the world (see next chart), some are worse than other and not all should be unwound.

ScreenHunter_1051 Jan. 30 17.39

Take, for example, the capital gains tax (CGT) exemptions on the family home, which are said to cost the Budget some $46 billion this year. Removing it would have the same deleterious impacts as stamp duty. It would discourage housing turnover and unnecessarily penalise people that move to homes that better suit their needs. Obvious examples include baby boomers downsizing from large family homes and young growing families upsizing to bigger family-friendly homes. In turn, such disincentives would encourage a less efficient use of the housing stock, such as empty nesters occupying large homes with multiple spare bedrooms. Applying a capital gains tax on one’s home would also hinder labour mobility, since it would discourage workers from relocating closer to employment.

Back to Carling:

The Henry tax review was at pains to explain that the principle of optimal taxation leads to savings income being taxed at lower rates than labour income (at least when tax on labour income is as high as it is). To do otherwise is to create a systemic bias against saving and investment. The review argued that the tax treatment of superannuation should be assessed against an expenditure (consumption) tax benchmark, under which super fund earnings and contributions (but not end-benefits) would be tax-free…

The consumption tax benchmark seriously undermines, if not destroys, much of the campaign against tax concessions. Many of these concessions are not unjustifiable loopholes at all but a route to more efficient taxation. For example, scrapping the 50 per cent capital gains discount – the most unfairly maligned of all concessions –would score an economic policy own-goal, damaging investment while raising little if any extra revenue.

…negative gearing… [is] not officially classified as tax expenditures. That should not exempt them from scrutiny, but they exist in the tax structure for good reasons.

Here, Carling has mentioned arguably three of the most inequitable and distorting tax concessions of them all: superannuation; the 50% CGT concession on investments held for more than one year; and negative gearing. That he can claim that these are based on sound tax and economic principles, and are a “route to more efficient taxation”, beggars belief.

Take the biggest concession, superannuation, which is estimated by Treasury to cost a total of $29,700 in revenue foregone (see below table), and estimated to raise $27,300 if the concession was eliminated. Superannuation concessions were also forecast in the December Mid-Year Economic and Fiscal Outlook to grow by a whopping 10.8% per annum between 2014-15 and 2017-18!

ScreenHunter_5849 Feb. 02 08.00

Critics of this type of Budget analysis, such as Robert Carling and 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 (i.e. C3 and C6 above).

They have a point: 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 fact is 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 $15 billion this year, rising to some $20 billion in 2017-18!

Carling also needs to explain why it is efficient and fair that the amount of superannuation 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 (see below table).

ScreenHunter_5484 Dec. 16 07.08

The draft report of the Murray Inquiry into Australia’s financial system agreed that the system makes little sense, noting that “the majority of superannuation tax concessions accrue to the top 20 per cent of income earners (Chart 4.3). These individuals are likely to have saved sufficiently for their retirement, even in the absence of compulsory superannuation or tax concessions”. 

ScreenHunter_3316 Jul. 15 13.21

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. They have increasingly become a mechanism for richer older people to avoid paying tax, rather than a genuine means for Australians to pay for their own retirement and avoid drawing on the Aged Pension.

As to Carling’s argument that the 50% CGT concession, and its partner in crime, negative gearing, “exist in the tax structure for good reasons” and to eliminate them “would score an economic policy own-goal, damaging investment while raising little if any extra revenue”, he needs to explain why it makes sense for tax policy to artificially juice housing demand:

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Without expanding supply:

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How have these policies facilitated productive investment, as opposed to simply channeling the nation’s capital into unproductive houses, raising housing costs in the process?

The Grattan Institute estimated that quarantining negative gearing losses, so that they can only be claimed against the same asset’s future earnings (rather than unrelated wage/salary income), would save the Budget around $2 billion a year in revenue foregone once lower capital gains tax receipts are taken into account.

It, therefore, makes perfect sense to unwind these concessions on budget, equity and efficiency grounds.

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Leith van Onselen
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  1. The removal of the reasonable benefits limits to super was the greatest rort ever introduced to the Australian parliament.

    It disguises huge tax cuts for the most well off.

    The middle income earners have taken the 30 pieces of silver to give tons of gold to the most well off.

    Asset and income means testing of all benefits and transfers needs to be reintroduced.

    Hockey totally avoided letting the Budget Audit Commission deal effectively with the tax concesions side of the budget. His approach was designed to screw the poor, the less intelligent, the marginally employed, the mentally ill. It was a patently unfair approach and underlined how the “budget crisis” were a totally confected story to justify the very worst, most unchristian class warfare.

  2. Liberals are in power + PM on shaky grounds. There will be NO changes that will impact the rich! I.e. NG, Super concession, etc.

    Possible changes
    -Cut on tax benefit for the low income earners.
    – No retirement till 80 years for gen Y onwards.

  3. “Applying a capital gains tax on one’s home would also hinder labour mobility, since it would discourage workers from relocating closer to employment.”

    This is a horseshit argument. If there is a problem with labour mobility, then it should be attacked with measures to help labour mobility, not via the back door with a tax concession that costs $46 billion per year.

    • great cartoon – the great boomer attitude of entitlement! Shift all that wealth into the family mansion and maintain eligibility for pension at all costs!!! YOU BEAUTY

  4. The reason that Treasury’s analysis is disappointing is that it does not address the issues raised by Carling and Keating. By failing to do so, it gives oxygen to their opinions. They can say, quite correctly, that Treasury’s analysis is incomplete, and by implication, what else has been left out? For example, while it is correct that concessions accrue to the higher end vs the lesser, it ignores the fact that someone starting out as Willy the mailboy, may end up as managing director, and so over his career, he is treated equitably. That does not change the thrust of the argument overall, but Treasury could have acknowledged it, but didn’t. It wouldn’t surprise me if these things added up to 20% or more.

    That gives opponents of change enough real ammunition to make a case. Indeed, in any event, why shouldn’t Treasury be expected to allow for these matters in the analysis? If they ignore this sort of detail in the normal course of their work, no wonder their estimates stink consistently.

    • “It wouldn’t surprise me if these things added up to 20% or more. ”

      20% of mailboys end up as CEOs? Or what does the 20% refer to?

      • The 20% refers to the order of error that Treasury serves up, time and again.

        Knowing that a particular factor is important, but omitting it from the calculation is deceptive and misleading.

        The fact that people do move up during their careers should be good enough for inclusion in analysis. Even if it is just to prove thoroughness and silence critics should it turn out to not be material.

  5. At the end of the day it all makes little difference.
    As an exersice I calculated my tax liability via the Netherlands tax system to compare with Australia.
    The result was about the same for each country.
    I included all taxes, direct and indirect plus council rates and the like.
    Note in the Netherlands GST is 21.5 % there is no CGT, there is an overall wealth tax of around 1.4% on nett assests. Even an imputed rent is counted if you own your own home. Holland has no natural resources it even had to import basalt rocks to shore up the dykes!

    • It must have had natural resources in the past – otherwise there would be no such phrase as “Dutch Disease”.

      • Namely large gas reserves. That is where the origin of the phrase came from. Today gas is purchased from Russia.
        They have lots of clay and I am not even sure where crushed rock comes from to make concrete. Any way the point is the budget receives no income like Australia from natural resources.
        Further and I must check this but it appears taxes are raised if required when the budget is handed down like what our local Councils do to balance the books.