Fairfax’s Peter Martin is on point this morning urging the Abbott Government to plug the Budget deficit by unwinding Australia’s overly generous and highly inequitable superannuation concessions:
…as Hockey puts it, “the government is spending $100 million more than it collects every day. It has to borrow that $100 million per day just to pay its bills”…
He can’t hack into it by slashing spending on education and health…
Nor can he do it by further trimming the public service…
The really big dollars have to be found where the government hands out money and where the government forgoes money by handing out tax concessions. The really big dollars are in superannuation…
The easiest concession to axe would be the one on contributions… No one’s take-home pay would be cut… Hockey would have made billions (a fair proportion of the Medicare budget) without ripping anything much out of the economy…
The Mid-Year Economic and Fiscal Outlook (MYEFO), released in December, forecast that 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 – would 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, were 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! That’s commensurate with the cost of Medicare (currently $20 billion).
An even worse aspect of superannuation concessions are that they are skewed overwhelmingly towards high income earners. As noted by former Liberal leader, John Hewson, in December:
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.
Alan Jones put it best when he said the following on Q&A last week:
The notion that someone like me should be getting concessions – I pay 48 cents in the dollar tax but if I put my super in, I pay 15. I get a 33 cents in the dollar concession. Superannuation concessions are costing the Government $49 billion a year. If someone is in a $3 million home with $100,000 in the bank they get the full aged pension. Now, someone along the line has got to say, look, in an ideal world, that would be terrific, but we ain’t in an ideal world.
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.
Peter Martin believes that Treasurer Joe Hockey will announce reforms to superannuation concessions on Budget night. Let’s hope he is correct.
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