Super Hoax

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The Australian Treasury is short of cash and looking for some more income. There is a fairly large amount of money is superannuation savings accounts, and contributions mean it keeps growing, so it was inevitable that this pot would eventually come to their attention.

This is basically a wedge issue. Swan said in the presser on Friday that the legislation would probably not be passed before the election (after subtracting estimates, the Senate has only ~10 sitting days left before the election, and the House ~17 days).

So why do it? So they can spend the money. There are other savings measures from MYEFO that have not been passed and are unlikely to be (but they have spent the money), so this is not new. The ‘saving’, will, however, be included in the Pre-Election Fiscal Outlook (the PEFO), and you can bet that the ALP will spend the money.

The idea is to give the Conservatives less money to spend (if they object to the bills) or to make them sign up to something that is anathema to their base.

Anyhow, so is this a good idea? Probably not. Apart from that fact that the tax is basically retrospective (taxing contributions, as the conservatives previously did to raise cash does not alter the retirement plans of the invested — taxing earnings does), it is also bad economics.

Most economists agree that taxing capital is not just bad policy, but also impossible.

There is a great summary blog post on this topic here. The bottom line is at the top:

The standard “classic” result in this field is, in fact, that an optimal system would have no taxation of investment income.

So what’s the beef?

Under standard, pretty flexible assumptions, it’s impossible to tax capitalists, give the money to workers, and raise the total long-run income of workers.

So who ultimately pays the tax? Workers do via lower real wages.

If you tax capital income and hand all of the tax revenue to workers, then in the long run (or the “steady state”) you’ll wind up with a smaller capital stock. And since workers use the capital stock to earn their wages, the capital tax pushes down their wages

[There is an excel sheet on the blog you might play with]


  1. If you can’t win the upcoming election, then make sure you will win the next one. And they will.

    My perfect taxation system? A flat tax rate on all personal income, no matter how achieved (investment / labor / housing / shares / interests / capital gain / rents / etc), same rate for companies, no discounts EVER for anything, not even super or residence. All expenses that are occurring to generate income are deductible (even mortgage expenses on your own house). That’s it. The only change I may do is tax free up to a certain amount. One thing is sure. Australian superannuation is a mess!

    1. Pretty unlikely to make a one term opposition. Most governments get a second shot, at least. Why are you so sure it will be different if the conservatives win?

      1. It will go in the same way as it is going in QLD. Conservatives are coming in at the end of the mining boom, and they plan to cut expenses, balance the budget, when the economy will be at one of its weakest point (2014). The whole world is moving to the left anyway, times are hard and debt must be repaid, and liberalism and capitalism have been hit significantly after the GFC. Conservatives will NOT resist “the urge to purge the Australian economy”, as Paul Krugman wrote. One more thing :) conservatives do appeal to baby boomers and they are on their way out.

    2. I agree. I reckon there’s a fair chance that an Abbott Coalition will be like Baillieu in Victoria. That is, weak, listless and convictionless. Abbott believes in balanced budgets (one day), reduced taxes (no carbon tax, no mining tax), maintaining carbon tax compo and tax cuts, no changes to super to improve sustainability, a very generous maternity leave scheme via a tax on big business, and removing rather sensible means tests to middle class welfare like private health insurance rebates. On top of that, I don’t see much courage from Abbott to make deep cuts to the budget – he’s tied himself in knots recently avoiding saying anything that could reasonably be seen to be offensive to anyone.

      That’s a very inconsistent mix to be taking to the electorate. He can’t possibly deliver it all. If that turns out to be the case, the public will be very disappointed in Abbott that he hasn’t lived up to expectations. I think a single term is not out of the question.

      1. Isn’t is just a case of not saying anything while your opponent is punching himself in the face? The Australian public don’t expect policies and don’t think in terms of mandates. For better or worse Australian elections are about ‘values’ and ‘trust’. Abbot will say ‘ohh my goodness, what a mess they left’ when elected and then he has a year to remake policy and redefine himself. If he mucks that up, Turnbull leads to 2016 and they are returned on a smaller majority. Pretty much everyone gets two goes.

      2. I think Baillieu was a bit different because the Victorian Coalition had little expectation of winning in 2010. Abbott and co are getting plenty of time to prepare.

        Abbott is not promising to retain carbon tax compo or tax cuts, although it would suit him that people assume he will. The fact is that with the European carbon price (which will set our carbon price from 1 July 2015) at 4 Euro and the mining tax raising two-tenths of stuff-all, Labor would have to find savings themselves if they won.

        The PHI rebate means-test is one of my pet peeves. It was accompanied by the Medicare surcharge on taxable incomes over $50k, which many people ignore. Get rid of the rebate by all means, but then get rid of the surcharge as well and let people make undistorted decisions.

        I agree with Ricardo that at this point, Abbott is trying to not to say too much,lest he create the basis for a bigger scare campaign. Having seen the easy ride Rudd got from the media in 2007, Abbott’s easy ride doesn’t surprise me at all, nor does it strike me as particularly unfair.

  2. I’d vote ALP just on the basis that I want the NBN now and apparently coalition want to scale it down. If there is one infrastructure project that we need now is the NBN. I’d put all the money we are making from mining on that project.

  3. Great post; now it makes sense why they are doing it. Totally agree with the inefficiency – and inequity – of taxing capital income (and I don’t have even close to seven figures in my super).

    1. The thing is, anyone can make 100k by being lucky. It’s not a ‘balance’ based tax, it is an earnings based tax. The 2m just drops out of their 5% return assumption. Also, while few have enough super to make 100k now, over time many more will — and as wages grow faster than CPI the indexation of the 100k won’t stop serious bracket creep.

      Anyhow, this is why Treasury is so keen on the change — it gives them some ‘bracket creep’ back. They lost a lot of it when Costello / Rudd cut rates and flattened income tax in 07/8.

  4. This is not what I would have expected. It is pretty poor.

    I have written about Super and it easy to discuss how it should be taxed.

    does this measure make it better overall. I think it does as it improves equity somewhat.

    Now if the got rid of all taxes on Super and aligned benefits with income tax it would be easier, simpler and more equitable.

    1. +1, the bigger super benefits are now for those who do not need them, and are paid for by younger generations who will not be able to have the same benefits when they’ll retire. Just wait to see how the coalition will make super even more inequal.

      1. I don’t get it … It is a defined contribution privately funded (well, at the top it is) system, so there are no direct equity implications from the first round effects. The broader impact comes from the ultimate incidence of the tax (the govt must tax to spend) and there the research i linked to shows that the tax just ends up on the ‘workers’ in any case, via lower real wages.

        1. Why are we all paying the same 15% concessional tax on our super contributions, no matter what our income is?
          Why are you allowed to put 450k into super and then have all super earnings tax free just a few years before retirement (like selling your home tax free and then put all the money into super)?
          Are we able to keep this system going for the next 100 years so that all generations will enjoy the same benefits or do we already know it is not sustainable and young generations are subsidizing generations that did not save enough?

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