Tax expenditures often deliver more to people who earn more, especially in relation to superannuation. Photo: Jessica Hromas
Both Daryl Dixon and Michael Bannon (Asset Check and Tax Word respectively, February 10, p23) have raised important issues in connection with the taxation of superannuation and the amount of government support that superannuation funds, contributors and retirees receive through the tax system.
Tax expenditures are at the heart of this discussion.
As Treasury puts it: ''A tax expenditure is a provision of the tax law that provides a benefit to a specified activity or class of taxpayer that is concessional when compared to the 'standard' tax treatment that would apply.'' The value of the tax expenditure is the amount of revenue the government forgoes by, for example, not taxing the activity.
Treasury estimates that the tax expenditures that it can quantify resulted in forgone revenue of $111 billion in 2011-12. By comparison, direct government expenditure was $377 billion.
Treasury releases the tax expenditure information in the hope that this disguised spending can receive the level of scrutiny that direct spending receives.
A simple example may help. Let's say I earn a net $100 a day from my professional writing activities and it is taxed at 30 per cent. So I pay $30 tax and have after-tax income of $70 a day. The government decides in its wisdom that the income of freelance journalists and bloggers should be exempt from tax. So I now receive $100 a day before and after tax, a benefit to me of $30. It is as if the government had taxed my $100 income at the normal rate of 30 per cent and then given me $30 a day to encourage me in my writing.
If the government supported my activity with a direct grant of $30 a day, that spending would be monitored closely to ensure it was meeting its objectives and was within budget. That doesn't happen with tax expenditures. Take for example the sum total of tax expenditures going to superannuation - the low tax on contributions, the low tax on fund earnings and the non-taxation of withdrawals by retirees aged over 60.
These concessions were ostensibly introduced, along with compulsory superannuation, to tackle the problem of the ageing of the Australian population and encourage - or force - people to take up superannuation, thus saving the government money it would otherwise have to spend on the age pension.
The problem is that the amount of revenue forgone from the superannuation tax concessions is now $32 billion and will rise, based on Treasury predictions, to nearly $45 billion in 2015-16, more than will be spent on the age pension. Spending on the age pension is about $34 billion. If the idea of the superannuation concessions is to save the government from spending on the age pension, then it may be working but all it has done is shift the focus of spending to often well-off retirees.
That is the other problem with many tax expenditures - they deliver greater benefits the more income you earn. Back to the example of the $100 I earn as a freelance journalist. If my tax rate is 30 per cent, then not taxing that income gives me an effective grant through the tax system of $30. If, however, my tax rate is 60 per cent because I am a high-income earner, then not taxing that income gives me an effective grant through the tax system of $60. The more income I earn, the higher my tax rate and the greater benefit to me of tax expenditures.
That is the case too with superannuation. Treasury has estimated that the top 5 per cent of income earners (roughly those earning more than $150,000 a year) receive 37 per cent of the super tax concessions (more than $10 billion). Nice work if you can get it.
Treasury analysis shows that very high-income earners receive $520,000 in superannuation tax concessions while the average male retiree receives about $270,000 in the form of age pension payments and tax concessions.
Those shouting that touching the superannuation tax rorts is class war have got the wrong end of the stick. The concessions going disproportionately to the rich are the result of the one-sided class war the rich have waged successfully against the rest of us since the 1980s. The shift in wealth from us to them has been very large, and the superannuation tax concessions are but one example of this.
Much of this apoplexy about class war - I wish - was prompted by rumours that the government was considering taxing payouts from superannuation balances greater than $800,000 or $1 million (since quashed by Julia Gillard). Yet only 3 per cent of superannuants have balances greater than $1 million. The average balance for male workers aged 55 to 59 is $240,000 and for female workers in the same age group it is $125,000.
Daryl Dixon and others have pointed out that if we were to reduce or abolish the superannuation tax concessions then the lurk and perk men (they are almost invariably men) would move their money elsewhere, for example into negatively geared rental property. That's an argument for attacking all tax rorts, including negative gearing, not to let the rich get away with tax blue murder.
It's time to end the super tax rorts for the rich.
John Passant is a PhD student at the Australian National University and a former assistant commissioner of taxation. He blogs at enpassant.com.au.
