ga('send', 'pageview');
John Passant

Site menu:

February 2013



RSS Oz House



Subscribe to us

Get new blog posts delivered to your inbox.


Site search


My interview Razor Sharp 18 February
Me interviewed by Sharon Firebrace on Razor Sharp on Tuesday 18 February. (0)

My interview Razor Sharp 11 February 2014
Me interviewed by Sharon Firebrace on Razor Sharp this morning. The Royal Commission, car industry and age of entitlement get a lot of the coverage. (0)

Razor Sharp 4 February 2014
Me on 4 February 2014 on Razor Sharp with Sharon Firebrace. (0)

Time for a House Un-Australian Activities Committee?
Tony Abbott thinks the Australian Broadcasting Corporation is Un-Australian. I am looking forward to his government setting up the House Un-Australian Activities Committee. (1)

Make Gina Rinehart work for her dole

Sick kids and paying upfront


Save Medicare

Demonstrate in defence of Medicare at Sydney Town Hall 1 pm Saturday 4 January (0)

Me on Razor Sharp this morning
Me interviewed by Sharon Firebrace this morning for Razor Sharp. It happens every Tuesday. (0)

I am not surprised
I think we are being unfair to this Abbott ‘no surprises’ Government. I am not surprised. (0)

Send Barnaby to Indonesia
It is a pity that Barnaby Joyce, a man of tact, diplomacy, nuance and subtlety, isn’t going to Indonesia to fix things up. I know I am disappointed that Barnaby is missing out on this great opportunity, and I am sure the Indonesians feel the same way. [Sarcasm alert.] (0)



Superannuation for the rich?

There has been a bit of talk that the Gillard government may reduce the superannuation concessions going to the rich. One rumour doing the rounds is that all those with a super balance greater than $800,000 would lose the over 60s tax exemption on their retirement income.

The Australian Institute has produced figures which show that the top 5% of income earners currently receive $10 billion of the $30 billion in tax benefits given by the concessional tax treatment of superannuation. They say:

‘When in government the Coalition turned superannuation into a rort for the rich. The forward estimates show super tax concessions will be worth $45 billion in 2015-16. 37 per cent of that goes to the top five per cent of taxpayers’ said David Richardson, senior fellow at The Australia Institute.

‘Someone on $250,000 receives a tax concession worth $6,750 on their contributions alone. That compares with low income earners who get a rebate of up to $500 which the Coalition wants to scrap’ said Mr Richardson.

‘If the Coalition wants to find savings they should be looking at the subsidies going to the top end of town—not assistance for the 3.5 million low income earners who are likely to struggle in their retirement’ said Mr Richardson.

So what is going on?

Let me explain tax expenditure theory to help readers understand what I am talking about. I’ll use a simple self-indulgent example. Let’s assume there are 100 people in our economy, Utopia. There are three tax rates – 30% on all income up to and including $100 per day and 60% for all income above that up to $200 a day. After that the rate is 90%. Everyone in Utopia earns $100 a day, so all 100 of us pay $30 tax a day and so earn $70 a day after tax.

Now the government in its infinite wisdom decides that anyone whose name at birth was John Passant should be exempt from tax. There is only one John Passant. This means JP’s after tax income is the same as his pre-tax income – $100 a day.

It is effectively the same as him being taxed just like everyone else and the government giving JP a grant of $30. That is the essence of tax expenditure theory – that tax concessions are deviations from a benchmark tax system and are effectively just like grants to the beneficiaries equivalent to the revenue forgone.

The Utopian Government did this because they realise the one John Passant in their population is hard working, industrious, creative, intelligent, good looking, witty… Oh, back to the story. The Government wants to attract more John Passants to Utopia because they want more hardworking people in the economy and they think the tax exemption will do that.

And it does. At first it is just one other John Passant, from the UK. Now UK John Passant earns $200 a day, double what everyone else earns. So Aussie JP gets a tax benefit or disguised grant of $30 a day, while the tax benefit of the exemption for UK JP is $30 plus $60, ie $90 all up.

Notice something here? The higher the income, the bigger the benefit. This is called the upside down effect and is a common problem with many tax expenditures.

But soon the many John Passants of the world hear about the exemption, and they flock to Utopia. The population grows from 100 to 150, and the extra 50 are all John Passants from around the globe so they all get the concession.

One of them earns $300 a day. Because he qualifies for the exemption his effective tax benefit is $30, plus $60, plus $90, ie $180. This is 6 times Aussie JP’s tax benefit. Yet his salary is only 3 times bigger. In any event, shouldn’t it be the other way round, with the bigger benefit going to the lower paid and the well paid getting a low or no benefit?

Imagine a government going to an election promising to spend more on the rich than on the poor. Evidently they can do that if it is disguised as a tax expenditure program.

The other good thing from the point of view of the recipients and governments is that disguised spending programs never face the same sort of slash and burn savagery often meted out to spending programs on the poor.

Back to Utopia. The Utopian Tax Office – Michael D’Abenzo – administers the spending program rather than a spending department. A conservative estimate is that is is now costing the revenue $2000 a day, which given that the economy before the upsurge in John Passants coming was only $10,000 a day represents a sizeable part of the Budget.

And of course these new arrivals, the other 50 John Passants, want basic services like roads, public transport, health and education facilities. Yet they aren’t contributing to the coffers to pay for these benefits.

The Government is considering cutting back on some of its programs because it doesn’t have the money to fund them. There will be less teachers, nurses, road repairers than budgeted for to be employed. But they need and will employ more tax officers.

Michael D’Abenzo, the Utopian Tax Office (UTO), cannot cope on his own. Things are so busy he has had to give up his other job as head of the Guinness Appreciation Society and go full time as the UTO.

But he is overworked. He is monitoring the exception to make sure no one pretending to be John Passant gets the benefit.

He has also had to deal with a number of ruling requests on the law. Jean Passant from France and Jean-Luc Passant from Switzerland have received rulings granting them the exemption. Jan Passant from Luxembourg was ruled not to be exempt and he has appealed to Utopia’s Court.

More tax cases are expected and Barfield Garwick, also the town rat catcher and sewer sweeper, is already stretched to the limit.

The Government has mooted cutting back the exemption but given there are now 51 John Passants in a population of 150 on Utopia, and they all vote, the electoral consequences would be disastrous for a Laborious Party Government already on the nose.

Surely suckling on the teat of government wouldn’t influence voting? Well, since writing this Julia Gillard has ruled out taxing the superannuation payments of the rich over 60s.

So what happens with the taxation, or not, of superannuation in Australia? When money goes into a super fund it is lightly taxed. When the fund earns income it is lightly taxed. And when the money is paid to the superannuant, in the main it is exempt if the recipeint is over 60.

These concessional tax arrangements mean a lot of tax that might otherwise be collected is forgone. Every year the Treasury releases its Tax Expenditure Statement. This year’s one, Tax Expenditures Statement 2012, was released a week ago. The overall revenue forgone from all Commonwealth tax expenditures was estimated at $111 billion for the 2011/12 income year.

For superannuation the estimate for 2011/12 was $30 billion. This is projected to rise to $45 billion by 2015/16. Let me just emphasise what flows from this. If the Australia Institute analysis holds true (and there is no reason it won’t), by 2015/2016 the top 5% of income earners will receive superannuation tax grants from me and you of over $15 billion that year.

Clawing that $15 billion back would be enough to fund Gonski, a full NDIS, and begin the process of moving to a renewable energy society.

The two big superannuation tax expenditures are the concessional treatment of employer contributions and fund earnings. These may be in Labor’s sights, although how you distinguish between rich contributors and the earnings of the rich in the fund and the rest of us may prove difficult, unless you plan to attack all superannuation contributors.

There are various ways different countries treat the taxation of superannuation. One model is T-T-T, ie tax contributions fully, tax earnings on the fund fully, and tax income payments to retirees from the fund fully. Another would be e-e-e, ie exempt each of these stages. Australia’s system used to be t-t-t, ie tax lightly at each stage, but in 2006 Peter Costello basically removed the tax on retirement incomes to the over 60s, so we now have a t-t-e system.

Our system forgoes $30 billion currently and this will rise to $45 billion in a few years. The tax benefits go disproportionately to the rich.

By way of comparison the age pension currently costs $38 billion but it is estimated the cost of the superannuation concessions will pass the cost of the age pension in 2015/16. There were about 2.25 million age pensioners in 2010/11. The age pension is means tested.

According to the Australian Bureau of Statistics in 2011 there were 3.08 million people aged over 65.

Now I am no genius when it comes to figures but if we added the cost of the pension and the revenue forgone from the superannuation concessions together and divided by 3.08 million, my back of the envelope calculations (literally!) are that you’d be able to pay every person aged 65 or over $23,000 a year, an increase of about $90 a week on the current payment, but unlike the current means tested, asset tested pension, including everyone aged over 65.

If it were restricted to the 2.25 million current age pensioners then the payment would be around $30,000 a year, an increase of over $200 a week. That would take pensioners out of the poverty zone.

Now revenue forgone is not the same as revenue that would be collected if the concessions were abolished. But much of the money currently benefiting from the superannuation tax concession would go into areas taxed at normal rates. If it were to flow into tax preferenced or no tax arrangements (such as negatively geared rental properties) then the time has come to remove these lurks too.

If rich people want to set aside amounts for their retirement they can pay normal tax on the interest, dividends, rent or superannuation streams.

The age pension for all is an example of a universal welfare payment. It may seem unfair that millionaires should get the pension but the argument is society recoups it from them during their lifetime of earnings through a steeply progressive income tax, wealth taxes and taxes on wealth transfer.

That would not only cover any revenue forgone versus collected shortfall alluded to above but also provide the base for increasing the pensions to an even more livable amount, say $30000 a year.

A universal benefits scheme such as the age pension for all people over 65 and steeply progressive income tax rates and wealth and wealth transfer taxes are traditional left wing approaches to make the rich support the poor and less well off in society. It is time to tax the rich and that means getting rid of their tax rorts like superannuation tax concessions.


Write a comment