Mr Swan’s preoccupation with superannuation

When public opinion is whipped into a stampede, facts, balance and perspective sometimes get trampled.

So it is with the campaign to cut and reshape the tax concessions for superannuation - a campaign that has gained traction with opinion leaders by stressing that the current concessions are skewed in favour of high income earners. Wayne Swan late last year declared that the concessions “undermine the progressive income tax system” and gave the clearest signal yet that change is on the way (yet again) for the super tax system.

But it is hardly exceptional that higher earners are the main beneficiaries. The fact is that any neutral tax cut or concession - which is what the 15 per cent contributions tax is - will save high earners more in tax because they pay most tax in the first place. The concession is only as “skewed” as tax obligations are. The top 25 per cent of earners pay 66 per cent of total tax paid, while the bottom 25 per cent pay only 3 per cent. It is hard to give a tax concession to someone who pays little or no tax.

Of course, tax policy can craft the concession so as to favour low and middle earners, but to do so is to load another layer of “progressivity” onto what is already a highly progressive tax/transfer system.

There is something fishy about a campaign to overturn an arrangement put in place 25 years ago by another Labor government, which knew exactly what it was doing by introducing a flat 15 per cent contributions tax. If it is so self-evidently “unfair” now, why didn’t that occur to them then?

One reason is that they knew it only made sense to look at the effects of the whole retirement income system on individuals over their whole lifetime - not just bits of the system in isolation and at one point in time.

They also knew that the tax should be set low for everyone so as not to unduly handicap the growth potential of peoples’ super contributions at the starting blocks. A dollar of pre-tax income that goes into super with a tax of 15 per cent has a good chance of growing to $5 or more over 25 years. With a non-concessional tax of 31.5 per cent on entry, it will become little more than $4, and at 46.5 per cent, closer to $3. The more growth there is in super balances, the lighter the future demands of retirees on the public purse.

The rationale for the low, flat contributions tax remains valid today. What has changed is that the tax on benefits (from age 60) has been removed, but the government is hungry for revenue despite promising not to reintroduce a benefits tax. The government is also more preoccupied than its predecessors with redistributing income and wealth by making the system more “progressive”.

What has also changed is that the lowest marginal tax rate has been slashed over the years (to 16.5 per cent up to $30,000 and effectively 20.5 per cent above that level) so that it now approximates the concessional super contributions tax. Very good, but that doesn’t mean that the contributions tax for those on the lowest marginal rate should now be cut to reopen the gap. The tax on income going into super has not gone up simply because the tax on other income has come down.

There is a general point here that should be a guiding principle for tax reform: it would be a great idea to cut marginal tax rates so much that the case for concessions withers away. But if Mr Swan wants to cut marginal rates while he cuts concessions, he’s not letting on.

If the government wants to do more to support the super balances of low earners, it can do so without complicating the tax system: it can revamp its co-contribution so that the contributions tax is effectively refunded to everyone up to a certain income level.

The alternative - distorting the simple, flat contributions tax - would go in the opposite direction to the government’s stated emphasis on removing complexity from the tax system. As soon as the tax rate that a super fund has to pay on a member’s contributions becomes a variable that depends on the member’s individual circumstances, complexity ratchets up. The Howard government’s short-lived and horribly complex super surcharge was a case in point.

There are big issues in super, but the distribution of concessions isn’t one of them. Super is just one form of saving. The big issues are how saving in general should be treated within the tax system, and whether super should continue to be more lightly taxed than other forms of saving. It is to be hoped that the Henry review of the tax/transfer system - now in the hands of the government - has focused on these issues rather than Mr Swan’s preoccupation with distribution.