The payroll tax that dare not speak its name

Hence the best chance of reducing the distortionary taxes that presently pay for the age pension is to displace that pension by expanding superannuation funded by the "least bad tax."

Here's how the system might work:

The present de-facto payroll tax is abolished (the saving being passed on in higher wages and lower prices). In its place, every person of working age, whether working or not, receives two compulsory contributions to a private super fund, those contributions being:

Part A: a levy payable by that person, of so many percent per annum on the value of residential land owned and occupied by that person; and

Part B: a per-capita share of the revenue from a similar levy on the value of commercial land, rural land, and non-owner-occupied residential land.

Part A is off-budget and is strictly for the benefit of the payer, neutralizing the political sensitivity of a levy on the "family home." As it is not payable by retirees, it largely avoids the "asset-rich, income-poor" issue that often arises with municipal rates.

Part B, which could be on- or off-budget, is meant to become a non-means-tested replacement for the age pension. Consistent with this purpose, the payout from Part B is taken as a lifetime annuity and its preservation age is greater than for Part A. But, as a political sweetener, and as a dividend from the economic expansion that follows the abolition of the de-facto payroll tax, the preservation age for Part B is less than the present pension age, and won't need to be increased as the pension age will be.

The preservation age for Part B is taken as the upper limit of "working age": Part A is not payable by, nor Part B for the benefit of, persons past that age.

As a test of political feasibility, let us estimate the rate per annum at which the two levies would raise enough revenue to replace the SG.

In 2009/10, Australians earned about $549 billion in wages and salaries [according to ABS 5204.0 Tab.6]. The SG should have raised 9% of that, i.e. $49.4 billion.

The alternative revenue base would be land values as assessed in mid 2009. Because residential land owned and occupied by persons of pensionable age is exempt, taking the base as the total value of residential, commercial and rural land would overestimate the base, hence underestimate the rate.

To the contrary, one could argue that a lower rate, causing a lower level of saving, is acceptable because the abolition of the de-facto payroll tax would reduce prices for retirees.