Taxing savers and investors the key to delivering in the May budget

As the May Federal Budget approaches and Liberal state governments increasingly move to sabotage the Federal Government's Gonski proposals purely for political purposes – it seems possible that if Gonski is to succeed the Federal Government must 'pick up the entire tab'. The National Disability Insurance Scheme (NDIS) will also involve a heavy cost, and Labor simply cannot deliver without progressive reform on the revenue side. More unpopular austerity – as in the case of Sole Parents – which saw disgust and cynicism amongst parts of the electorate – is not a viable option. And in any case it simply should not be part of the Labor ethos –'to take from Peter to pay Paul' – seeking to spin these matters to create only an illusion of overall progress.

Mark Kenny, writing for the Sydney Morning Herald explains how resort to superannuation investment has become a prime means of tax avoidance for high income groups.. Hence:

"High-income earners simply have greater scope to save and thus evade the 46.5 per cent marginal tax rate on income by sending it into super. The result is that what is saved on the aged pension budget through self-funded retirement winds up being less than what the superannuation policy costs in tax revenue foregone."

Richard Denniss of the Australia Institute has been one of the most determined critics of the existing system of superannuation concessions. In August last year he put the argument that while those concessions cost the public $30 billion in late 2012, they will cost $45 billion as early as 2015. This is well in excess of the entire Aged Pension budget – which was only $25 billion in 2012. And in 2012 $10 billion of these superannuation concessions were going only to the top 5 per cent income demographic. Denniss has argued: "We estimate, for high income earners, up to 60 per cent of their lump sum is actually the contribution of the taxpayer."

The ACTU, meanwhile, has urged the Government to target the top 10 per cent income demographic. And were superannuation concessions revoked for that top 10 per cent group, at an estimate it could bring in over $15 billion - enough for the government to fund Gonski and begin to phase in the NDIS without having to depend upon the Conservative states.

Yet even as Tony Abbott and the Liberal Party condemn Labor for considering revoking concessions for some of the most privileged, they are committed to withdrawing superannuation tax breaks for low paid workers. Bill Shorten has pointed out that the restoration of a 15 per cent tax rate on these Australian workers will affect 3.7 million people, including 2.1 million women. It could cost these workers $500 a year: which is not inconsiderable for those on low incomes. This is blatant hypocrisy from Abbott. So much for 'solidarity with those doing it tough' as proclaimed in his manifesto, 'Battlelines'.

So what should Labor do? Gonski and NDIS are potentially landmark reforms which appeal strongly to Labor's base. Social solidarity, social insurance, and equal educational opportunity are all "core Labor values". Withdrawing superannuation concessions from the top 10% income demographic would make these policies affordable regardless of the Liberal states' spoiler tactics. And withdrawing Labor's unjust policies on Sole Parent payments could moderate the backlash from this callous and self-destructive decision.

But arguably Labor needs a more robust electoral war chest in order to 'break through' to a cynical electorate which has already 'turned off' in parts of the country.

Another area of potential reform is Dividend Imputation - which the Henry Tax Review considered axing a few years ago. Dividend Imputation seeks to eliminate so-called "double taxation" of investments by providing credits on dividends. This is fine for small investors – but should the wealthy be receiving a massive tax break as a consequence? Especially when the Company Tax rate has been cut again and again for decades.

Writing for 'The Age' Nicholas Gruen pointed out late in 2012 that the Dividend Imputation system costs the government in excess of $20 billion a year! That being the case he went so far as to suggest getting rid of the entire system; arguing that the benefits of the system in spurring additional investment are minimal anyway. A spare $20 billion annually – on top of rescission of superannuation concessions for the wealthy – invested in health, education, aged care, welfare, infrastructure, and foreign aid – could work wonders! It could also help Labor balance the budget over the course of the economic cycle without further callous austerity. (indeed, quite the opposite!)

Even were the dividend imputation rate only incrementally reduced, an initial reversion to a 75 per cent imputation credit could bring in over another $5 billion; and a 50 per cent rate – argued for in the early 1990s by economist, John Quiggin, could bring in over an additional $10 billion. (See: Quiggin & Langmore, 1994, p 148)

Finally, the Greens have argued for lifting the Minerals Resource Rent Tax (MRRT) rate to 40 per cent, eliminating loopholes and removing "generous accelerated depreciation provisions." This, they argued, could raise $26 billion our four years.