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February 14th 2010 print

Peter Smith

Taxing superannuation

One of the potential problems of getting divorced – particularly relatively late in life - is finding that your net worth is not only to be halved but that it is much less than you thought it was.

Taxing superannuation: the socialists’ dilemma

One of the potential problems of getting divorced – particularly relatively late in life – is finding that your net worth is not only to be halved but that it is much less than you thought it was once various debts are accounted for. So it was that I contemplated the need, in the early 1990s, to save as much as I could. Since 1988 a tax of 15 per cent had applied on employer contributions to superannuation with no limit on the amount that could be contributed. This was my chosen path to self-sufficiency. A sound and certain path you might have thought given the election of a Coalition Government under Howard in March 1996. Not so; from August that year the new Government imposed a ‘surcharge’ (not a ‘tax’ for that would have broken an election promise) of an additional 15 per cent on contributions to superannuation for those earning above a quite modest amount of income. I adjusted my living arrangements but still managed only partially to make up for the new ‘tax’. Since then superannuation arrangements have been continually changed and tinkered with. Apart from anything else it is hard to plan when government keeps on making unpredictable and capricious changes; of which the surcharge, removed in 2005, was a prime example.

Piers Akerman, in his Daily Telegraph blog (“Punished for doing the right thing”, 10 February), brought the story up to date with his own experience of having now to face another capricious change. This time it is a new lower limit of $50,000 per year (down from $100,000) being available as a ‘concessionary-taxed’ contribution. Rudd excuses his promise to make no changes by saying this is just ‘fine tuning’. Trickiness didn’t stop with Dick.

Look at it this way. With children it is hard to save much when you are young and middle aged. You depend on the later years, when your income is higher and family responsibilities less, to build the nest egg. This nest egg, if large enough, allows you to be self-sufficient in your retirement years and not a burden on taxpayers. But this is just the personal end of it. By putting income into superannuation you are saving; and importantly this is long term saving. Your saving of this kind, in turn, provides the wherewithal for businesses to invest in physical capital. These investments make us all collectively more productive and wealthier. This wealth, among other things, allows governments to raise revenue and provide welfare entitlements to those who cannot provide for themselves. It is a virtuous circle. Why then do governments tinker with and tax superannuation?

They do it because they can and because they are myopic. They can because usually only the comparatively well off are particularly disadvantaged and they are comparatively few in number and settled in their political allegiances. They are myopic because the costs of imposing heavier taxation on superannuation will not be felt until much later on; well past the prevailing electoral cycle. Those costs will be twofold. First, fewer people will be self sufficient and therefore more people will require support from taxpayers of the time. Second, society as a whole will be less wealthy, and therefore less able to provide support, because government will have commandeered resources and used them wastefully at the expense of denying them to the private sector that would have used them productively.

 It is a socialists’ dilemma:

  • We need to tax the well off and reduce their superannuation avenue of escape (and we feel morally justified in doing so) so that we can afford to provide ever-increasing welfare entitlements now to those perceived to be in need of taxpayer support.
  • Welfare recipients and those not so well off don’t save very much and reducing the long term superannuation saving of the well off will reduce our capacity to provide for the expanding welfare entitlements of the future.

It should be a peculiarly socialists’ dilemma but, as we have seen, the Coalition Parties seem to fall into its clutches all too easily. Far sighted governments, not blighted by the economics of envy, or hamstrung by the need to finance bloated welfare expenditure on those who have no real need of it, would do all they could to encourage people to make contributions to superannuation because such contributions represent long-term saving and this underpins growth and progress. Such governments, of whatever complexion, are proving to be elusive.

 

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics