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October 29th 2015 print

Peter Smith

State Largesse and Legerdemain

Striving is the key to self-sufficiency and contributing. Less striving means more demand for free stuff. Reducing superannuation tax concessions on "the rich" is a voracious welfare state's way of saddling the productive with higher taxes

pocket pickedNews alert: Lord Benefactor was attacked last night by a group of ruffians who claimed that he short-changed them when giving them alms. He ‘ad more in his purse, they claimed, and selfishly wanted to keep it. Benefactor gave a pathetic excuse for his stinginess. I had already given them a lot, he lamely said. He failed to realise that enough is never enough.

The Australian’s editorial (27 October) made the ‘damning indictment’ that almost “60 per cent of all [superannuation] concessions flow to the top 20% of earners.” This reflects the general tone du jure that a dastardly injustice is afoot. Deloitte has released a report which offers a formula to redress the injustice. I will come to that later. First, to the facts by way of an example.

Take one of those rich chancers getting away with things. This one is 50 years of age and earning $245k. He (she if you like) is putting away the capped amount of $35,000 in superannuation taxed at 15%. His super tax saving is $10,500. But wait, his total tax bill, excluding the Medicare levy, is a little over $73k or 30% of his gross income.

Compare him with the put-upon ‘dupe’ in the scene earning $42,000 and contributing the statutory minimum amount of 9.25%, or $3,885, to superannuation at a tax rate of 15%. His super tax saving is only a measly $200. Unfair! Unfair! But wait, his total tax bill is only a measly $4.5k or 11% of his income and that is without accounting for the free stuff he undoubtedly gets if he has a spouse and kids.

We are told with a straight face that the situation is unfair because the higher income earner is getting a bigger superannuation tax concession than is the lower income earner. But put it in a quite different perspective. The higher-income earner is more than paying his way. He’s keeping the whole nation state afloat. The lower income earner is not nearly paying his way. To be fair, he is at least paying some tax but, not to be too unkind, he is a fiscal burden.

It simply makes no sense to look at the so-called superannuation concession in isolation from the total picture.

Consider the Deloitte “fairer” regime. Deloitte has proposed that everyone be given a reduction in tax of 15% on each dollar contributed to superannuation. So if you pay tax at the marginal rate of 45% your superannuation contributions would incur a tax of 30%. This would apply pari passu down the line. Those paying zero tax because their income is below the threshold would get a rebate of 15% of their superannuation contributions.

According to Deloitte, this measure would provide the government with an additional $6 billion in revenue 2016-17. How revenue-tempting is that for any government unable to balance its budget?

In my example above, the higher income earner’s tax would jump to $78.5k, or 32% of his income. The lower-income earner’s tax would stay more or less the same. Roughly speaking, those earning between $37k and $80k would see little difference because their marginal tax rate is 32.5%. Those earning below $37k would gain; those earning above $80k would lose. So as well as being a revenue-increasing measure it is a redistributive one. It will likely appeal therefore to Labor and to The Greens and, at a guess, to those earning less than $37k.

Baseless complaints that higher income earners (‘the rich’) are getting beneficial treatment is designed to provide the basis for taxing them more and raising revenue. That’s fair enough in a sense. Only the rich can afford to pay more to fund spendthrift government. But be honest and upfront about it, not weasel on, like layabouts from Occupy Wall Street, about how the rich are not paying their fair share.

As night follows day, the squeeze on the rich will continue because the welfare state is voracious. It will never be sated. It grows organically, increasing dependency, by antiquating the view that people are responsible for taking care of themselves.

Striving is the key to becoming self-sufficient and contributing. Free stuff undermines striving. Less striving means more demand for free stuff. It is an enervating spiral.

Reducing superannuation tax concessions for the rich is just another way of sticking them for more taxes. This will help pay for the bloated welfare state and, inevitably, help underpin its continuous swelling. An energising spiral would result from reducing taxes on the rich and correspondingly reducing free stuff, starting with those most able to afford it. As an aside, not by starting with those least able to afford it, as the Abbott/Hockey government ineptly and forlornly tried to do.

Unfortunately, the debate gets sidetracked into fretting over whether those paying all of the bills are getting away with something. And so the Greek-like tragedy goes on towards its inevitable conclusion of fiscal collapse.

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

Comments [9]

  1. Bill Martin says:

    Hear, hear! And the process is made ever more inexorable by the swelling number of those who vote for a living rather than work for a living. It is a perilous, self perpetuating process.

  2. en passant says:

    Some years ago I worked in Sydney, but lived in Melbourne so every weekend I did my bit and pumped some much needed CO2 into the atmosphere. It was the right thing to do and made me feel I was doing good. One morning, as I got off the commuter train at Wynyard Station an old, well dressed man with a cane asked me if I could spare some change for his fare as he had lost his wallet. A quick check a d I had enough coins for my morning coffee and $1.00. I gave him the $1. This incurred a stream of invective at the top of his voice about my meanness, antecedents and unfairness, etc. People looked as they passed. Being me, rather than slink away or give him the rest of my change I demanded my $1 back. He was shocked, but I insisted. He raised his cane and shouted that I was trying to rob him. I was now enjoying myself and shouted back that he had defrauded me. When I had had my $1 of fun I went on my way. I thought at the time that even Sydney beggars have standards to maintain, but on later reflection I realised that he was not exhibiting some form of ‘standard’, but an entitlement to my earnings and a resentment at my unwillingness to share. I OWED him.
    He was obviously a careless fellow because I saw him on several other occasions, but I never helped him with his fare again. My preferred approach was to walk by waving a $100 Note. I suppose this just demonstrates that he really had a justifiable case.

  3. Jody says:

    You don’t mention the Defined Benefits recipients who never paid a cent of tax on the earnings in their super fund but retired with extraordinarily generous superannuation benefits linked permanently to the CPI increases of their last wages before retirement. Nobody ever mentions this group, let alone taxation for them.

    Then the Sydney home-owner with the $M2+ capital gains tax free family home…these people just don’t need superannuation. They can sell, downsize and move and stash away a considerable amount without worrying about a cent of taxation burden.

    Lastly, those earning $75,000 are in receipt of some kind of Family Tax Benefit, while $180,000 is now regarded as “wealthy” for the purposes of raising taxes through increased ‘concessional’ rates on super. So, it’s official; the gap between welfare and being wealthy in this country is a mere $10,000. Let’s shout it from the rooftops.

    The whole superannuation system is a shambles and I think God every single day I kept hundreds of thousands of dollars OUTSIDE superannuation because of “legislative risk”. The government and its voracious taxation habits can GO JUMP.

  4. Bran Dee says:

    The welfare state is certainly veracious and government departments expand to administer it. As this happens year after year has anyone ever heard an ABC interviewer ask a politician of the left how expenditure is planned to be cut? They could simply say that the country is living beyond its means so where do you cut? Why is that too hard?

    • Jody says:

      What’s really frightening is that the middle class has been rebadged as “weathy” for the purposes of extracting more superannuation taxes from retirees – particularly those nasty self-funded retirees who had the temerity to save and who didn’t have a Sydney home they could sell to use for super or to pass on to the next generation tax free. When we die 15% tax will be levied on our funds in SMSF and paid for by our children. What I want to know is, if tax is re-introduced to the over 60′s will the inheritance attract FURTHER tax as well? In short, death duties by default but not on the family home!!!

  5. Dan Hannan summed it up fairly well when he defined the following – “Greed: Wanting to keep your own money. Need: Wanting to be given someone else’s. Compassion: A politician arranging the transfer.”