Superannuation & Tax

This page presents comprehensive tax reform proposals, covering individual income tax, superannuation and consumption taxes (merged as an integrated system), welfare (especially through a Universal Basic Income) and company tax (in particular using a "cash-flow" tax).  The objectives are to substantially improve efficiency (both in terms of tax incentives and administration), as well as fairness (through a more progressive system that taxes those who can most afford it) and flexibility to individual needs (particularly in the case of superannuation tax & regulations).  A broader discussion of inequality and economic management is at this page.

The reform proposals here are divided into the following sections:

(A) Reform of superannuation tax & regulations;
NB. I submitted this pdf version of section A (as at 13 Feb. 2020) to the Australian Treasury 2019-20 Retirement Income Review.

(B) Welfare reforms to support improved equality along with flexible & productive employment
        — especially through a Universal Basic Income (UBI), which would be especially helpful for managing economic disruptions like those caused by Covid-19;

(C) Rationalising tax administration by integrating income tax and sales tax (GST/VAT) with the proposed superannuation tax changes – delivering a more efficient and fairer, progressive system;

(D) Reforming company tax through the introduction of a universal "business cash-flow tax";

(E) Finalising a comprehensive tax & welfare reform strategy.

(A) Reform of Australian superannuation taxation and regulation

The current superannuation system is inflexible and complex, which explains why despite its very expensive & unfair tax concessions, the average Australian has as much in savings outside super as they do inside it.  It doesn't meet the needs of a modern, flexible and ageing population. It needs fundamental reform.

The attached paper, "supertaxreform-final updated2012", presents a vision for simple, flexible, customer-focussed superannuation (to support flexible careers and retirement) that is fair and sustainable in its tax treatment.  The paper has evolved over the years through various submissions (initially to ASFA's 2005 competition and to the 2006-07 Budget, which Costello & Dutton failed to grasp).  Here's a news article about my long-standing campaign on the issue.

The inevitable need for such tax reforms – due to an ageing population – is put forward in my one-page paper, "AgeingSuperTaxReformJan2017" (also published here).

The following are the key points of my proposed superannuation reforms:

An initially voluntary new "Flexi-Super" scheme (voluntary for at least older workers, over, say 45), with the following features:

a) No tax on contributions (i.e. made from pre-tax income, or with tax credits granted for post-tax income contributions).

b) A low tax on earnings (say 15%) for funds below a defined maximum balance that provides for "comfortable" retirement.

(This tax would apply at all ages, including in “retirement”, but may be offset by tax credits paid by companies on their distributions to shareholders.
Higher tax rates may apply to earnings on funds above the maximum balance, but these may generate tax offsets for subsequent withdrawal tax.)

c) Withdrawals (for spending on consumption) taxed at progressive rates, similar to income tax (and replacing income tax as in part C below).

d) Funds could be withdrawn at any age (e.g. for a mid-career break or unemployment period), as long as the balance exceeds a regulated minimum amount that would rise with age (the minimum, specified by age, would be based on the savings required to retire with a basic 'minimum' standard of living, i.e. less than "comfortable")
— this flexibility addresses probably the biggest barrier to voluntary contributions under the current superannuation regime.

e) 10% of wages must only be contributed if the fund balance is below the regulated minimum (for the person's age) — noting the arguments for more than 10% (made by the self-interested super industry) are not strong.

Besides being simple, having all tax benefits on earnings (a low tax rate) automatically rewards people for saving longer and thus avoids the need for complex regulations limiting annual contributions and withdrawals.  And with progressive tax rates applied to withdrawals, the more that's withdrawn in any single year, the higher the % rate of tax that will apply — so there's an incentive to withdraw funds gradually.

The proposed tax treatment would also benefit people taking a voluntary or forced career break, because the marginal tax on withdrawal could be at a lower rate than during prior high-income periods of their career.  For example, the tax paid by someone earning $100k in year 1 who saves $50k of this in superannuation to withdraw in year 2 when out of work, would be the same as someone who worked two years at $50k p.a., unlike the current income tax system, which taxes you at a higher % rate for earning a given amount if it is concentrated into one year rather than two, thus actively discouraging employment contracts that respond faster (more efficiently) to varying demand.  Hence these proposals could encourage greater job mobility – with more frequent vacancies and more opportunities for those looking for work – thus potentially reducing unemployment.

There may also be other 'externality' (society-wide) benefits arising from people taking more career breaks to focus on their families or other aspects of life.

Pragmatic implementation could be assisted by:

1. An extended phased implementation, with voluntary participation from people currently over, say, age 45.  Those people that valued the flexibility (especially younger people) would voluntarily switch to the new scheme, even if it had somewhat lower tax benefits.  Over time, the current Australian superannuation scheme would be phased out.

2. Pre-paying of withdrawal tax credits (perhaps encouraged by incentives) in order to manage any short-term government budget constraints.

3. The Australian Superannuation Funds Association (ASFA) should support it as it's based on a concept that they awarded first prize to in their 2005 "Simply Super" competition, and it also has similarities to their 2013 reform proposals.

(C) Integrating income tax and a progressive sales tax with superannuation

The reforms proposed above for superannuation tax would largely replace income tax and also constitute a progressive consumption or sales tax (GST or VAT), because tax would only apply to people's income when they withdrew funds to spend it.  It would be equivalent to (but administratively far more efficient than) applying a GST to every transaction with an increased % rate for wealthier people that spend more.  Hence there would then be no need for "luxury goods" taxes (nor administratively costly exemptions) and even the GST itself would become administratively redundant and could be abolished, at least for domestic production (see below for imports).  Philosophically it makes sense to tax consumption rather than income, because it is consumption choices that determine how society's limited human and natural resources are utilised.  Tax (spending) allowances could be rolled over into future years so that tax liabilities for major one-off purchases like homes & cars are assessed and paid on the basis of average lifetime consumption (and so that tax is not distorted by financing mechanisms).

Further major economic efficiencies would come from consolidation of banking & super industries as people choose to bank almost all their savings in their super account — because why would you put money in the bank when you can leave it in super with a lower tax on earnings and still access most of it?  Nevertheless, people could still choose to periodically transfer their estimated annual spending needs to a separate spending account, which would incur withdrawal/consumption tax when transferred, on the assumption that it will be spent in that financial year.  The funds in this post-tax spending account could then be readily compared like-for-like with retail prices (that would incur no further tax).  An automatic year-end assessment would then adjust the annual tax liability for any residual unspent funds left in the spending account (as if it had not been transferred from their super savings account).  These arrangements could also help to reduce the psychological impact of taxation, since it would mostly be incurred automatically, similarly to current PAYGO systems.  Another implementation option, with potential enforcement benefits, would be to initially apply the tax at the maximum rate to all company sales, then make adjustments for individuals (according to their annual spending) once they've provided satisfactory tax returns.

Tax avoidance could be minimised as current income tax administered by employers would be redundant and a fixed top tax rate (with no deductions) could be applied to all funds or income not held in, or transferred out of accredited superannuation savings accounts (e.g. to overseas tax havens).  Current opportunities for income tax deductions should be much reduced anyway, as they are in most other countries.  Parents could effectively get an extra allowance for dependent children by donating from their pre-tax income (in their super fund) to their children's superannuation accounts, which they could then use to meet living expenses (thus effectively getting an extra tax-free spending allowance).  But aside from this, tax & welfare should not depend on whether an adult is sharing accommodation with another adult – whether they be friend, partner or otherwise – as it makes no sense for society to penalise people for sharing companionship, love and assets, and the state has no business prying into such things as it is increasingly doing (plus de facto laws deny people the right to choose whether or not to make a marriage commitment, and should be repealed now gay people have been granted marriage equality).

For domestic investors & corporations, a superannuation earnings tax of 15% would be equivalent to a 15% corporations tax but applied one step beyond the corporation (on dividends paid to individual investors, rather than on the corporation's aggregate profit).  Hence it would seem to make sense to set Australian corporation tax at the same consistent level of 15% (which would capture retained profits), with existing dividend-imputation rules enabling individual Australian investors to offset this corporations tax paid against the 15% tax payable on their superannuation fund earnings (at least for funds below the regulated "maximum" super fund balance providing for concessionary tax).  However, this proposition needs to be considered within the context of the following proposed structural changes to company tax.

(D) A business "cash-flow tax"

A company 'cash flow tax', as suggested in the Henry Tax Review and further developed by Garnaut et al., has a lot of attractions in terms of reduced administration cost & multi-national tax avoidance, as well as – most importantly – greater economic efficiency, because in contrast to existing taxes it presents literally no disincentive for investments, even if levied at 30% or more for returns on investment above the benchmark rate (so-called "super-profits", which don't just occur in mining industries).  It should also remove distortions to business financing currently caused by allowing tax deductions for interest but not dividends (the equivalent of interest for equity lenders), which could make the problem of "negative gearing" redundant.

Conceptually a business cash-flow tax has similarities to the GST and the above superannuation tax proposals, and many of its perceived problems – particularly from not directly taxing profits retained for reinvestment – could possibly be addressed if it were applied in combination with the above proposals for taxing corporation profits & superannuation investment earnings.  Together they would basically create a progressive company tax, which is not something you can otherwise do like with personal income tax (because big companies with big profits would simply break up into smaller companies so they each incur a smaller tax rate).

A cash-flow tax offers a number of other potential advantages:

• • It may support the establishment and growth of small businesses — which collectively may be viewed as a diversified investment portfolio, similar to an R&D portfolio.  Many small businesses won't deliver returns above or much above the benchmark rate, and many will fail completely, but a minority will provide the innovation and dramatic growth to become the major corporations of the future.  From this perspective, a cash-flow tax would make the government a co-investor in this diversified portfolio, effectively helping to balance the super-profits and losses across the portfolio of all Australian businesses and supporting the "innovation economy" in a more efficient way than traditional grants and tax breaks.  Given that luck is also a factor in business success or failure, this also seems a socially equitable approach to taxation, as well as being economically efficient.

  • For businesses that enjoy some level of "monopoly rent"/super-profits, thanks to regulatory protection (e.g. if they are critical to society and "too big to fail", like major banks), a cash-flow tax will at least deliver some return to government as compensation for holding those industry risks.

  • Once introduced, a fixed, tax-free interest rate benchmark (above which investments returns are taxed) would give certainty and simplicity for businesses, and also provide an automatic macro-economic stabiliser — reducing the tax take and thereby stimulating the economy when business investment returns are low.  Also, when I wrote this in 2016 it was an ideal time to introduce such a tax – at least from a Treasury perspective – because with long-term interest rates so close to zero (in prior years and futures markets), a low or even zero-interest benchmark rate could be justified, and thereby ensure significant ongoing tax receipts — quite possibly making existing corporations tax superfluous.  Alternatively, one could possibly have progressive tax bands of, say, 10%, 15%, 20%, 30% & 40% for investment returns over, say, 0%, 5%, 10%, 15% & 20% (although this could be difficult to implement, given investment return rates will vary by year).  Progressive business tax rates might encourage small, fast-growing companies to sell out to larger, slow-growing companies, so as to reduce the aggregate rate of return and total tax paid on the combined companies, which could have a positive impact on overall business investment and productivity growth, although it needs further thought and analysis as there may be other unintended consequences.

  • Preferably the cash-flow tax could also apply to own-home ownership, in order to correct current distortions favouring housing investment over more productive commercial investments (which increases house prices and reduces home affordability) and to curb current arrangements that have contributed to rising inequality.  The tax-free interest rate benchmark – which for owner-occupiers could be linked to an historic, rolling-average house price index – could ensure the affordability of moving house is not adversely affected by general, economy-wide price increases, and would also promote a more equal geographic distribution of house price growth by applying higher tax to areas with higher-than-average price growth, thus improving social equity and inclusiveness (although of course this wouldn't be popular with people wanting to upgrade to a bigger or better house in an area of high price-growth, but what do you expect?  It is a tax!).

  • Possibly the cash-flow tax could also replace existing gambling taxes if it were applied to individuals' annual net winnings (in addition to subsequent consumption tax when those winnings are spent), although probably without tax credits for net losses.

  • A competitive open-source technology delivery model could integrate tax collection systems with business cash-flow management, which could be a significant administration benefit to small businesses, who are more concerned with cash flows than accrual accounting.

  • I suspect a simpler cash-flow approach to corporate taxation may also reduce tax minimisation/avoidance opportunities based on dodgy accounting, which may be why big business and accounting-advisory firms aren't keen on it (see here for where the interests of the 'Big Four' lie!).

  • Note also that the comprehensive tax reforms advocated here could compensate for cuts to existing corporation tax, which in isolation would just be a gift to foreign treasuries.

The question then arises as to how to treat imports.  If we assume imports are made in a country with similar taxes and regulatory standards (e.g. for environmental protection), and therefore are competing on equal terms, then the best economic outcome may be achieved from a level-playing field for competition between local production and imports with no import taxes (despite the disadvantage of imports providing less tax revenue to the Australian Government, because it can't tax foreign companies' profits).  However, if we take the view that all consumption should be taxed equally to pay for the public services Australia wants, then this suggests we would like to receive the same tax revenue from imports as from local production.  Given foreign countries may not actually have similar taxes and regulatory standards, a pragmatic position might be to apply a sales tax of around 10% on imports only, unless agreed otherwise through international trade negotiations.  A 10% import sales tax would be unchanged from the current GST (whilst the GST would be subsumed into superannuation withdrawal tax for domestic goods) and, depending on profit margins & other factors of production, may raise similar revenue to that from company taxes applied to local production.

(E) Finalising a comprehensive tax & welfare reform strategy

The discussion above provides a new more efficient and fair structural framework for taxation, which would involve the drastic rationalisation (abolition) of many existing taxes, with one integrated tax on personal income/savings/spending replacing existing separate taxes on superannuation savings, consumption (GST) and income (including State payroll taxes, which are just another form of income tax).

Implementation would need to be staged over many years (to ease the pain of any transition for certain groups), and obviously requires further detailed analysis and refinement, especially to ensure enough revenue is raised for decent public services.  Particular issues to consider include:

• An increased role for land tax, at a rate at least high enough to offset the cost of abolishing current inefficient State stamp duties, as part of a broader strategy for more efficient & affordable supply of housing — phased in over a decade or more (as the ACT is currently doing);

• Taxes and/or other revenue-neutral incentives designed to promote broader/"external" public benefits, such as reduced pollution or less consumption of sugar/junk foods and alcohol (with corresponding benefits for health systems and public safety/crime);

• Finalising the approach to taxing company profits, cash-flows and imports;

• Tax rates & thresholds for the integrated income/savings/spending tax.  I suggest progressive tax rates of maybe 15%, 20%, 25%, 35%, 45% & 55% (rather than the virtually flat rate proposed by the 2018 Budget, which would seriously reduce the current system's contribution to reducing inequality), and maybe 65% or even 75% as an optimal top rate, although even if they are justifiable on fairness & economic grounds, rates above 60% may raise so little extra revenue (probably less than 1%) as to not be worth the battle.  In isolation, based on analysis using the attached xls, I'm not sure that tax rates much higher than the current top rate of 45% would add any significant amount of revenue, but with the reforms I'm proposing that effectively combine income tax with the current 10% GST, the current top rate may translate to a new one of 55%.

  • Once the overall tax system has been set, income thresholds for higher income tax bands should probably be automatically indexed annually in line with CPI (if not wage inflation), to remove the bracket-creep budget toy from politicians (although some bracket creep can be a useful way of gradually overcoming fiscal problems with minimum political resistance).  Alternatively, these few discrete tax bands could be replaced by a continuously increasing tax rate — either by computing through a huge number of very small discrete bands, as recently proposed by PwC, or by using a mathematical formula as I demonstrate in the attached xls, which would be simpler to calculate and by using a smoothly increasing tax rate, seems to offer higher tax revenue for any given maximum tax rates (although I realise some people may find it confusing to use a logarithmic formula for tax).

• Replacing the current zero-rate income-tax band (tax-free allowance) with a UBI (see also here and UBI discussion above).  

  • A UBI is often presented as something that everyone would receive, and would therefore be exorbitantly expensive and wasteful compared to more targeted welfare payments.  However, this critique is misplaced, because it fails to recognise that a UBI would inevitably be funded by offsetting tax changes (which would recover the UBI provided to more wealthy people), so the net cost is much lower (or even zero) and the net effect of the changes is to effectively still target UBI funds towards those most in need.  Clearly, any assessment of the net impact of a UBI must be based on the combined impact of the UBI and other accompanying tax changes. 

  • My initial estimates in the attached xls suggest a UBI averaging about $300 / week (a bit less than the shared-household pension in 2019, but rising with age so as to equal the pension at age 65) could be given to about 11 million people (roughly everyone aged 25 to 65, less about 3 million people not seeking work) at a cost of around $170 billion p.a., which could be substantially funded by some $100bn of increased income taxes from replacing the tax-free allowance with a minimum rate of 20-25% followed by 30% in place of the current 19% band (or with a formula-driven average tax rate that continually increases with income).  This could provide a net benefit to almost all taxpayers (reducing with higher income to zero at about $180k p.a. gross), and the remaining cost could be funded by reducing or abolishing $50bn p.a. of current family & unemployment benefits (including about $18bn for FTB & $11bn for Newstart prior to its increase under Covid-19 "JobSeeker"), as well as slashing the absurd, grossly inequitable & unsustainable existing tax concessions on capital gains and superannuation (currently costing at least $60 bn p.a. just for Australia's wealthiest 20%), as per my reforms proposed above.  Obviously this needs a lot more detailed work in the context of overall tax reform, but it does appear to be more realistic than some people claim.