Superannuation & Tax

Below covers:

A.  Reform of superannuation tax & regulations,

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

C.  Broader tax reform facilitated by the superannuation tax changes - especially rationalisation of income tax and sales tax (GST/VAT) administration - along with further reforms to company tax through the introduction of a universal "business cash-flow tax".

I submitted this pdf version of section A (as at 13 Feb. 2020) to the Australian Treasury 2019-20 Retirement Income Review.

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:

B.  Welfare reform

These superannuation reforms could also enable comprehensive rationalisation & reform of the broader tax system (including GST, income tax and company tax, as discussed in part C below) as well as facilitate the following potential welfare-system reforms to support flexible employment markets, through integration of the aged pension with superannuation and a Universal Basic-Income:

Allowing the option to invest in home ownership rather than the stock market can be justified as a matter of principle, but to moderate the risk that an excessive use of super funds for home ownership could inflate property prices (thereby reducing the net benefit of these individuals' choice to invest in their own home), the funds withdrawn - escalated in line with a property price index - should be included in the measure of total assets that determines eligibility for government co-contributions (that fund the equivalent of the aged pension).  Refinancing an owned home in retirement to fund enhanced living expenses could also then be automatically and consistently encouraged.

In addition, excessive investor demand for housing could of course be moderated by Reserve Bank monetary policy and/or by APRA through lending controls as suggested here.

Universal Basic Income (UBI)

Wealth inequality is more pronounced than income inequality
(refer final sentence of Welfare Reform point 1 above)

In 2015–16, ABS data reveals that the mean Australian disposable equivalised-household income (after tax & Medicare levies), at $1009 per week, was 18% higher than the median (which 50% of households have less than), but the large wealth accumulated by a small fraction of households (the top 1% own as much as the bottom 70%) made the mean household wealth 76% higher than the median and the wealthiest 20% of Australian households owned 63% of total household wealth, which was 80 times more than the less-than-1% owned by the lowest 20% of households.  By 2018, the Credit-Suisse Global Wealth report indicated the ratio of mean to median Australian wealth had risen to over 2x, while in the UK & USA it was nearly 3x & more than 6x respectively.

Greater inequity in wealth over the 15 years since the 2008 "Global Financial Crisis" has been caused by low wages growth and high asset price growth (driven by low interest rates), plus relatively low tax on investment earnings (including super), resulting in 93% of the gains from economic growth going to the top 10% of income earners (pre tax), even without much change in income equality.

C.  Broader tax reform/rationalisation

The reforms proposed above for superannuation tax would largely replace income tax and also constitute a progressive consumption 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 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).

To cover any reduction in total tax revenue from the above changes, new highly efficient taxes could be introduced, including:

- phased in over a decade or more (as the ACT is currently doing),


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, even though imports will deliver 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 10-20% sales tax 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.

So that's about it - get rid of just about all other taxes (except those designed to promote broader/"external" public benefits such as reduced pollution or less consumption of sugar/junk foods & alcohol, with corresponding benefits for health systems and public safety/crime) and replace them over 1-2 decades with just these four or five simplified, reformed taxes - on land, company profit & cash-flow, personal income/super/consumption, and import sales.  Of course it still needs further detailed thought & analysis, including to confirm tax rates & thresholds, but for the tax applied to consumption (super withdrawals), which would largely replace income tax & GST (& State payroll taxes, which are just another form of income 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 will 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%). 

With tax rates and the overall tax system set, income thresholds for higher income tax bands would then be set at whatever level raises enough revenue for decent public services, and probably 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).

The net cost of a targeted UBI

Finally, the current zero-rate income-tax band (tax-free allowance) could be replaced by a UBI (see also here and UBI discussion above).  One objection often made to a UBI is the high cost of providing it to everyone - suggesting funds may be better targeted only on those most in need.  However this argument is somewhat of a red herring, because a UBI that is recovered from more wealthy people through higher taxes achieves the same net targeted outcome.  So any assessment has to be based on the combined impact of a UBI and 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.

It all sounds too easy doesn't it?  But while resolving details may be complex, from a strategic perspective I don't think these are especially tricky problems - they just need to be tackled by people who aren't wedded to the status quo, because the aim is not to produce a "perfect" system (which isn't possible); it's to clean up what's widely regarded as an inefficient mess.  Economists know that taxation affects economic trading activities, which involve the interaction of producers/employees, investors and consumers, so applying multiple taxes to different parties in this trade (e.g. income tax and profit tax and GST) generally just adds administration costs compared to one simple tax on the trade (ultimately money just facilitates bartering, so you never really get paid for your labour until you cash-in your IOU in return for bread).  But the world's taxation systems have grown over many, many years into the mess they are through a combination of short-term, timid political incrementalism & compromise, plus equally cautious advice from accountants (who make money from having complex tax & accounting systems) along with lobbying from self-interested business leaders seeking loopholes under cover of proclaimed but generally non-existent economic expertise (there's a big difference between knowing how to run a business and understanding the economy).