Superannuation & tax

Below covers:
  • Reform of superannuation tax & regulations, along with,
  • Implications for the administration & reform of income tax and sales tax (GST/VAT), plus further reforms to company tax, and
  • Reforming welfare to support employment and provide a Universal Basic Income (UBI, including this latest article on a "UBI for Covid", also published here amongst other articles of mine on GAP's OpenForum).

1. 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.pdf", 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.pdf" (also published here).

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

  1. 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%), at least 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 (replacing income tax as per "2. Broader tax reform/rationalisation" discussion 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d) Funds could be withdrawn at any age (e.g. for a mid-career break or unemployment period), as long as the balance exceeds a regulated minimum amount that would rise with age (this 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.

  1. Pragmatic implementation could be assisted by:

    a)  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.

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

    c)  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.

  2. These superannuation reforms could also enable comprehensive rationalisation & reform of the broader tax system (including GST, income tax and company tax, as discussed in section 2 below) as well as facilitate the following welfare-system reforms to support flexible employment markets, through integration of the pension with superannuation and a Universal Basic-Income:
a) Replacing the current means-tested pension with government contributions to private super accounts that are below the minimum balance.
    • This would create a simpler system that could reduce current incentives for people to spend or manage their personal finances in a way that increases their eligibility for the means-tested pension.
    • Although mandatory superannuation contributions are notionally made by employers, for many people the reality is they substitute for otherwise higher current-day wages.  However, mandatory superannuation is important for people on low incomes as they tend to have low bargaining power, which means their wages can be pushed down to the bare minimum needed for current living costs and inadequate for any voluntary retirement savings.  Similarly, welfare payments for those not-yet retired should also include an extra protected component for savings (i.e. contributing to mandatory superannuation).
    • Providing the low-paid and those on welfare with superannuation is also important to give them a stake in society's wealth (e.g. via "Capitalist Co-ops"), since the concentration of capital through the ownership of land & corporations otherwise gives the "elite few" disproportionate power & control over society and leads to the further unequal accumulation of wealth and increased inequality - because only when people have more income than their basic living expenses can they save & invest any surplus so as to build their future wealth.  This is why the ABS charts here (& copied below) show that wealth inequality is starker than income equality (and conversely, a small improvement to income equality could significantly reduce wealth inequality).

Universal Basic Income (UBI)

  • Furthermore, with a UBI in place there would be no need for a minimum wage (although whether that is socially acceptable depends very critically on how high the UBI is), which should then create new employment opportunities, as it would be less costly for businesses to employ someone.  In effect, it would introduce a more efficient form of "access pricing" for labour, analogous to utility bills, where the UBI (paid by government) forms the fixed-cost component for the minimum cost of living and the variable cost (paid by consumers) of what is then genuinely voluntary labour only needs to compensate for the "marginal cost" (disinclination) of the person undertaking that labour.  This would have cascading effects throughout the economy; for example, it could become more viable to repair rather than replace broken appliances (thus reducing waste & environmental damage), and lower marginal labour costs (in isolation) would make it cheaper to eat in restaurants, but as the cost of food ingredients would then form a bigger proportion of meal costs, smaller (more healthy) meals would be relatively even cheaper (unlike at present where customers are encouraged to eat in excess because fixed, high service costs mean a larger meal incurs a relatively small premium).
  • On the other hand, people providing essential services (e.g. nurses, teachers etc.) may be able to bargain for higher wages than at present, because they would not have to work just to survive.  In other words, wages might better reflect the value of the job to society than at present.  Also, companies would have to focus more on making work a positive experience - e.g. as a place for forming and enjoying relationships with others - in order to attract people to spend half their life there.
  • A guaranteed basic income would enable people to borrow against it to buy their home, instead of being forced to rent indefinitely (because bank's won't lend against future benefit streams that are only available for rent support, as at present).  Also the level of a bare-minimum & truly unconditional UBI could be based on the cost of housing in regional areas and thus cost taxpayers significantly less than the rent-assistance currently required for unemployed residents struggling with unaffordable housing in high-priced cities (further welfare supplements might be available subject to conditions such as not refusing employment or retraining opportunities).  The implication is that the unemployed may have to move to non-urban areas where they could afford rent, but although these areas may have few current job opportunities, a UBI makes this a feasible option as recipients would not have to provide evidence of job applications (as required with current welfare benefits).  Over time, the growing regional population (supported by a planning & transport strategy connecting regions to cities with fast rail links) would improve the economic viability of local businesses and thus facilitate new residents on UBI gaining employment or creating new businesses and contributing to increased local economic activity (as occurred in trials of a universal basic income in Uganda and as might be expected when people no longer have to worry about their most basic, immediate needs and can afford to take risks & innovate).
b) Mandating the purchase of lifetime annuities to provide an indefinite minimum income beyond "retirement age" (to the extent a specific "retirement age" has much meaning in future).
    • Note if lifetime annuities aren't compulsory then demand will be biased towards those that expect to have a higher than average life expectancy, which will cause premiums to rise and be poor value-for-money for a person with average life expectancy, thus causing a spiral of low demand and higher premiums.  There is also of course the problem of people spending their savings too quickly and then expecting the Government to bail them out.  These market failures justify mandating minimum annuities.
c) Replacing most tax allowances and welfare payments (but not disability support) with one, simpler Universal Basic-Income (UBI) - see inset box, plus my initial paper, "Supporting Employment & Reforming Welfare(on the need for a UBI to support productive employment of an ageing population, amongst other things) and my subsequent UBI paper (also published here), my cost calculations in section 2 below, and my latest article on a "UBI for Covid".

d) Supporting more affordable housing by, for example, allowing low-wealth first-home buyers to use superannuation funds for a deposit or mortgage repayments (subject to constraints).  This could be enabled if APRA helped manage excessive investor demand for housing through lending controls as suggested here (noting that as a matter of principle, low-wealth households should be able to use their limited savings for a home deposit, but allowing the wider population to access superannuation for this purpose will simply bid up the price of housing).  However, this is not a substitute for having a progressive tax & welfare system to redistribute wealth, since increasing inequality is the fundamental cause of declining home ownership.
    • Note the proposed low tax rate of 15% on superannuation earnings could also address the economy's current distortion towards housing investment without requiring changes to negative gearing policy, which is mainly a problem because of its interaction with the discounted tax rate currently applying to capital gains (which the over-rated Treasurer Costello introduced along with unsustainable superannuation tax changes, although maybe his adviser is to blame).
http://www.futuremap.com.au/category/hr-specific/employee-engagement/



Wealth inequality is more pronounced than income equality (see discussion 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.
  • Distribution of Australian equivalised household disposable income (after tax & Medicare levies - ABS "Graph 2" from here):

  • Distribution of Australian household wealth (ABS "Graph 3" from here):




2. 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 income not held in super accounts (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 children, 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:
plus:
  • A company 'cash flow tax', as suggested in the Henry Tax Review and further developed by Garnaut et al., which 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.
    • A cash-flow tax seems an appropriate approach for small businesses if one considers all such businesses as representing 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.
    • Also 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 in return for holding those industry risks.
    • Once introduced, I recommend having a fixed tax-free interest rate benchmark (above which investments returns are taxed), to give certainty and simplicity for business and because this will provide an automatic macro-economic stabiliser - reducing the tax take and thereby stimulating the economy when business investment returns are low.  And because long-term interest rates are currently so close to zero (in 2020 & several years prior, as well as in futures markets), the time to introduce this tax - at least from a Treasury perspective - is NOW (so a low or even zero-interest benchmark rate can be justified and ensure significant ongoing tax receipts, quite possibly making existing corporations tax superfluous).
    • Preferably the cash-flow tax should 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, 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 broad 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, 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 ratealthough 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, to remove the bracket-creep budget toy from politicians (although bracket creep can be a useful way of gradually overcoming fiscal problems with minimal political trauma).  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 xlswhich 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 current shared-household pension, 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.

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).


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David Thorp,
24 Jun 2019, 18:38
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