- Terry McCrann
- The Australian
Separated by three centuries, the timeless quotes of Jean-Baptiste Colbert and Willie Sutton capture in the first the essence of true tax reform and in the second the inevitability of tax reality.
They therefore identify what should be the ambition of Joe Hockey’s ‘conversation’ on tax; but also the likely outcome of what he has unleashed with the release of the Treasury tax paper: in brief, a replay on a bigger and likely more permanent scale of his disastrous first budget.
Colbert, a finance minister to the 17th century’s ‘Sun King’ Louis XIV, elegantly advised that: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
Generally considered to highlight only the ‘efficiency’ objective of tax collection, when considered more holistically, it really also encapsulates what should be the parallel objective of an optimum tax system — equity. For a loudly hissing goose — geese — would suggest an absence of both.
While the quote from Sutton — who in the early decades of the 20th century was embarked on a less formally acceptable form of ‘plucking’ than Colbert and all his successors in all the countries around the world — might have lacked in elegance, it more than compensated in powerful logic.
Asked why he robbed banks, Sutton replied: “Because that’s where the money is.” Ah, the inevitability of tax: reformed or otherwise. And “where the money is” in 21st century Australia is in the near $2 trillion superannuation pool.
That is to say, it’s the last big pool of lightly taxed money, the ‘plucking’ from which — especially if you are targeting that amorphous category of ‘the rich’ — will likely cause the least amount of not so much audible but acceptable (to the chattering classes) hissing.
Who could possibly deny the ‘equity’ of ending the ‘rich’s’ super tax rorts; and for that matter, let’s throw in the dividend imputation rort, negative gearing and the capital gains discount.
Well the case is actually nowhere near as self-evidently clear-cut as claimed. At core it rests on the casual assumption that the neutral rate of tax is 100 per cent and anything less is a tax concession or expenditure.
Superannuation is taxed at two levels: at contribution and subsequently in earnings. Yes, both are taxed at lower levels than other forms of income; but there is a very huge price to be paid for that — you lose access to the money for decades.
Lost in Joe’s ‘conversation’ this week was also the fact that the super contributions of ‘the rich’ are already taxed at a higher rate. Introduced by Treasurer Wayne Swan in 2012, anyone earning more than $300,000 now pays 30 per cent tax, everyone else is still at 15 per cent.
Yes, that’s less than the 47 per cent — ‘temporarily’ hiked to 49 per cent by Joe last year — to be paid if the money was paid as salary. And yes, the earnings on the 70c in every dollar left will then only be taxed at 15 per cent.
But to repeat, the taxpayer cannot access that money, as against the 53c (51c) in the dollar of ordinary earnings. Further, the taxpayer can redirect money coming directly to him or her into low tax or no tax or even tax-loss generating alternatives. Or more simply be spent, with an eye to a taxpayer-funded pension in retirement.
Simply and clearly, superannuation should be taxed at a lower rate than ordinary income on both equity and efficiency grounds. Equity, as a fair trade off for the inflexibility it imposes; efficiency, otherwise no money other than mandated would flow into super.
With both equity and efficiency served by the central objective of our universal super scheme — that in time the tax concessions will be effectively repaid by a retiree not getting the old-age pension or at least not a full pension.
A casual assumption of utter stupidity hung over much of the ‘conversation’ in the idea that a super balance of more than $2 million was ‘more than enough’; that it would finance a ‘high income’ in lifetime perpetuity.
Yes it might, in the context of the 10 per cent-plus income returns of the last two decades. But not if we are entering a future of 2-3 per cent returns — especially in fixed interest securities which should form the bulk of super balances in retirement pension mode.
While a $2 million ‘balanced’ portfolio is vulnerable to being cut 20-30 per cent in another GFC. Suddenly a ‘rich’ self-funded retiree might be struggling to live on $45,000 a year.
While that might sound reasonable right now, what of a return of inflation? Even modest 5 per cent inflation cuts the value of a super balance in half after 14 years.
By then an income of effectively $22,500 a year would no longer sound quite so ‘rich’. It would also almost certainly see such a ‘rich retiree’ back on the pension — somewhat defeating the purpose of the exercise.
Perhaps our good treasurer would have been best advised to have had a ‘conversation’ with himself before unleashing his ‘good idea’, which will inevitably turn ‘tax reform’ into tax increase, neatly replicating last year’s budget. Back then Hockey had the ‘good idea’ of the ‘temporary’ high income levy as the sop to the ABC, Fairfax et al for the other budget cuts.
Apart from earning exactly zero credit — indeed he was flayed for breaking the ‘no new taxes’ promise — what did we get? The high income levy and precious little of the rest.
His tax ‘conversation’ is headed the same way. We are likely to see increased taxes on the rich/ high income earner super and precious little of any real tax reform. Thus does a Liberal treasurer become the instrument of a higher tax ‘consensus’.