Tuesday, March 16, 2004

Tell me it isn’t true!

This reads as if I am angry.

Latham wants to cut the already hugely concessional rate of tax on superannuation to zero. [* see update]

The AFR deadpans: “The superannuation industry has reacted favourably.”

Well, yes – but the biggest winners would be Australia’s highest income earners. They are the people who put the most into super (both because they have the most to spare and because of its generous tax treatment, which Latham wants to make more generous still).

A zero rate of tax on earnings would be quite an achievement for Labor. It is a step not even John Howard was not prepared to take when he neutered the capital gains tax.

Here’s an idea – why not tax all earnings, even those from dabbling in financial markets, at the marginal rate.

It’s an idea that might have once come from Labor...

Despite what Latham is doubtless saying, it is a measure that would most likely not do much to increase the rate at which Australians save. Vince Fitzgerald notes in his landmark report (page 26) that “an increased return on saving is an incentive to save more, but also an incentive to save less.” “Save more” (through super) because it boosts the return on that sort of savings, “save less” because it makes it easier to reach a saving target.

And to the extent that a zero rate of tax on super earnings does push more of our money that way, history suggests that will happen at the expense of other (more reasonably taxed) forms of saving.

And what about Latham’s catch cry "65 at 65"?

It might be an understatement. Work the done by Anthony King at the National Centre for Economic Modelling (pp 27–29) suggests that a zero rate of tax on super fund earnings could give some Australians a higher standard of living post retirement than they had pre-retirement. [* see update]

(Assuming that the cut in tax on super earnings was paid for by increases in tax on other earnings in the working years, as it would have to be, otherwise his promised tax cut would be a cruel joke on retirees.)

As King says: “At this point, it would be fair to ask why one would want to aim for such high retirement incomes.”

We could ask as well: what would those high retirement incomes buy?

A higher retirement income for one Australian will buy that lucky Australian preferred access to the services of whatever working-age Australians are around during his or her retirement.

But a higher retirement income for all Australians would not buy all of them all preferred access to those services (except at the expense of working age Australians). It would bid up the price of the services they wanted access to. Another cruel trick, don’t you think?

Guess what? The best way to increase the purchasing power of our retirement incomes is to increase the number of workers around in our retirement years.

That's what Costello proposes. He wants us to work longer. And that's what the AFR says Latham opposes.

UPDATE: (18.03.04) It isn't true. In my anger I misread what Latham had promised. He has promised to eventually remove the (already concessional) 15 per cent tax on contributions, presumably leaving in place the (concessional) 15 per cent tax on earnings.

This blunts my criticism but does not change the thrust of it. The biggest beneficiaries would still be those Australians who earned the most. But the policy would not, as I feared, run the risk of giving some Australians a higher standard of living after retirement than they had before it.