Tuesday, May 20, 2008

Tuesday Column: Labor's home saving scheme is now only half a dud

Wayne Swan said his Budget would keep all of Labor’s election promises.

But it didn’t really.

Some of them were too awful to implement in full.

Take Wayne Swan’s promised ‘Low Tax First Home Owner Savings Accounts’.

His pre-election sales pitch promised that “savers will be eligible for a low tax rate of 15 per cent on the first $5000 of income they deposit in their account each year rather than the ordinary tax rate they would pay”.

There were two problems. One was there was no mechanism for charging people one rate of income tax on wages parked in an account and another rate of income tax on the rest. Labor hadn’t realised that.

The other was that Australians on salaries of up to $30,000 (soon to be $34,000) pay no more than 15 per cent tax anyway – for them the so-called ‘low tax’ accounts wouldn’t be low tax at all...

But for someone earning in excess of $75,000, the 15 per cent rate would be valuable indeed. A rate of 15 per cent instead of 40 per cent would mean a gift from other taxpayers of $1,250 for each $5,000 parked in the accounts.

For a very high-income earners on a tax rates of 45 per cent the gift would be bigger still.

Labor didn’t see this at the time, explaining that it was proposing “superannuation-style accounts”.

The tax concessions for superannuation do indeed have such unfair and indefensible features. That Wayne Swan didn’t see them that way is disheartening.

He continued not to see the problems after the election when the Treasury made them clear.

In advice to the Treasurer mainly blacked out from documents released under the Freedom of Information Act the Treasury said that they couldn’t charge one rate of tax on income put in one place and another on income put in another unless the specially taxed accounts were to be funded by employers as are superannuation accounts.

But the Treasury said Wayne Swan could achieve the same effect as his policy would by paying a government co-contribution directly into each First Home Saver Account. If he wanted exactly the same effect, he could direct the biggest contributions into the accounts of the highest income earners.

I am guessing that the Treasury said this to make a point, one the Treasurer failed to get – that his policy was untenable.

Instead in February Wayne Swan and the Housing Minister Tanya Plibersek actually published something very close to the Treasury’s ‘suggestion’ under their own names in a consultation paper.

It was hoot - the equivalent of a ‘kick me’ sign.

It even included a table making clear that an Australian on up to $80,000 could get $750 from the government (Swan and Plibersek had at least abandoned the idea that low-income earners should get nothing), someone earning more than $80,000 could get $1,250 and someone earning in excess of $180,000 could get $1,500.

Expressed as a per cent the matching contribution would be 15 per cent of what most earners put in, 25 per cent of what higher income earners put in, and 30 per cent of what very high-income earners put in.

Then Swan and Plibersek asked for submissions.

Unpublished until now, the public submissions excoriate the ministers’ clever idea and their dumbness in actually putting it forward for comments.

One member of the public, Leah Fawcett, wrote:

“I would like to know why an earner of $180,000+ will receive the most contribution from the government, while a low to middle income earner will receives the least.”

“I understand that higher income earners pay more tax. But someone with an income of $180,000 will still take home more than an average income earner. That person should be more able to afford their own home.”

Another, Ian Hafekost complained that under the proposal:

“Those individuals with a taxable income of up to $80,000 per annum, who you would think might need the most help in saving for a deposit, receive the smallest Government contribution.”

Yet another, David Ng was “shocked and utterly disillusioned to find that the government contribution is twice as much for those paying the highest rate of income tax (i.e. with the most income) as for those with the lowest”.

“I cannot comprehend how rewarding those who earn around $80,000 per annum with a $1,250 contribution, and those who earn $40,000 with $750, even though they have both saved $5,000, could possibly do anything other than to push house prices even further beyond the reach of the latter, who is after all competing with the former,” he said.

“To portray it as being even vaguely beneficial to lower-income earners is a fallacy, as not only does their higher-earning competition have equal access to the scheme, and not only do these richer aspirants escape paying the higher rates of income tax that would normally be applicable to their savings; they are to be given more money solely because they earn more.”

“Not because they have saved more, but because they earn more,” he added for emphasis.

David Ng said that as it stood the proposal might even push housing further out of the reach of low income earners.

“The proposal is a tax-break for middle-to-high income earners that will enable them to spend more on housing, thus pushing up prices which are already beyond the reach of most low income earners.”

The proposal would be the right one only if the aim was to “push up house prices and exacerbate the housing schism”.

As he put it: “Tax reform to help the rich should be publicly debated rather than advanced under the guise of improving housing affordability”.

What would Wayne Swan and Tanya Plibersek do without such selfless Australians as Leah Fawcett, Ian Hafekost and David Ng prepared to spend their own time gently pointing out the blindingly obvious ways in which their Ministers have stuffed up?

The Treasurer sheepishly and belatedly backed down on Budget night. His budget documents said that the government contribution had been changed to a flat 17 per cent “in order to increase assistance to low and middle income earners”.

Because of the late change the start of the scheme was pushed out from July to October.

But it is still an untenably unfair scheme. The earnings of the a First Home Owner Savings Accounts will be taxed at 15 per cent – a concession that’s worth nothing for a low-income earner, but a lot for a very high-income earner.

The Treasurer and Housing Minister mightn’t have twigged to that.

2 comments:

daiskmeliadorn said...

well, that was eye-opening! and depressing.

georgia. said...

*head. meets. desk.*

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