Tuesday, March 10, 2009

Tuesday Column: What if Swan and Rudd got tax right?

It's a good thing Kevin Rudd and Wayne Swan set up the Henry Review to examine Australia's tax system because, frankly, before they took office there's little evidence they understood it.

Their election promises were shockers. They proposed tax cuts that increased (yes, increased) the effective marginal tax rate faced by average earners. The Coalition didn't point it out because they were actually Coalition tax cuts, largely photocopied by Rudd and Swan and represented as their's.

It happened because the cuts also extended the range of pay rates over which the Low Income Tax Offset was withdrawn, pushing up the effective marginal tax rate faced by average earners by 4 cents in the dollar.

Wayne Swan went ahead with the changes, promising "incentive to people out there who will work additional hours,"...

...but by then the Treasury had told him (in papers since released under the Freedom of Information Act) that while the changes would increase the total number of hours in work, they would prompt some 33,000 Australians presently in work to cut their hours.

Their plan for First Home Saver Accounts was ditched within weeks of the election and replaced with something only slightly more workable. Under that plan every dollar that a first home saver put into a special account - up to a maximum of $5,000 - would be matched by a government contribution of 15 cents. Except for Australians earning more than $80,000 per annum. They would get a government contribution of 25 cents for every dollar they invested. Really.

Unless of course they earned more than $180,000 per annum in which case they would be blessed with a government contribution of 30 cents per dollar they put in.

Wayne Swan and Kevin Rudd actually put the scheme forward for serious discussion, even publishing a table that made the disparity clear - low and middle income earners were to get up to $750 a year from the government; high income earners, $1,500.

They got what they deserved - submissions such as these, still available on the Treasury website: “I am shocked and utterly disillusioned to find that uthe government contribution is twice as much for those with the most income as for those with the lowest," I would like to know why an earner of $180,000+ will receive the most contribution, while a low to middle income earner will receive the least,” and so on.

By Budget night they had abandoned the design feature and instead agreed to match each dollar in a First Home Saver Account with 17 cents regardless of the saver's income.

But what blind spot could have possibly made them get it so wrong in the first place?

Its superannuation. Swan and Rudd modeled their demonstrably unfair home saving scheme on Australia's superannuation saving scheme.

Imagine a scheme that paid high income earners 30 cents for each dollar they put into super; middle earners 15 cents, and low income earners absolutely nothing. It's the opposite of how things should be, but we tolerate it because it is not often expressed in those terms.

Under the arrangements introduced by Rudd and Swan's Labor predecessors all payments into super are taxed at 15 per cent, instead of the saver's marginal rate. That means Australians earning more than $180,000 on the top 45 per cent rate get a benefit of 30 per cent, the bulk of us on middle incomes get a benefit of 15 per cent and those earning less than $35,000 get nothing.

So big is the effective payment to high earners that the Treasury points out the top 5 per cent get 37 per cent of the concessions. The Australia Institute says it would be cheaper to pay them the pension.

But it'd be wrong to believe the rort is here to stay. The Coalition had a go at removing it in its early reforming phase. Remember the super surcharge?

And Wayne Swan set up the Henry Tax Review. The Prime Minister and Treasurer may have begun their education about tax and super from a standing start, but they are quick learners, as their responses to the financial crisis demonstrate.

With very little publicity Wayne Swan has asked the Henry Review to bring forward the section of its report dealing with the taxation of superannuation. It'll go to him in time to be considered in the lead up to this year's Budget. Submissions to that part of the Henry Review (but not those to other parts) have already closed.

The review is certain to point to the unfairness and ineffectiveness of the super tax concessions we have now. We give high income earners - the most able to save for their retirement- the most assistance in doing so, and low income earners - the least able to save - the least assistance.

Wayne Swan and Kevin Rudd, more concerned about Labor values than Labor tradition, are likely to listen. The party that invented compulsory superannuation may finally make it fair, or at least a good deal fairer.

All eyes will be on the Treasurer on the second Tuesday in May. The head of his department, also the head of Henry Review, is making sure of it.