Tuesday, December 16, 2014

Advice for Hockey: Slug super and fix the budget in one hit

Sooner or later Joe Hockey is going to do what's needed.

He is running out of other options. In opposition he said returning the budget to surplus would be easy: "Based on the numbers presented last Tuesday night, we will achieve a surplus in our first year in office and we will achieve a surplus for every year of our first term," he promised just 18 months before the election.

As the election came closer he became more cautious, refusing to set a date. And then in his first budget, in May this year, he said he would deliver a surplus in 2018-19, a deadline now a mere memory.

Many of the things he thought would be simple turned out to be difficult. He was going to axe 12,000 public service positions before discovering Labor had already set in train processes to axe 14,000. He hemmed himself in with promises not to cut health, education or pensions, each of which he has had to honour in the breach.

Some of his promises made things needlessly hard. Axing the carbon tax (while keeping the associated compensation measures) will cost the budget $7 billion.

And the iron ore price collapsed. It'll rip $14 billion from the budget over the next four years. It's a truly massive problem, yet rather than find a massive fix Hockey has so far used piecemeal measures such as shaving foreign aid, indexing petrol excise, penalising job seekers, giving less to universities and trying to charge for previously free visits to the doctor.

Each doesn't save much, and each arouses so much opposition as to make it scarcely worth his while, even if it gets through the Senate.

What he needs instead is one really big tax hike (spending cuts won't raise enough), but one won't rip money out of wallets and purses. It needs to be easy to justify (attractive to Labor), invisible on a day-to-day basis, and simple. And it needs to raise, say, $12 billion. Per year....

Labor's own tax review has already pointed the way, but at the time Labor was too scared to take any notice.

What Hockey needs to do is to tax compulsory superannuation contributions as income, which is what they are. At the moment after the employer pays them they are taxed from the fund at 15 per cent, which is a very good deal if you are on a marginal tax of 37 per cent, quite a good deal if your rate is 19 per cent, and an appalling deal if you earn so little your tax rate is zero.

Instead of being paid by the fund the tax would be paid by the employee at the same time as all their other tax, in the same way as other tax and at the same rate as other tax. Nothing could be simpler.

The Treasury says the present tax arrangement will cost the budget $17.8 billion this financial year, $19.15 billion next financial year and $20.7 billion the following year. The figures exclude the incredibly generous concessions for the income earned within super funds, which needn't be touched. But they do include the tax concessions on extra contributions made over and above what's compulsory. To the extent that they are made merely to avoid tax they will vanish, cutting the benefit for the government to about $12 billion a year – which happens to be about what's needed.

Former Treasury economist Steven Anthony of the Canberra consultancy Macroeconomics has come up with the $12 billion figure, from taxing wages paid as super in the same way as wages paid as wages. He says it's extremely conservative and it would climb each year.

The thing about compulsory contributions is that they are compulsory. They can't be cut. The government would lock in an extra $12 billion per year (and climbing) at the stroke of a pen. It shouldn't dent household spending in the same way as would an increase in income tax, but it might make households more wary of spending, believing they've less tucked away for when they retire.

Which is where Hockey's just-completed financial system review comes in. It's come up with a plan to boost retirement incomes by between 25 per cent and 40 per cent, largely by the simple expedient of cutting the other "superannuation tax" – the fees imposed by fund managers for performance that's usually no better than ordinary.

The plan is wonderfully simple. The market would cut the fees all by itself. All the government would do is conduct an auction every three or so years for the right to manage all new default accounts. With a huge business up for grabs, the fund managers would fight among themselves to bid the fee down. Right now fees range from 0.48 per cent 1.84 per cent. When Chile adopted the scheme it got the fees for new accounts down to 0.4 per cent and customers in other schemes switched over. The Grattan Institute reckons it would save around $10 billion per year, which coincidentally is close the $12 billion extra the government would take from them by properly taxing their super contributions.

As it happens the Coalition is in a good position to blame Labor when it grabs the $12 billion. It is Labor that set up compulsory super in 1992. It is Labor that taxed all contributions at 15 per cent regardless of the taxpayer's rate. It is Labor that was prepared to leave the woefully deficient scheme in place until right near the end when budget pressures forced it to take limited action against high earners – action that it didn't have time to put through parliament.

If anything it is the Coalition that has a better track record. Peter Costello introduced a 15 per cent super tax surcharge for high earners (they paid 15 per cent plus 15 per cent) which he later removed after it led to "enormous complexity and compliance costs".

This wouldn't. There is nothing simpler than taxing all income as if it is income. And the pay-as-you-earn tax system is set up to collect it.

It's over to Joe, and the tax inquiry he is about to commission. He could solve his problems in one hit.

In The Age and Sydney Morning Herald

Related Posts

. How unfair are super tax concessions? Two views

. The Grattan fix. How to stop fees eating up our super

. Treasury: Super costs us three times what it should