I can understand why libertarians might favour a flat tax on superannuation contributions and on ordinary income. I disagree vehemently with that position, but it’s logically coherent to me. Personally, I favour a progressive tax on both of those things, and I think that position also makes sense. What isn’t coherent to me is the idea that we should tax ordinary income in a progressive way, with higher income earners paying a greater proportion of their income in tax, but we should tax super contributions with a flat tax. How does that make sense?
Yet the proposition that higher income earners should pay more tax on their super contributions seems to be accepted wisdom, at least in certain quarters. Wayne Swan was accused of ‘class warfare‘ when he announced that we’d move from having a completely flat structure of tax on super contributions to one that’s flat between $37000 and $300000, and then has an increased rate at the very top.
Before July last year, the way we taxed super contributions didn’t make much sense at all. The lowest paid workers were paying 15% on their super contributions, even though they didn’t pay any income tax on their ordinary earnings. Not only were they not getting a tax concession on their super contributions, they were effectively being penalised. A low-paid full time worker wasn’t penalised, but they weren’t benefiting either, with super and ordinary income taxed at the same rate. To fix up this glaring inequity, the government introduced a new ‘offset’ that effectively cancelled the tax that people on less than $37 000 paid on their super contributions. So far, so good.
A typical full-time worker faces a marginal tax rate of 32.5%, but pays 15% on super contributions. That’s a tax concession of 17.5%. If you’re a higher income earner, you get a bigger concession – if you’re on the 37% tax rate, your concession is 22%, while those on over $80 000 get a 30% concession. Where Wayne Swan went too far in the eyes of some was to scale this back, just a little bit, so that people on over $300 000 now pay 30% on their super contributions, for a tax concession of 15% – pretty close to the 17.5% that ordinary workers receive. If you’re in the $180 000-$300 000 bracket, you still get the 30% concession.
Tax concession (marginal rate minus the rate on super contributions) – percentage points
The 2012 changes were a step in the right direction, but we still have only a very mildly progressive system of tax on super contributions. I’d like the country to move towards a system in which everyone received the same ‘concession’ for super contributions. Let’s say the concession is 17.5 percentage points. That means, if you earn between $37 000 and $80 000, nothing changes – you still face a 32.5% marginal tax rate on your income, and 15% on super. If you’re in the next bracket, you’ll pay 19.5% instead of 15% on your super; high income earners would pay 27.5%.
Tax rates on super contributions with an equal concession
With a change like that, everyone still gets a concession on their super, but they’re not skewed to high income earners as they (still) are now. This isn’t a radical proposal – it’s pretty much what’s in the Henry Review, although the Review proposed a flatter personal tax structure and an equal 20 percentage point concession for everyone who earns above $25 000. Now, can someone explain to me why a system like this would be a bad idea? Preferably without using the phrase ‘class warfare’.
Note: I’ve ignored the Medicare Levy in my charts, for simplicity’s sake. I