Friday, March 16, 2018

Labor's Tax Plan Is A Raid On Every Australian's Super Fund

The next federal election campaign got under way this week.  It looks like debt, deficit, and taxation will dominate our lives for the next year or so.  Not nearly as exciting as citizenship and sex scandals, but ultimately more important to the long-term prosperity of the nation.

The differences are quite clear and stark.

The coalition government is arguing, from a position of budget deficit and growing national debt, for lower company and personal taxes.  The Labor opposition is arguing for higher taxation, and presumably higher levels of spending.

What makes this situation particularly interesting is that the government's position, given the budget situation, is weak, while Labor, rightly or wrong, is perceived to be weak on economic management.

All that suggests that we are in for an ugly debate that generates more heat than light.

The government's arguments for lower tax burdens are quite good.  The Australian company tax rate is quite high by international standards.  The consensus amongst economists is that the economic burden of company tax falls on consumers and workers.  So a company tax cut that primarily benefits foreign shareholders will ultimately translate into benefits for Australian consumers and workers.  This was Labor party policy in 2010.

Of course, company tax cuts won't immediately benefit Australians much and so personal tax cuts would provide a bigger economic (and not to mention political) bang for buck.

What makes these arguments a hard sell for the government is the persistent budget deficits and growing debt that Australia has sustained since 2008.  It's all very well the government claiming that tax cuts are factored into the return to surplus, but the very basic problem is that we've heard this before.  Wayne Swan promised surpluses in 2012.  To paraphrase Jerry Maguire — show us the surplus.

Labor's problem is that they are being too clever by half.  They want to increase taxes without clearly saying so.  That is profoundly dishonest.  Receiving a tax refund is not welfare.  In the same way receiving your change from the supermarket isn't corporate charity — it is a return of your own money.  Millions of Australians overpay their tax liabilities each and every year and receive a refund from the government.  Labor proposes to stop paying refunds to older Australians — both now and in the future.

Australia's tax system is quite complex and politicians often rely on that complexity and a lack of community understanding of taxation to their own benefit.  Not just politicians — the Australian Broadcasting Corporation recently published an article arguing against company tax cuts while confusing the difference between revenue and income.

Australia's dividend imputation system was introduced in the late 1980s.  It was intended to tax company distributions at the shareholders' marginal tax rate.  For Australian tax residents the company tax became a withholding tax.  Those Australian shareholders with a marginal tax rate above the company tax rate generally had to pay in and Australian shareholders with a marginal tax rate below the company tax rate generally got a refund.

At the time a pragmatic decision was taken to only refund the amount that extinguished any outstanding tax liability.  Taxpayers entitled to more simply lost out.  In 2000 the Howard government made the principled decision to refund the entire amount that could be owed the taxpayer.  Labor proposes to revert to the pre-2000 pragmatic approach.

So the important question becomes, who are these taxpayers likely to be losing out?  Answer:  current and future elderly Australians are the losers.  Labor's policy is not just a raid on the living standards of the currently retired (former workers), it is a raid on the superannuation funds of every currently working Australian, too.

By invoking a return to Paul Keating's original policy Labor must have hoped to ignite some nostalgia for a bygone era of prosperity when it had a reputation for sound economic management.  Labor's greatest economic asset, Paul Keating, would be in the forefront fighting a weakened coalition government on economic policy.  That does sound like a winning formula.

Yet it immediately contradicts Keating's greatest achievement — superannuation.  The fact is this is just another raid on super.  Now there may be good reasons why super funds should effectively pay more in tax, but it is up to Labor to spell out those reasons and not simply hope that nobody will notice a tax increase.

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