YOU need just the right amount of inequality in a society. Too much results in resentment, crime and even revolution. Too little results in destruction of wealth-generating prosperity.
Tax, of course, is the main way to change equality.
Tax the wealthy too little and you increase inequality because the wealthy take the advantages from society without paying for them. Tax them too much and enterprise and wealth generation suffer, as the Wilson Government in the UK found when the top marginal tax rate was 95 per cent.
You end up increasing the disadvantage you hoped to alleviate.
So here we are, two years after the Henry Tax Review reported to the Government, still inquiring into how best to go about it.
Most recently, the Senate Economics Committee ended its submission period for its inquiry into the mining tax and the government’s plan to use part of the proceeds for superannuation changes.
Submissions closed just before Christmas but the Superannuation Industry Association has some more research to come in.
In some respects the seemingly endless inquiries are not a bad thing. Very often the best changes come after significant academic, bureaucratic and industry inquiries and input. After a time their ideas seep into society as accepted wisdom, making it easier for governments to put them into effect.
The goods and services tax, compulsory superannuation for all employees, floating the dollar and easing the regulation of the financial markets are all good examples.
When, on the other hand, a Treasurer pulls rabbits out of the hat as Peter Costello did with changes to the capital gains tax and superannuation, the consequences are invariably poor.
Indeed, a lot of the hand-wringing over superannuation now is the fallout of Costello’s changes. Superannuation favours the rich, the argument runs, the more so because Costello made retirement payouts to people over 60 tax free.
So people on $180,000 a year who hit the top marginal tax rate of 46.5 per cent can put the next $50,000 a year they earn into superannuation and cut that rate to 15 per cent. When they retire they will have saved 31.5 per cent of $50,000 every year up to their retirement. A big tax break.
The bulk of people on lower marginal rates make little or nothing. Some low-income people on zero marginal tax will be worse off by putting money into superannuation where it is taxed at 15 per cent upon entry.
The Government proposes at least to fix this with a standard tax rebate for low and medium taxpayers, using the proceeds of the mining tax.
But the ACTU argued in a submission to the Senate inquiry that the tax breaks should be done away with and everyone should pay their marginal rate on superannuation contributions.
However, turning around the Costello foolishness will be politically impossible. Any government that attempted it would lose the votes of swags of people approaching retirement.
The Costello decision has had a grave unintended consequence. In the days when the decision was made, super funds were making good returns. Now they are not, and people are acting accordingly. The global financial crisis may have forced some to delay retirement, but others have been induced to retire as soon as they turn 60 to grab all their tax-free super now and invest it by paying down debt or in fixed-interest accounts before their super fund can do any more damage with their money.
Three years of losses on the trot make withdrawal from superannuation an attractive proposition, especially if Uncle Peter is giving it to you tax free.
It would have been better to reduce or eliminate the tax on funds going in and reduce the tax the earnings on those funds rather than cut exit taxes. It would have been better to leave or increase exit taxes to encourage saving, not give approaching retirees and vote-catching bonanza.
The other Costello policy which seemed like a good idea at the time, but not so good in the long term, was to make the Commonwealth debt free. Sounds good. And it did leave the Australian Government in a good position to borrow to alleviate the global financial crisis.
But once the government withdraws from the borrowing market, investment is left to the private sector with the results we have seen. How much better it might have been for the Australian Government to borrow from its own people and their superannuation funds at a sustainable rate of interest to invest in infrastructure which would more than pay the interest and be of long-term benefit.
However, Costello withdrew the government from the borrowing and infrastructure-investment market in Australia. As a result there were no government bonds for superannuation funds and individuals to invest in. So they had to lend and invest in private cowboys and big-risk takers instead.
The mining boom, the global financial crisis, the end of the housing boom, the ageing population and other factors make change desirable and inevitable. But it is critical for the government to get its changes right.
To get it right we need the right mix of taxes. Rather than whinge about superannuation tax breaks for the rich, we should be making it more attractive for middle and lower incomes to save for their retirements. We should reduce the tax on labour and increase the tax on consumption.
We should change the way we tax the family home – the main item of capital for most people. Instead of hitting people with a massive inefficient stamp duty when they move house we should have an annual property tax.
The Costello changes to capital gains tax should be scrapped. Instead of halving the rate after one year there should be a sliding reduction scale – reducing to nothing after, say 15 or 20 years — to encourage long-term investment.
The essential story is that tax is complex, needs detailed and constant attention, but that it is critical in achieving the right level of inequality – not so big that Father Bear gets the lot and not so small that Baby Bear gets nothing – but just right.
CRISPIN HULL
This article first appeared in The Canberra Times on 7 January 2012.