Superannuation is inequitable and unsustainable | | MacroBusiness

I agree with Leith van Onselen that Australia’s aged pension/superannuation regime will be sorely tested over the next 30 years as the number of workers per retiree falls to below 2.5 to 1:

Workers per Retiree

But I don’t agree with his proposed solution:

…The flat 15% tax on superannuation contributions should also be axed in favour of a flat 15% concession. As illustrated above, under the current 15% flat tax arrangement, the amount of super concessions rises as one moves up the income tax scale, resulting in a system whereby higher income earners receive the most super tax benefit, despite being the very people that are the least likely to rely on the aged pension in retirement. A flat 15% concession, by comparison, would improve the equity and sustainability of the system by: 1) providing all taxpayers with the same taxation concession; 2) boosting lower income earners’ super savings and thus reducing reliance on the aged pension; and 3) reducing costs to the budget.

Argument that the flat tax on superannuation contributions is inequitable is based on the presumption that the present system of progressive tax rates is equitable. No doubt high income-earners benefit more from the flat tax than low income-earners, but the proposal ignores the fact that they pay more income tax in the first place. And even after the larger tax savings on their super contributions, the high income-earner will pay a significantly higher average tax rate.

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2 Replies to “Superannuation is inequitable and unsustainable | | MacroBusiness”

  1. Agree with your response. To exclude higher income earners from concessional tax rates on super, disrespects the tax burden they already meet…to the benefit of low/no tax payers.

    Below is a Fable that many will have read. But it is worth reading again to remind those who believe progressive tax rates are equitable.

    Be careful for what you wish for.

    Andrew

    A Tax Fable

    Suppose that everyday 10 men go to PJ’s for lunch. The bill for all ten comes to $100. If it were paid the way we pay our taxes, the first four men would pay nothing; the fifth would pay $1; the sixth would pay $3; the seventh $7; the eighth $12; the ninth $18. The tenth man (the richest) would pay $59. The 10 men ate lunch in the restaurant every day and seemed quite happy with the arrangement until the owner threw them a curve.

    “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily meal by $20.” Now lunch for the 10 would costs only $80. The first four are unaffected. They still eat for free. Can you figure out how to divvy up the $20 savings between the remaining six so that everyone gets his fair share?

    The men realize that $20 divided by 6 is $3.33, but if they subtract that from everybody’s share, then the fifth and the sixth man would end up being paid to eat their meal. The restaurant owner suggested that it would be only fair to reduce each man’s bill by roughly the same amount that each paid and he started to work out the amounts each should pay.

    And so the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of $59. Outside the restaurant, the men began to compare their savings.

    “I only got a dollar out of the $20,” declared the sixth man pointing to the tenth, “and he got $7!”

    “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got seven times more than me!”

    “That’s true,” shouted the seventh man. “Why should he get $7 back when I got only $2? The wealthy get all the breaks.”

    “Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor.”

    The nine men surrounded the tenth man and beat him up. The next day he didn’t show up for lunch, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important: They were $52 short!

    And that, boys and girls and college instructors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. There are lots of good restaurants in Switzerland and the Caribbean.

  2. I would like to know how an able-bodied person of working age paying no tax is equitable against someone paying 45% tax + medicare (also a tax), and usually working long hours. This has always perplexed me…. Likewise, I do not agree with Leith van Onselon. I am over all of this talk about inequality in the tax system and class warfare. It is inequitable, but not for the reasons that are constantly bandied around.

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