With the campaign to increase tax on superannuation in full swing two years ago, Kelly O’Dwyer — then Assistant Treasurer — let it be known that superannuation tax concessions were “a gift that the government should only provide when it makes sense”.
It has long been obvious there was a belief in some corners of Canberra that government has first claim on our income and the role of tax policy is to determine the residual available for private use.
But it still came as something of a shock that this interventionist way of viewing the relationship between government and the people had become so entrenched.
It’s at this time of the year the government reveals the extent of its generosity, in the annual Tax Expenditures Statement (this year quietly released after the close of business on the day before Australia Day).
The government’s “gifts” are all there to be seen in the TES, each one with its own price tag.
Not taxing capital gains on the family home the same as other assets: $33 billion a year, thank you very much.
Discounting capital gains by half: another $51 billion. Not taxing concessional superannuation contributions at full rates: another $17 billion. Not taxing superannuation fund earnings at full rates: another $19 billion. And so on it goes.
The problem with all this is that the estimates are extremely rubbery, and in any case they all depend on the benchmark against which the “gifts” are measured.
Taken to extremes, the notion of “tax expenditure” could be used to claim that not taxing all income at the top marginal rate is a “gift”, or for that matter so is not taxing everything at 100%.
Thankfully the TES does not go that far. The benchmark used by Treasury to make the estimates is the so-called comprehensive income tax benchmark, under which the standard income tax scale is applied to any form of income.
But what is included in “income” under this approach is still a matter of judgement.
They don’t include in the benchmark the imputed rental income of owner-occupied housing, which a purist would include.
They do include realised capital gains on such housing — and the purist would go further and include unrealised gains as well.
It’s not clear that capital gains should be included at all. And it’s not clear that taxes on saving through superannuation should be benchmarked against a comprehensive income tax on such saving.
In this year’s TES, the Treasury makes a concession to that viewpoint by including alternative estimates of tax expenditures on superannuation against an expenditure (or ‘consumption’) tax benchmark, and the result is a startling $28.7 billion a year lower.
Treasury concedes “there are reasonable arguments for both the comprehensive income tax benchmark and the expenditure tax benchmark” and adds that “caution should be exercised when drawing conclusions on the size of the superannuation tax expenditures.”
This is a warning to those who confidently state year after year, as if reciting an incontrovertible fact, that superannuation tax concessions are costing the budget more than $30 billion.
The Henry tax review was more explicit on this, stating baldly that “comprehensive income taxation, under which all savings income is taxed in the same way as labour income, is not an appropriate policy goal or benchmark.”
The benchmark isn’t the only problem with tax expenditure estimates, and the Treasury has sprayed words of warning all over the document. The problem is that these warnings have been judiciously ignored by users in the past and are likely to be again this year.
The TES is like manna from heaven for those on a mission to increase revenue to fund more government spending or to promote “fairness” by taking more from “the rich”. To such users of the TES it is nothing but a revenue-raising policy menu — and never mind the defects, judgements and ambiguities in its construction.
The huge amounts of tax expenditures reported for superannuation concessions — against the questionable comprehensive income tax benchmark — were instrumental in the campaign to reduce such concessions.
If the TES reveals distortions, rorts or concessions that have no good reason for being, they should go (in favour of lower tax rates for all, not more spending). But on closer inspection the TES isn’t the Aladdin’s cave it is often thought to be. Many tax expenditures are there for good reason and do not deserve to be labelled as rorts or distortions.
Robert Carling is a Senior Fellow at the Centre for Independent Studies.
This column does not necessarily reflect the views of Business Insider.