Superannuation Tax Changes Set Worrying Precedent
I have been watching closely over recent days the rhetoric surrounding the government's proposed changes to superannuation. Earlier this week treasurer Jim Chalmers has announced intentions to place caps on the concessional treatment of superannuation for balances above $3 million. There seems to be a sentiment in the media that the rich have been exploiting the public by being the only ones benefiting from superannuation's more favorable tax environment. The rhetoric that the wealthy don't pay their fair share reminds me of an article I saw in the Chicago Tribune some years ago. Sometimes we lose sight of where wealth comes from and this article was a reminder.
The article in the Tribune was focused on more controversial tax cuts rather than tax increases that only affect 0.50% of the population. However, it discussed tax in terms everyone could understand. It was a story of how every night, 10 people went out to dinner together and the bill for all 10 came to $300. If they paid their bill the way taxes are paid it would be as follows: the first four people, the poorest, would pay nothing, the fifth would pay $3, the sixth would pay $9, the seventh would pay $21, the eighth would pay $36, the ninth would pay $54, and tenth person, the richest, would pay $177.
That’s what they decided to do. They ate dinner in the restaurant every night and seemed quite happy with the arrangement until one day the owner gave them an unexpected benefit. In tax language he gave them a tax cut. ‘Since you are all such good customers,’ he said, ‘I am going to reduce the daily cost of your meal by $60.’
So now the dinner only cost $240. The group still wanted to pay the bill the way we pay our taxes, so the first four people continued to eat for free. What about the other six? These were the paying customers and they had to work out how to divide the bill so everyone would get their ‘fair share’ of the windfall. The six people realized the $60 divided by six was $10, but if they subtracted that from everyone’s share then the fifth and sixth people would end up being paid to eat their meal.
So the restaurant owner suggested it would be fair to reduce each person’s bill by roughly the same amount. He proceeded to work out what each person should pay. The result was that the fifth person now paid nothing, the sixth put in $6, the seventh put in $15, the eighth put in $27 and the ninth put in $36. This left the tenth person to put in $156 instead of the earlier $177. Each of the six people was better off than they were before and the first four continued to eat for free. Once outside the restaurant however, they began to compare their savings.
‘I only got $3 out of the $60,’ declared the sixth person, pointing to the tenth, ‘but he got $21!’
‘That’s right,’ exclaimed the fifth, ‘I only saved $3 too. It’s unfair that he got seven times more than us.’
‘That’s true!’ shouted the seventh person. ‘Why should he get back $21 when I only got back $6? The wealthy get all the benefits!’ ‘Wait a minute,’ yelled the first four people in unison, ‘we didn't get anything at all. The system exploits the poor!’
So the nine people surrounded the tenth person and beat him up. The next night he didn’t show up for dinner (or in the real world he took his business out of the country) and the nine sat down for dinner and ate without him. When it came time to pay the bill, they discovered too late something very important. They were $156 short of paying the bill! 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 may just not show up at the table anymore and where will that leave the rest of us. It is a shame this rather straightforward logic doesn’t always get through to the electorate.
Years ago, New Zealand reviewed its revenue gathering process, they found the system extremely complicated in the way that it distorted business as well as private decisions, so they asked themselves some basic questions. Was the tax system concerned with collecting revenue? Was it concerned with collecting revenue and delivering social services? Was it concerned with collecting revenue, delivering social services and changing behavior? They decided that social services and changing behavior didn’t have any place in a rational system of taxation.
As a result, they elected to have only two mechanisms for collecting taxation revenue. These were a tax on income and a tax on consumption and they would simplify the collection mechanisms and lower the rates as much as they could. They lowered their highest income tax rate from 66 per cent to 33 per cent and the low-end tax rate from 38 per cent to 19 per cent and introduced a 10 per cent consumption tax but eliminated capital gains tax, property taxes and all other indirect taxes.
It was designed to be revenue neutral so they carefully designed the system to produce exactly the same revenue as they were receiving prior to the changes and presented it to the public as a zero-sum game. In fact, what happened was they received 20 per cent more tax revenue because of an increase in voluntary compliance.
Every country in the world that has dramatically simplified and lowered its tax rates has ended up with more revenue, not less. The United States under Reagan experienced this with tax cuts, as did Australia when GST was introduced in 2000. The aim was to be revenue-neutral but both countries found that the tax take increased substantially. But, despite overwhelming evidence to the contrary, the politics of envy make it incredibly difficult for the electorate to accept a still more logical system of taxation.
A better tax system with incentives to work allows governments to better care for the disadvantaged in our society. The poor will be with us always but the entrepreneurs may not be.