Don't let rich old men tell you the planned super tax is terribly bad

Would you want Australia to become more like America? How on Earth did so many Yanks vote to reinstall a crazy, destructive leader such as Mad King Donald? If we don’t want to become more like them, it’s worth thinking about how it happened, so we know what not to do.

Americans brought Trump back for two main reasons. First, extreme partisanship. Many registered Republicans voted for him because, no matter how bad he was, he couldn’t possibly be as bad as a Democrat president would be. But second, I suspect many Americans voted for him because they’d become so disenchanted with the way the country was run, felt so mistreated and estranged from the rest of America, that they wanted to give the system a big kick up the backside.

It wouldn’t do any good; Trump was no more to be trusted than any other politician, but it would make the outcasts feel a bit better.

I worry that if we go on the way we have been, we could end up with a section of our own community that was so peed off it wanted to kick against the pricks (excuse my language; not all politicians deserve that description). And it’s a mighty big section to have on the outer – the young. Everywhere they look, the young feel discriminated against.

Most of the older generation bought homes when they were affordable, but now they’re unaffordable. At work, they get paid much less than most older workers. And while their parents paid nothing for their tertiary education, they’re hit with huge HECS debts.

The young are right to feel ill-treated. Our system of tax and welfare benefits is biased in favour of the elderly and against the young.

Many people on the age pension benefit only to the extent that their paid-off home is ignored in means testing. Many self-proclaimed “self-funded retirees”, however, are doing very well for themselves.

It’s possible for a young family on, say, $150,000 a year, to be paying a lot of income tax, while a well-off retired couple on the same income pays very little.

The Albanese government is already facing annual budget deficits for at least the next decade, adding to the annual interest bill on our growing public debt. If we’re going to be spending more on defence and many other things, it will have to raise more in taxes.

How? Well, the nation’s chief executives in the Business Council of Australia helpfully suggest an increase in the GST. But it would be fairer if the government started by reducing the tax concessions and loopholes used mainly by the well-off.

And that brings us to the massive tax concessions attached to superannuation, which cost the government almost $50 billion a year in lost revenue. The concessions are worth far more per dollar saved to high income-earners than lower earners.

But they also favour the old rather than the young. The old earn more than the young, find it easier to save, and get the benefit from super sooner than the young. That’s why, in the government’s efforts to collect more tax, fixing the super concessions is a good way to reduce the tax system’s bias against the young.

Two-thirds of the value of super tax concessions go to the top 20 per cent of income earners. The concessions are intended to ensure people have enough income to live comfortably in retirement, but a fifth of withdrawals from super go as bequests to the superannuant’s children.

Treasury estimates that the share of withdrawals going as bequests will rise to a third by 2060. In other words, the concessions are so great that super has become a taxpayer-subsidised inheritance scheme. Meanwhile, other taxes must be higher to cover the cost of this inheritance scheme.

Treasurer Jim Chalmers intends to press on with a super tax measure he announced two years ago, but hasn’t yet been passed by the Senate. The plan is to increase the tax rate on super annual earnings for balances exceeding $3 million from 15 per cent to 30 per cent. The tax would apply only to the amount above $3 million.

The change will affect just the top 0.5 per cent of people with super – only about 80,000 people (including me). It would save the government more than $2 billion a year.

But the people affected by the change – mainly rich men – have put up an almighty resistance, portraying the measure as utterly iniquitous and – would you believe – unfair to the younger generation. “I’m not opposing this for myself ...”

However, the proposal has had strong support from the Australian Council of Social Service and the Grattan Institute.

The claim that the proposal would harm the young rests on the government’s intention not to index the $3 million threshold. If you left it unchanged forever, inflation would eventually cause the higher tax to apply to all the young.

Sorry, this is fanciful. There will be plenty of time to raise the threshold before then. Meanwhile, it will just apply to more, but slightly less-rich, old men (and a very few rich old women).

The other claim is that the extra tax would apply not just to interest and dividend income but also unrealised capital gains. This is true, but not as iniquitous as the protesters claim. It will mainly affect self-managed super funds.

It’s a messy way to tax earnings, but it’s difficult to avoid administratively because the existing 15 per cent tax on earnings is imposed on the fund, not its individual members.

Taxing capital gains that haven’t yet been realised may mean the tax has to be covered by money taken from elsewhere, but most people this well-off have plenty of money outside their super funds.

So, don’t believe it. These rich people just don’t want to pay more tax, and, as usual, are hunting around for the best counter-arguments they can find. I can afford to pay it, and so can they.

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Ross Garnaut: Prophet with a sunny view of our better future

Economist Paul Krugman’s endlessly repeated maxim that “productivity isn’t everything but, in the long run, it’s almost everything” has deluded far too many of the economics profession’s conventional thinkers.

It’s a throwaway line that should be thrown away.

It implies that any economic objective other than improved productivity is hardly worth worrying about. Such as? Distributional fairness aka “intergenerational inequity”. Tell that to the 40 per cent of voters under 40, and see how far you get.

It implies that the structure of our economy never changes, nor does the planet we live on. So the single-minded pursuit of improved productivity will somehow either stop climate change or magically deliver us a zero-carbon economy without any need for government intervention.

Or maybe the proviso “in the long run” is saying that our great, great-grandchildren will be able to look back on the clean-energy transition as little more than a blip. What a pity we live in a succession of short runs, not the long run.

A more realistic view is that, should the world fail to stop climate change, life will become almost unlivable, much of the economy will be stranded assets, and every spare cent we have will be spent shifting from one part of the country to another, and on buying hugely expensive water and permanent air conditioning.

A less cataclysmic future would see climate change get a lot worse before the major economies finally got their act together and ended the use of fossil fuels. This, of course, would lead to much unemployment in our coal and gas industries and much loss of export income.

Our future, no matter which way you envisage it, doesn’t sound very inviting. Much of our “natural endowment” of coal and gas deposits will be worthless and our “comparative advantage” in flogging them off to other countries will have disappeared. Do you still believe our government should be only worried about improving productivity?

What we need is some sort of economist prophet who can help us overcome this existential threat, not an army of blinkered economists telling us all that matters is raising our material standard of living.

Fortunately, among the profession’s abundance of unproductive thinkers is a lone prophetic, and so productive, thinker, Professor Ross Garnaut, who sees not only how we can minimise the economic cost of the transition to clean energy, but also what we can do for an encore. What we can do to fill the vacuum left by the looming collapse of our fossil fuel export business (which, by chance, happens to be our highest-productivity industry).

Because economists are such incurious people, Garnaut seems to have been the first among them to notice that, purely by chance, Australia’s natural endowment also includes a relative abundance of sun and wind.

Until now, we thought these were non-resources and of little or no commercial value. It took Garnaut to point out that, in a post-carbon world, they had the potential be our new-found comparative advantage. To provide us with a whole new way of making a bundle from exports, while generating many new jobs for the miners to move to.

When you add the possibility of structural change to the rules of conventional economics, you get what’s a scary thought for many economists: maybe our natural endowment isn’t ordained by the economic gods to be unchangeable through all eternity.

Maybe there are interventions fallible governments should be making to move our economic activity from one dimension of our natural endowment to another. Maybe such a switch is too high-risk and involves too many “positive externalities” (monetary benefits than can’t be captured by the business doing the investing) for us to wait for market forces to take us to this brave new world.

Maybe changing circumstances can change the nature of our comparative advantage in international trade, meaning the government has to nudge the private sector in a new direction.

It was Garnaut who first had the vision of transforming Australia into a “Superpower” in a world of ubiquitous renewable energy. And it was he who uncovered the facts that made this goal plausible.

Exporting our fossil fuels is cheap, whereas exporting renewable energy would be much more expensive. So whereas it was more economic to send our coal and iron ore overseas to be turned into steel, in the post-carbon world it soon will be more economic to produce green iron and other green metals in Australia and then export them.

In a speech last week, Garnaut acknowledged that, in its first term, the Albanese government began to lay the policy foundations for the Superpower project. The economic principles are set out clearly and well by Treasury’s “national interest framework” for A Future made in Australia, released after last year’s budget, he says.

The re-elected Albanese government has already restated its commitment to the project. Garnaut says there’s much more for the government to do in creating the right incentives for our manufacturers to re-organise and expand.

Research sponsored by his Superpower Institute finds that Australian exports of goods embodying renewable energy could reduce global emissions by up to 10 per cent. So we can contribute disproportionately to global decarbonisation by supplying goods embodying renewable energy that the high-income economies of Northeast Asia and Europe cannot supply at reasonable cost from their own resources.

This would “generate export income for Australians vastly in excess of that provided by the gas and coal industries that will decline as the world moves to net zero emissions over the next few decades”.

Garnaut concludes: “The new industries are large enough to drive restoration of growth in Australian productivity and living standards after the dozen years of stagnation that began in 2013.”

The present fashion of obsessing with productivity improvement for its own sake is counterproductive and probably won’t achieve much. We should get our priorities right and focus on fixing our most fundamental problems – unfairness between the generations, action on climate change and fully exploiting the opportunities presented by our newfound strength in renewable energy – and let productivity look after itself.

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Our politicians aren't acting their age. That's a good thing

By MILLIE MUROI, Economics Writer

If I told you someone, especially a politician, wasn’t acting their age, you might safely assume that’s a bad thing. What childish behaviour have they indulged in this time, you might ask.

But this week, it’s a compliment. The fountain of youth still evades us, and there’s no great anti-ageing commission – AAC, not to be confused with the ACCC – on the way. But the focus in Canberra has switched, at least for a minute, to something that’s flown under the radar for too long.

Treasurer Jim Chalmers on Thursday – at last – said something a lot of us, especially young people, have lived and known well: “there is an element of intergenerational unfairness in our economy”.

The culprit? A three-letter word that sends most of us to sleep, but here it is: tax. No one really likes it, but there’s a collective understanding – served with a hearty side of grumbling – that it’s a necessary part of our economy.

A good tax system, however, is supposed to be fair. And it’s meant to make our country fairer, too.

Tax as it stands now stacks the cards against young people: the very people we need to be supporting to become the backbone of our economy – including hospitals, aged care homes, and schools – as the rest of the country ages.

What’s unfair about our tax system? Didn’t generations before us get put through the same wringer? Well, not really.

If our economy is a board game, the rules have changed. So has the starting point for our newest players.

Young people today graduate from university or TAFE with bigger study debts than their parents had, face house prices more than 16 times the average household income (rather than nine times the average household income 25 years ago) and wages that have only started clawing back losses from inflation in the past year.

To then have a tax system that pulls the ladder out-of-reach of young people is bad – for all of us.

Grattan Institute chief executive Aruna Sathanapally, in a speech last week, put it like this: “Intergenerational equity is not a zero-sum game.”

We may never have it perfect, but it needs to be fair. Who wants to play or work hard in a game where your winnings are constantly whisked away?

But that’s what’s happening. Our tax and spending policies are leading to “unprecedented transfers from younger households to older households”, Sathanapally says.

Analysis from Grattan in 2019 showed a working-age household earning $100,000 would pay about 2½ times as much tax as a household over 65 earning the same amount.

While households over 65 have grown their income, they’ve also been shielded from paying their fair share of tax. That’s thanks to a bunch of policies that have ground down taxes for some types of income but not others.

If you’ve held an asset – such as an investment property – for at least a year, you could sell it and get 50 per cent off the tax you pay on its capital gains. If you bought the property before 1985, you’d pay no tax at all on your (probably very handsome) profit.

And if you’re drawing down on your super, it’s tax-free to withdraw after the age of 60 (after being taxed at a concessional rate of 15 per cent while you’ve been contributing to it).

But most young people don’t own a property they can sell – or even live in – and would have missed out on the windfall gains of the past few decades that have seen house prices shoot through the roof. And withdrawing from super isn’t really an option.

A bulk of young people’s income comes from wages that attract no tax discounts. And as our population ages, our reliance on taxing wages will probably worsen.

Why can’t young people just work their way up to things such as home ownership? Well, it’s a tough ask to save for a deposit when, on top of income tax, young people are paying off huge study loans and facing rents that have risen much faster than inflation or wage growth.

Income taxes have ballooned as a share of our economy – from about 8 per cent of gross domestic product (GDP) in the early 1960s to 14 per cent in the 1980s, and more than 18 per cent in 2023. And while in the 1950s, income from “personal exertion” – or wages – was subject to lower tax rates than income from investments, there’s now no such distinction.

In fact, those who invest in housing can be negatively geared, meaning if they make a loss on their investment property because the rent they earn on it is less than the costs of owning the property (including interest they pay on their mortgage), they can reduce their taxable income. That’s even if the property is quietly growing in value.

At the same time, zoning rules are pushing young people to the edges of our cities, further away from their work and study, and pushing up house prices in leafy suburbs.

The upshot of all this is that young people are having a harder time than older generations – so much so that the generation born in the 1990s, aged between 25 and 34 today, are the first not to enjoy higher incomes than their predecessors.

And according to Grattan, the wealth disparity between older and younger Australians has worsened. In 1994, those aged 65 to 74 had about three times the wealth of those aged 25 to 34. By 2020, that gap had increased to nearly five times.

While not all older Australians are wealthy, it was mostly older, wealthier households that continued saving and spending on discretionary items as inflation and interest rates spiked in the past few years. Younger Australians mostly cut back on spending and drained their savings.

It’s only recently that politicians have paid more attention to the plight of young people. That’s probably because, despite nearly 40 per cent of our population being aged under 40, fewer than 10 per cent of our federal MPs fit that bill.

Independent MP Allegra Spender this week launched her green paper on tax, pointing out that younger Australians were being left behind, unable to grow their financial security in line with other generations. “This creates a society of haves and have-nots, where your family wealth, and access to the bank of mum and dad, is essential to get ahead,” she said.

If we want a society that gives everyone the chance to work hard and get ahead, and move away from a game determined by a roll of the dice on who our parents are and how much wealth they can pass on to us, we need to shake up our tax settings.

It’s been a long time coming, but if our policymakers can step into the shoes of younger Australians and speak for their interests – as they’ve started to do – we’ll all be better off.O

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