A political $100 bill sitting on the pavement

From today’s Fin.

Tax cuts better off in super

As you read this, bevies of bureaucrats are busily building an inflation strategy. Virtually all the medicine theyll prescribe will have a nasty taste. We dont like spending cuts and revenue increases.

But one option could pull a billion odd out of consumption without being unpopular. Though painless it would be visionary, growing in popularity over time.

Wouldnt it be nice for the promised tax cuts to go into peoples superannuation rather than their pocket? Compelling such an outcome would hedge on a promise. Paul Keating tried that with his L.A.W. tax cuts and the electorates response means that a repeat performance is O.U.T.

 

But theres a middle way.

Many people who might be well disposed to increasing their super contributions never get round to doing so. So what if their employers deposited the proceeds of their tax cuts into their super, but also let them opt out, receiving the tax cut in their pockets if they chose?

Structuring the savings decision this way makes a big impact. In the US new employees participation in tax privileged 401K savings schemes can be as low as 26 percent though this rises over time. When firms enrol employees by default but let them opt out, participation jumps to over 85 percent.

The New Zealand Government is already using this insight in its innovative default savings. New employees have a hefty four percent of their salary deposited into their KiwiSaver superannuation accounts. The opt out rate is way below expectations at 32 percent.

Amongst the difficult anti-inflation decisions, thats a free hundred dollars lying on the pavement right there. Between now and tax cut day 1 July 2008 we could make the institutional arrangements necessary to encourage or require all businesses, or all businesses over a certain size to divert funds roughly equivalent to the tax cuts and/or wage increases into their employees super funds subject to employees ability to opt out. Then repeat the dose annually for all employees until their combined super contributions were something like 15% of their wages.

As a political message, Kevin Rudd would be inviting employees to join him in a fiscal conservatism that would do the country good in the short term and their families good in the long run. And those who dont like it? Well they just tick the box, opt out and thats it.

And it might signal something more that, after a long hiatus, were back in town leading the world in the game of economic reform: That, as with innovations like HECS and the Child Support Agency, and the way we crafted the worlds most targeted welfare system, Australian economic reform is not the reflex product of some ideological formula. Rather it is based on commonsensical improvements to the functioning of our collective institutions and through that to the quality of our individual lives.

I cant improve on the way Obama put it in his victory speech in North Carolina. We want a politics of commonsense, innovation, shared sacrifice and prosperity.

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27 Responses to A political $100 bill sitting on the pavement

  1. Rex says:

    Very good.

  2. wilful says:

    genius.

    Now, how do you get it from here into the mind of Ken Henry, Lindsay Tanner, Wayne Swan?

  3. Fred Argy says:

    Very innovative, as usual. Three queries:

    * what happens to those outside the workforce (retirees like myself who still pay tax): will they automatically get their cash? Or will they be excluded altogether from your scheme?

    * isn’t superannuation still a tax shelter for higher income people? Wouldn’t the latter be the ones most likely to take up the super option? Isn’t a 15% target a bit excessive in terms of what most people will need in retirement?

    * would you risk producing a fiscal over-kill? With the latest unwise increase in interest rates, do we really need a 2% or 3% budget surplus?

  4. woodsy says:

    Nicholas, if I may presume, in answer to Fred’s query:
    * most of those who spend time outside the workforce will choose to opt out of superannuation and will have to depend on social security in retirement. Change should not be stifled because it may offend a minority.
    * it’s only a matter of time before economic circumstance dictate that superannuation funds are taxed at the same rate as everything else (probably about 25 – 30%) so it will cease to be a tax shelter and 15% may be a bit much for those on above average incomes but to those who really need a reasonable capital base in retirement, it may not be enough.
    * my understanding is that the immediate aim is for 1.5% surplus which will only be adequate if the economy slows down – surely it’s better to be safe than sorry and it won’t harm the government’s credentials as economic managers at all.

  5. woodsy says:

    Nicholas, saw you on the box last night: well done. With regard to Mitsubishi, would it not be beneficial to all concerned (well, perhaps not Mitsubishi shareholders) for the Lonsdale complex to be turned over to manufacture something that Australia really needs ? What about wind turbines, with suitable government subsidies instead of unemployment benefits, most of the workforce could be retrained to use existing infrastructure to produce really cheap turbines and negate the major disadvantage of electricity generation by windpower – capital cost of the turbines. Not enough capital available ? Offer the employees the opportunity to invest their (what should be considerable) redundancy payments which will otherwise probably be spent on consumer goods anyway.

    Maybe others have ideas for an alternate purpose for the factory – I know, why don’t you organise a thousand ( soon to be unemployed) people to get together over the weekend to kick around ways to keep the factory productive ?

  6. Jacques Chester says:

    Bugger Mitsubishi. WA and the NT are gagging for experienced tradies of every sort, in firms that are actually turning a profit without sucking millions out of the public tit.

  7. Jacques amongst those factory workers will be fiftysomethings who aren’t exactly in a position to hop on a plane to go work in a mine.

    You certainly have a point – we pay a heap in tax and more expensive imported cars to keep those relatively few jobs in an unprofitable car industry, when other industries are indeed screaming out for workers. But there are social costs to this kind of industry transition; thankfully that this is as good a time as any for the transition to occur with unemployment so low.

    But, then again, Woodsy, the fact is that manufacturing is an unprofitable industry, whereas mining is an exceedingly profitable one, at the moment. We’ll all be better off if we mine more and manufacture less.

  8. Jacques Chester says:

    My old man is a sixty-something who works FIFO. I imagine there’s FIFO work ex-Adelaide too.

    Look, losing your job sucks, no matter what your profession. But the writing has been on the wall for 10 years, at least. The good news is that tradies are in great demand and they won’t find it too hard to find work, especially if they are prepared to up stakes.

  9. Thanks Fred,

    Right now I’m too busy to give your questions or points the attention they deserve.

    But yes, I expect some people would be out of the system. But it’s only a system of ‘prompting’ if you like, of shaping behaviour not compelling it. That relieves one of a lot of responsibility to get everything sorted out. One does whatever one can knowing that
    1) you will generally be helping people, and
    2) if you’re not, they get the final say in what happens.

    This latter point seems to me to cut through all those instinctive ‘who will it hurt?’ questions. For chrissakes there are so many difficult decisions made in government, this isn’t one of them. Just do it and if people feel strongly that what you’ve done isn’t right – guess what – they are forced to tick a box to right things. Move on to discussing problems of greater substance.

    Yes, super is too tax concessional – but that’s a long term problem – and not relevant here.

    Not at all sure what you mean about ‘taking advantage of the scheme’. The proposal doesn’t involve any greater or lesser access to the scheme, just a small but very influential wrinkle on what happens if you do nothing.

    1.5% surplus isn’t much above where we are doing nothing. I’d like to maximise the fiscal (savings) response to minimise the monetary response (because I think we’re redoing what we did in the late 80s which is to overvalue the exchange rate bringing a range of longer term problems). Also, monetary policy has very uneven effects. We should maximise the effect of broad base and ‘no regrets’ policies to minimise the effect of narrow base shorter term responses.

  10. wilful says:

    Doesn’t this add yet more complexity to an already unwieldy personal tax system? Creating two tiers of employees, which payroll would ahve to sort through and likely bugger up.

    I’d like to see some major simplifications in other areas (FTB parts A & B to start with) before you add more to that mess.

  11. David says:

    Jacques –

    Most of the soon-to-be-ex-Mitubishi employees are not tradesmen. My guess is that they’d be (somewhat unfairly, perhaps) classified as semi-skilled – very good at assembling components, but not fitters, mechanics or electricians.

  12. Bring Back CL's blog says:

    Yes Nick just as in the LAW days this is much better.
    Junking the LAW super tax cuts was the worst policy decision they ever did.
    They simply never understood retirement incomes.

    Easiest way to introduce equity into Super is to aign Suer with income tax i.e. just make benefits another form of income.

    This is the opposite of what Costello did. He should have got rid of tax on earnings and contributions and left it on benefits.

    That way taxes increased with the aging of the population.

  13. James Farrell says:

    You are in good company, including John Freebairn, whom I heard endorsing this idea on the radio last week, and a Union Boss.

    The obvious question, as usual when it comes to compulsory superannuation, is whether there will be an offsetting decline in discretionary saving. One estimate (which you’ve probably seen), was only 38 cents in the dollar.

    But you’d still have to answer the dreaded ‘Austrian’ critique.

  14. Yes James, there will be a decline in other kinds of savings, though if this scheme is introduced at the time that a tax cut comes in, or wage rises, I expect its short term leakage would be a fair bit lower at least for a while.

    Austrians? My Dad was born in Vienna – that will have to be good enough for them.

  15. James Farrell says:

    That’s why I use inverted commas. I have good friends who are Austrian, and wouldn’t want them implicated.

  16. Jacques Chester says:

    Most of the soon-to-be-ex-Mitubishi employees are not tradesmen. My guess is that theyd be (somewhat unfairly, perhaps) classified as semi-skilled – very good at assembling components, but not fitters, mechanics or electricians.

    Based on the qualifications of friends who have gone to work in the mines, that’s no problem. They won’t get as much as a fitter et al but there’s still a lot of work.

    There’s something like $150 billion worth of works in the pipeline.

  17. Jacques Chester says:

    I don’t think I’ve done a good job of explaining myself. There’s two things here:

    1. They lost their jobs. This is bad news.
    2. The demand for labour, skilled or semi-skilled, is very high. This is good news.
    3. Mitsubishi was inevitably going to shut down that plant. This is just news.

    I guess what I mean is, please don’t take 2 to mean I am gloating about 1, or 3 to mean I am pleased about 1. I’m trying to express the upside.

  18. Ted says:

    If you think mechanics, electricians, fitters are “more skilled” than other factory workers, then you’re just displaying or rather regurgitating long-discredited patriarchal, ruling class spin which is scientifically groundless and discriminates against the people who work hardest and produce the most value in the production process of manufacturing companies such as M.

    [edited for civility -Jacques]

  19. Fred Argy says:

    Thank you Nicholas for your preliminary response to my questions.

    Sorry I cannot see how you can divorce the superannuation tax perks (a “long term” issue) from your proposal. The fact is the better off will be the main ones taking advantage of your super option and for the most part they will simply reallocate savings from other investment vehicles, with only a small impact on their consumption. In the meantime, taxpayers (public saving) will be out of pocket. I believe you really need to address the scandalous superannuation tax privileges (and for that matter the high fees charged by investment managers in administering a captive market) as an integral part of your proposal.

    You must read Mike Steketee in today’s Australian. He echoes perfectly my concerns. http://www.theaustralian.news.com.au/story/0,25197,23171185-7583,00.html

  20. Well it beats me Fred how anything I’m proposing increases any perks for anyone.

    The perks are there – and they’re too large for those at the top end of the income band. But nothing I’m suggesting increases them or increases access to them.

  21. Paul Frijters says:

    Nick and Fred,

    I like the suggestion of manipulating the default allocation of tax hikes to prompt higher savings and am more positive than Fred about its likely effect on overall savings. Defaults work. The suggestion has been around in behavioural economics for a while now, with obvious ‘success stories’ of opt-out organ donor program as a major trump card.
    Whilst I share Nick’s reply to Fred that this proposal could be seen as divorced from the issue of the last government’s superannuation reforms, I am completely on Fred side when he criticises those reforms. I find it incredible that such a distortion ever passed the Australia media without much comment and I predict it to eventually be seen as Costello’s biggest mistake. As I’ve put in print before, the mess we’re now in in terms of superannutation rules is going to take years to clean up because the latent political interest group protecting the distortion is growing. Now, if Swan were to reverse that particular policy he’d really have something to crow about because it would mean reversing a hidden tax reduction for the rich.

  22. Fred Argy says:

    Nicholas, perhaps I have misunderstood you Nicholas. As I see it, under your proposal only people who believe they would be better off in superannuation in the longer term would opt for it (at present there are limits on what they can invest in concessional super). And they would only be better off if, by being given an opportunity to take increased advantage of the present tax super concessions, they would benefit more from from deferral of tax benefits than from taking the cash now.

    As superannuation balances expand, the cost to revenue increases over time and other taxpayers have to fund the extra cost. Have I got it wrong? If so, I apologise.

  23. Fred,

    You might be right that more money going into super can increase tax leakage – though it’s unlikely to do it for those on lower incomes as (thanks to Paul Keating and later Peter Costello) the tax concession for the low paid is pretty limited compared with its generosity to higher income earners.

    I expect the proposal will increase super mainly for people towards the bottom end. Those who are calculating in optimising their super contributions will be doing it anyway – or many of them will so default opt ins won’t increase their contributions much.

    But the scheme exists now and people who can take advantage of it will pile into it. The problems of that will have to be worked out in the long term. In the meantime the system can be used to dampen demand in the short term if we can get more people depositing the dividends of their tax cut and wage rises into super.

    I’m trying to use the systems that exist to maximise the efficiency and minimise the pain of the macro-economic adjustment we have to make (and minimise the monetary tightening necessary).

    I guess to the extent one could make the adjustment with simple broadly based tax rises or expenditure cuts that might be better – might not involve the use of a system that can depress national savings in the longer term. But you’d object to the expenditure cuts as they’d be likely to skewed towards cuts to lower income earners and the Govt and (probably) the electorate won’t cop higher taxes. So that’s out.

    So what better ideas have you got?

  24. Btw, NATSEM has just modelled the latest super changes.

    Good news for the wealthy. Not much news for others.

  25. Peter Wood says:

    Sounds like an excellent idea.

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