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Saturday, March 2, 2013

Superannuation and Dividend Imputation the Key for Delivering in the May Budget

Above:  Gonski is crucial in moving closer towards educational equal opportunity
If Labor wants to win in September it needs bold new initiatives – without ‘robbing Peter to Pay Paul’.  Reforming superannuation concessions and dividend imputation may provide Labor with the ‘warchest’ it needs to ‘break through;’ to disengaged voters.   Labor also needs to deliver in the immediate term as well – as voters may be sceptical of commitments only for the ‘distant future’.

 Tristan Ewins,  March 2013

As the May Federal Budget approaches and Liberal state governments increasingly move to sabotage the Federal Government’s Gonski proposals purely for political purposes – it seems increasingly likely that if Gonski is to succeed the Federal Government must ‘pick up the entire tab’.  The National Disability Insurance Scheme (NDIS) will also involve a heavy cost, and Labor simply cannot deliver without progressive reform on the revenue side.   More unpopular austerity – as in the case of Sole Parents – which saw disgust and cynicism amongst parts of the electorate – is not a viable option. And in any case it simply should not be part of the Labor ethos –‘to take from Peter to pay Paul’ – seeking to spin these matters to create only an illusion of overall progress.

Mark Kenny, writing for the Sydney Morning Herald explains how resort to superannuation investment has become a prime means of tax avoidance for high income groups.. Hence:

“High-income earners simply have greater scope to save and thus evade the 46.5 per cent marginal tax rate on income by sending it into super. The result is that what is saved on the aged pension budget through self-funded retirement winds up being less than what the superannuation policy costs in tax revenue foregone.”

Richard Denniss of the Australia Institute has been one of the most determined critics of the existing system of superannuation concessions. In August last year he put the argument that while those concessions cost the public $30 billion in late 2012, they will cost $45 billion as early as 2015.  This is well in excess of the entire Aged Pension budget – which was only $25 billion in 2012.  And in 2012 $10 billion of these superannuation concessions were going only to the top 5 per cent income demographic.    Denniss has argued:  “We estimate, for high income earners, up to 60 per cent of their lump sum is actually the contribution of the taxpayer.”

The ACTU, meanwhile, has urged the Government to target the top 10 per cent income demographic.  And were superannuation concessions revoked for that top 10 per cent group, at an estimate it could bring in over $15 billion -  enough for the government to fund Gonski and the NDIS without having to depend upon the Conservative states.  (nb: though NDIS will cost more over the years as the full program is phased in)

Yet even as Tony Abbott and the Liberal Party condemn Labor for considering revoking concessions for some of the most privileged, they are committed to withdrawing superannuation tax breaks for low paid workers. Bill Shorten has pointed out that the restoration of a 15 per cent tax rate on these Australian workers will affect 3.7 million people, including 2.1 million women.  It could cost these workers $500 a year: which is not inconsiderable for those on low incomes.  This is blatant hypocrisy from Abbott.

So what should Labor do?  Gonski and NDIS are potentially landmark reforms which appeal strongly to Labor’s base. Withdrawing superannuation concessions from the top 10% income demographic would make these policies affordable regardless of the Liberal states’ spoiler tactics.  And withdrawing Labor’s unjust policies on Sole Parent payments could moderate the backlash from this callous and self-destructive decision.

But arguably Labor needs a more robust electoral war chest in order to ‘break through’ to a cynical electorate which has already ‘turned off’ in parts of the country. 

Another area of potential reform is Dividend Imputation  - which the Henry Tax Review considered axing a few years ago.  Dividend Imputation seeks to eliminate so-called “double taxation” of investments by providing credits on dividends.  This is fine for small investors – but should the wealthy be receiving a massive tax break as a consequence?   Especially when the Company Tax rate has been cut again and again for decades. 

Writing for ‘The Age’ Nicholas Gruen pointed out late in 2012 that the Dividend Imputation system costs the government in excess of $20 billion a year!  That being the case he went so far as to suggest getting rid of the entire system; demonstrating that the benefits of the system in spurring additional investment are minimal anyway. A spare $20 billion annually – on top of rescission of superannuation concessions for the wealthy – invested in health, education, aged care, welfare, infrastructure, and foreign aid – could work wonders!  It could also help Labor balance the budget over the course of the economic cycle without further callous austerity.  (indeed, quite the opposite!)

Even were the dividend imputation rate only incrementally reduced, an initial reversion to a 75 per cent imputation credit could bring in over another $5 billion; and a 50 per cent rate – argued for in the early 1990s by economist, John Quiggin, could bring in over an additional $10 billion.  

Finally,  the Greens have argued for lifting the Minerals Resource Rent Tax (MRRT) rate to 40 per cent, eliminating loopholes and removing “generous accelerate depreciation provisions.”   This, they argued, could raise $26 billion our four years.

‘Doing the math’ this would translate into an additional $6.5 billion a year on average.  

Nonetheless it is quite possible that Labor has ‘done a deal’ with the miners. If so it is a fundamental matter of democracy that this ought be made known to the public. The alternative is the kind of ‘Iron Law of Oligarchy’ referred to by political scientist, Robert Michels – whereby political and economic elites determine agreements ‘behind the scenes’ – cutting ordinary citizens out of the equation.  (the anathema of democracy) Yet at the same time trust is an extremely valuable thing in politics – and even if Labor has made the wrong call on any deal, it would be understandable were they to remain true to that commitment. 

The Greens are thinking of ‘holding Labor over a barrel’ over the MRRT. And ideally the tax does need to revert to its original form as intended by the Henry Tax Review.  But if this is politically impossible the Greens must co-operate with a Labor Government that makes big progressive social initiatives possible through thorough-going reform of superannuation concessions and dividend imputation.

To put all this in perspective the Australian economy today is valued at approximately $1.4 Trillion. The Gonski package – crucial for the very viability of our state school system into the future – and to the opportunities of hundreds of thousands of students - will cost about $6.5 billion a year to implement.  And the NDIS – crucial to some of our most vulnerable Australians and their families - is assumed to being going to cost at least $15 billion a year when ‘fully operational’ in 2018.  (but only phased in gradually)

But what else can Labor do to ‘break through’ ahead of September; with the May Budget perhaps being its last opportunity to bed down such major initiatives?

For a long time this author has argued for reform of Aged Care.  It is an issue that effects many of us. Even the younger among us will have family who may need care in the future.

The unnecessary acuteness of suffering experienced by many aged Australians is a matter of national shame.

For those needing low-intensity care there must be high quality, affordable options available.  The  2012-13 Aged Care Reforms proclaimed the end of  'Living Longer. Living Better.'  This must include those with low care needs as well as those needing high level care.

Residents in high intensity care need privacy – they need their own rooms if they so desire.  They need heating and air-conditioning, dental care, facilitated interaction, quality food, and ‘changes of scenery’ - perhaps including access to gardens.  In the future some of those who remain alert and in need of mental stimulation could do with access to information technology.   There are also problems with staff to patient ratios, including a need for more registered nurses.

More generally there is a need for more robust career paths for aged care workers; with better training being complemented with better wages and conditions.  This will also improve the quality of care experienced by aged residents.

For those older Australians wanting to stay at home – and well enough to do so –  there is a also need for regular interaction to ward away the loneliness from which so many suffer. And Families and Carers also need additional support in order to make home care viable.  Staying at home is only an option for many with significant support, and the Combined Pensioners and Superannuants Association has long argued support services here are under-funded.

A minimum additional annual $5 billion devoted to Aged Care would be a start (though certainly not the ‘final word’) in working towards these ends; while also beginning a phase-out of user pays mechanisms that hit average and working class families. Working class and middle income Australians should not be forced to sell their family homes (using the equity in the home - even incrementally,) with an effective regressive ‘flat tax’ in order to secure care for their loved ones.  All the more so while there are massive tax breaks for quite wealthy Australians that go into the tens of billions

The NDIS will care for some of our most vulnerable – but not all of them.  Care for the Aged is just as crucial.

In order to ‘break through’ to cynical Australians who have ‘switched off’ from Labor, the government needs big initiatives that capture the public’s imagination. The government needs to mobilise the welfare sector, labour movement and other social movements behind it with a raft of measures unprecedented in our time.  Yet another dilemma is how to find ways of actually delivering to the public between now and September in such a way as to avoid cynicism about ‘distant’ promises. 

By withdrawing superannuation concessions for the wealthy and reducing dividend imputation Federal Labor can amass a very substantial war chest.

One thing is clear.  Without substantial reforms bringing in the revenue for the coming May Federal Budget Labor will be left with very limited options.  ‘Business as usual’ will not win Labor the election.

The Policy of the Combined Pensioners and Superannuants Association can be found via the URL below;  They generally lead the way in campaigning for the rights of aged Australians, including those in need of care:


  1. Another place that the Government could pick up billions is cutting Fossil fuel subsidies. Also the handouts to the brown coal generators as part of the carbon price package are clearly way too high. That's one reason Contracts for Closure didn't work. As George M said on Insiders this morning it's hard to see why the ALP isn't campaigning on climate change and a clean energy future given our record heat and the moves China and India are making. Tony is a climate change denier and the Direct Action plan would struggle to make 5% cuts at enormous cost. Renewable energy and action on climate change have strong community support and this could grow if the ALP wasn't so gutless about making the link. The fossil fuel industry would fight back but taking them on would not necessarily be electorally damaging. I hope that there weren't back room deals on fossil fuel subsidies and CEF compo as well as the mining tax!

  2. Agreed ALP should campaign on climate change - and there needs to be some kind of compromise to bring the Greens onside and make an electoral arrangement with Labor palatable for them (The Greens); Perhaps a big public investment in renewable energy infrastructure? And Jane I'm also interested in how cutting fossil fuel subsidies would work.. Perhaps you could explain?

    But the Greens need to look at the overall picture as well. If Labor comes with with a big warchest - funded through progressive tax reform - surely that would have to mean something to them... If Labor campaigns on the progressive theme of social insurance - and has the revenue side measures locked in to 'deliver the goods' - the Greens' left-of-centre support base would expect Labor and the Greens to support each other... To do otherwise would simply be self-destructive.