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Can Malcolm Turnbull really tax his core voters?

Broken piggy bank. Photo: Getty

Broken piggy bank. Photo: Getty

The feel-good factor that Prime Minister Malcolm Turnbull has brought to national politics in past weeks makes a nice change, but there is perhaps too much optimism about his apparent zeal for reform.

Superannuation tax concessions are a case in point this week.

Economists have been muttering for years about the highly regressive nature of the flat 15 cent tax on every dollar squirrelled away in super accounts.

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That’s because that flat tax gives a higher concession to high earners – if you’re paying 45 cents in the dollar tax (the highest marginal rate, before the Medicare and debt reduction levies are applied), then each dollar put aside saves you 30 cents (45 minus the 15 cent flat tax).

So the more you earn, the more help you get from other taxpayers to save for retirement.

This glaring inequity was ignored during Tony Abbott’s reign as Opposition leader and then Prime Minister.

Keeping super tax concessions off the table was one of Mr Abbott’s ‘captain’s calls’, to the ongoing chagrin of many economic thinkers. Even former Treasurer Joe Hockey finally admitted in his last speech to parliament that “tax concessions on superannuation should be carefully pared back”.

A tax reform breakthrough?

Broken piggy bank

The retirement of big earners is subsidised by lower earners. Photo: Getty

With an overhaul of the concessions system now being openly discussed by Treasurer Scott Morrison and PM Turnbull, the relief among some policy thinkers is palpable.

MacroBusiness economist Leith van Onselen wrote on Tuesday, for instance: “Well done Prime Minister Turnbull on casting aside Tony Abbott’s intransigence and embracing reform to the superannuation concession system, which is a no-brainer on political, equity and budget sustainability grounds.”

The scheme being kicked around at present has been suggested by Chris Richardson, partner at Deloitte Access Economics.

His idea is to turn the concession scheme upside down. Rather than everyone paying 15 cents in the dollar on contributions – which actually hurts the very lowest income earners, because they don’t pay tax on their earnings but do on each super dollar saved – Mr Richardson’s idea is to knock 15 cents off a saver’s marginal tax rate.

For middle-income Australians, who pay 32.5 cents as their top marginal tax rate, for each dollar of super saved they would pay 17.5 cents. However the highest income earners would pay 30 cents.

Thus the progressive nature of the income tax scale would be reflected in the distribution of super tax concessions too.

Mr Van Onselen is right that it’s “no-brainer” on the grounds of equity and budget repair. It would raise $6 billion a year to help reduce our near-$40 billion rolling federal budget deficits.

However, when it comes to the dirty business of politics, such a reform would be more difficult for Mr Turnbull than it first appears.

Who pays the $6 billion?

Australia's plushest suburbs have most to lose from super tax concession reforms. Photo: Shutterstock

Australia’s plushest suburbs have most to lose from super tax concession reforms. Photo: Shutterstock

The political problem stems from the fact that many people affected by such a reform will be living in safe Liberal seats, such as Mr Turnbull’s own seat of Wentworth.

Wentworth encompasses many wealthy postcodes in Sydney’s eastern suburbs, where residents are more likely to be stashing away the maximum amount that attracts the super contributions tax concession – up to $30,000 a year.

Anyone doing that, and earning income taxable at 45 cents in the dollar, will be getting a tax break of $9000 a year at present.

That’s $9000 less in consolidated revenue to help close the budget deficit.

One frequent criticism of super tax concessions is that where an individual’s super balance is vastly more than required for a dignified retirement, other taxpayers are in fact chipping in to help the wealthy with their estate planning.

Yep, your tax dollars flowing into the pockets of the next generation of trust fund kids.

Under the Deloitte proposal, people stashing away $30,000 a year would still get a tax refund, in the slightly more modest amount of $4500.

Is that reduction in tax breaks enough to cause a political headache for the Turnbull government? Actually, yes.

Stephen Luntz, long-time poll watcher and Greens psephologist, points out that Coalition ‘base’ voters would not abandon the government in the lower house if they lost those juicy tax refunds.

However, such voters typically register their protest in the Senate.

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Nick Xenophon: could pick up a few angry Coalition voters. Photo: Getty

Now, if Labor was making a similar reform that hurt their base voters, they would expect to see upper-house votes pouring into Greens senators’ pockets.

But on the right, things are less clear. Mr Luntz thinks wealthier voters tend to be more socially conservative, and so would probably lodge their upper-house protest vote with Christian conservative party Family First.

Or they might, at a pinch, plump for Katter’s Australia Party or the firearms-favouring Liberal Democratic Party. Or the newly formed Nick Xenophon Team might pick up votes, especially in South Australia.

The net result, says Mr Luntz, is that a returned Turnbull government could find itself dealing with as many as 14 grumpy cross-benchers – making a Turnbull reform agenda much harder to prosecute.

The time to address upside-down super saving incentives is now. It is indeed a no-brainer on equity and budget repair grounds.

But the politics of such a move are more difficult than reform-minded commentators have yet acknowledged.

Mr Turnbull and Mr Morrison are rightly winning praise for putting a heap of policy options ‘back on the table’.

But taking back billions in tax concessions may not be as easy as it sounds.

Read more columns by Rob Burgess here

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