My instincts already lead me to distrust anything that Bill Shorten says. Recently he found a way, in the name of fairness, to save $65 billion dollars in the budget by not paying franking credits to people with low ‘taxable’ income. His policy was targetted at the Liberal heartland of older self-funded retirees. Then someone pointed out that this policy would hurt poorer people as well so he back-tracked and said, of course, genuine pensioners would be exempt. But then an ordinary working person with a low income and some shares might also be affected. What then? Another exemption?
The lesson to learn is that making policies on the basis of political considerations is always going to lead to inconsistencies, and then making exemptions creates more inconsistencies.
Good policies don’t require exemptions. Exemptions create opportunities for people to adjust their behaviour to take advantage of the new loophole. Costello created the problem back 11 to 13 years ago. He first exempted drawing from a retirement fund from income tax. That was reasonable, as such drawings are like taking money from your bank account. But he also made earnings within a retirement fund free from tax. Contributions to super funds were already concessional. At first, the cost to the budget was minimal, but now it is huge and growing. While superannuation rules were originally created to encourage ordinary Australians to contribute to their own retirement, Costello created a virtual tax haven on-shore that mainly advantaged the already wealthy.
Super concessions were initially there to compensate those who were not drawing a pension, but we now had the case where the tax concessions far exceeded the value of universal pensions. The current government has already put in train some changes which will, over time, dilute the worst excesses of Costello’s policies. These same policies will also negate the effect of Shorten’s thought bubble.
There should be some simple rules that can be applied to see if a budget measure is a good one.
- Does the measure encourage an undesirable change in people’s behaviour?
- Does the measure apply to citizens in an equitable manner or in a regressive manner?
- Does the measure discourage self-reliance and invite people to become welfare dependent?
- Is the measure so complex that an ordinary person requires a planner to assist them, even though they probably don’t realise it?
Here are some examples of what I mean.
I saw a chart of incomes reported to the Tax department and many of them were clustered just below the marginal tax thresholds, like $87,000. This was very sad because it meant these people didn’t understand marginal tax rates. They had forgone income they could have earned and enjoyed because they thought that by earning over $87,000 they would pay a lot more tax.
The baby bonus was a bad policy because some naive poor women had children just to get a small bit of cash.
People will delay or sabotage their recovery from illness or injury in order to gain a disability allowance. The reason for this is that unemployment benefits are so miserly and difficult to qualify for.
Asset tests on pensions are bad policy (in their current form) because the exemption for the family home and the rules about gifts make it impractical for some pensioners to sell their large home for a smaller one. Likewise, farmers who want to stay on their farm (their home) after they retire will be penalised because of a rule about property size.
Let’s ask a few questions that might point us to good tax or pension policy.
- Who should get a bigger pension? A person with a $3million home or a person with just $100,000 in the bank? (I think they get about the same.)
- Who pays more tax? A 25 year-old person with a $1million home, $0.5million in super and income of $80,000 or a 55 year-old with the same income but no assets? (It’s the same, except that the super fund will pay a little tax.)
- Who should get more income assistance? An unemployed couple with two teenage children or a single teenage girl with one child under five living with her mum? (I’m pretty sure that the single parent gets a lot more.)
- If a man put his home into a trust many years ago but then died and the proceeds of the trust passed to his spouse, what would be the tax consequences? I think his wife will have a huge CGT bill to pay.
I often read Noel Whittaker’s column in the Herald. Apart from constantly reminding me how poor I am, it amazes me what a minefield awaits unwary people when they make decisions about their wealth, getting pensions, saving on CGT etc. In most cases Noel can only tell people the rough chances of their plans blowing up in their faces and suggest that they get professional advice. It’s as if the gnomes who populate the bureaucracy are constantly manipulating the rules to trap the poor fools who haven’t done their homework.
So I conclude that the current system is both complex and unfair, littered with inconsistencies and loopholes that punish the naive and reward the cunning.
My view is that simplicity is key to fairness and that exemptions may seem to be justified in some cases but we should always think whether there is another way to achieve the same end. I’ll give my plan in a future blog.