Deloitte’s myths need busting

While Deloitte Australia’s report Mythbusting tax reform has made a useful contribution to the tax debate, the report is misguided in a number of areas — and espouses myths that themselves need busting.

One of the key problems with the Deloitte analysis relates to the taxing of superannuation. The report correctly states that the tax incentives for super are much smaller than is argued by other commentators who are basically misusing Treasury data.

The graph below shows the problem: many commentators argue that the cost of super tax concessions is around the same size as the cost of the aged pension. But this approach uses the worst possible benchmark, and a more reasonable approach (using an expenditure benchmark) shows the costs of the tax concessions are much smaller.

The natural conclusion of this is that it is unwise to dramatically scale back the tax concessions for super – but this is exactly what Deloitte is recommending. If there aren’t large problems with the taxing of super, then it isn’t clear why the system needs as large a change as Deloitte propose. Small problems suggest the need for small changes.

But Deloitte doesn’t follow this logic: they are instead arguing for large tax changes, suggesting that the tax on super contributions should be increased by $6 billion per year.

Deloitte unhelpfully call this tax increase a ‘reform dividend’. However, a tax impost isn’t a reform dividend — Australia gets a reform dividend if growth increases, and large tax increases won’t generate this growth. It is possible that a $6 billion tax increase, when fully used to fund a company tax cut, will actually have a reform dividend, but Deloitte don’t present evidence that this is the case. In addition, it is unclear whether the political process would be able to deliver a $6 billion tax cut for companies.

The report notes that compulsory super doesn’t cause a large increase in national saving. A large part of increased super saving is offset by reduced saving elsewhere — so super isn’t prompting much of an increase in saving for retirement. The natural (but unstated) conclusion of this is there is no need to increase compulsory superannuation contributions. The case against an increase in mandatory contributions is powerfully bolstered by official Treasury estimates that an increase would actually cost the budget more money than it saves.

The report usefully busts the myths that negative gearing is a tax loophole that is driving property prices through the roof, and argues it is bad policy to remove negative gearing because it is used by the rich. Deloitte strongly — and correctly — argues that tax policy shouldn’t be changed solely on the basis that rich people are more prevalent users of a part of the tax system. It doesn’t matter whether the rich or poor use negative gearing.

However, Deloitte are inconsistent on this issue. They earlier argued that super tax concessions were unfairly used by the rich, and later argue the Capital Gains Tax discount should be wound back for similar reasons: it is more often used by the rich.

Consistency would argue that it is poor policy to remove any tax concession simply because the rich are using it.

Based on their earlier argument that tax should be lower on saving, Deloitte supports the arguments for a discount on capital gains tax (CGT). But the report does not justify why the current approach is too generous or provide adequate analysis of why their proposed change to a discount of 33⅓% is an improvement.

Deloitte’s report has provided some useful analysis for the tax reform debate — confirming that taxes should be lower on saving, and justifying why tax rules shouldn’t be changed solely because those rules are used by the rich. However, neither of these fundamental arguments justify their proposals for changing the tax treatment of super or capital gains. In busting some myths, they have generated some of their own.

Michael Potter is a Research Fellow at the Centre for Independent Studies