The federal budget has (again) changed the rules of superannuation. The aim of superannuation is to encourage savings and reduce reliance on government pensions in our old age. But fiddling doesn’t help. People wonder if their superannuation is safe from government opportunism.

So perhaps it is time to think more broadly about encouraging savings. One option is a progressive consumption tax. Robert Frank discusses the details here. But there are three key points:

  • It encourages savings;
  • It is as easy (or easier) to implement as our current income taxes (this doesn’t mean it is simple – neither system is simple); and
  • It fits recent research on happiness, spending and ‘relative’ consumption.

I will leave the details to the Frank article – but it is worth thinking about before we fiddle with superannuation again in next year’s budget.

3 Responses to Instead of fiddling with superannuation, how about a progressive consumption tax?

  1. derrida derider says:

    The PET is an old and well-examined idea (dating back to he Rolls commision in the UK in the late 60s, IIRC).  That no-one anywhere has tried it should give you a hint that it has some serious problems (as well, of course, as the major attractions that Frank outlines).

    Firstly, the much higher marginal rates needed for revenue-neutrality may not be a problem for savings incentives – quite the reverse – but they remain a problem for labour supply. And the orthodoxy is that the major DWL from high marginal income tax rates is at the labour/leisure, not the consumption smoothing, margin.

    Secondly, it has all the evasion/avoidance opportunities of the income tax plus a raft of new ones (by manipulating measured saving).  The recent Saez et al JEL review article (also as NBERworking paper 15012 – well worth a read) concluded problems with the income tax base cause DWL of the same order as those from changes in the marginal rate – evasion has big efficiency, as well as equity, costs.

    Thirdly, how would you do it through PAYG system?  Maybe not such a big problem in Oz where we are used to collecting too much tax during the year and handing it back as a refund, but a big problem for the many countries (eg the UK) that attempt rolling reconciliation to avoid unecessary tax returns.

    Fourthly, in the long run it will skew the distribution of wealth by leaving its accumulation untaxed.  This may not be a direct utility problem (beause consumption, not the sum of past consumption foregone, is a better welfare measure) but it certainly has implications for how democracies are run.

  2. On your Marx says:

    DD has said it all.

    with regard to Super simply align with income tax and get rid of taxes on contributions and earnings and just tax benefits.

    A progressive expenditure tax is much better but then you have to eliminate income tax!!

  3. Jasbo says:

    Just one question:

    “fits recent research on happiness, spending and ‘relative’ consumption”

    Do you really buy the stuff that’s come out on happiness, and even if you do, do you think it is a sufficient justification for changes or increases in redistributive government policy?

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