Budget Cuts and Superannuation

Here in Australia we are now in the run-up to the annual federal government budget announcement. All kinds of ideas that might be in the budget are always floated in the run-up. One big one in the last few days is the idea of cutting superannuation tax concessions. Superannuation is the Australian retirement account system. It is very complex due to the nature of the tax regime. At the moment contributions are taxed at 15% rather than at people's marginal tax rate. Earnings of the funds are taxed at concessional rates and there is no tax when the money is withdrawn and once you are in the withdrawal phase there is no tax on earnings either. The latter two concessions were introduced by the previous Liberal government. So the most likely outcome is to remove the concessions for contributions. This will be a further step towards making our system like the US Roth IRA. But we will still be tax fund earnings which is the main contributor to complexity in the Australian system.

Even though obviously it is personally a bad thing for contributions to be taxed more, I think it is a sensible move. Why should high income earners get such a big concession and low income earners none? * It is the easiest way to push the budget towards surplus without raising tax rates or cutting welfare payments. All government departments in Canberra are already getting massive cuts to their operating budgets, but really there just aren't that many public servants in Canberra that this can make a really big difference, especially as in the short-term they are getting redundancy payments. I would be in favor of cutting some of the family welfare payments that the former Liberal government introduced and that Joe Hockey seems to regret, but I can't see Labor doing that.

* Of course you can flip this argument and say we should have a flat tax and super contributions are a good first step towards a flat tax. But that ain't happening any time soon...