Letter to the PM

I emailed a letter to the Australian Prime Minister, Kevin Rudd, yesterday:

"Dear Prime Minister,

There is lots of media comment about how keeping your election promise regarding tax cuts would be inflationary, at a time when the need to fight inflation appears more urgent that in recent history.

One way to keep the tax cut promise and to avoid inflationary effects and to boost retirement savings is to pay out the tax cuts as a government superannuation contribution. For example, adding a 1% government superannuation contribution to the existing 9% employer SGL.

The payment would be funded via a government superannuation levy of 1%, similar to the existing medicare levy -- which isn't a "tax" ;)

This would reduce the amount of extra cash arriving in employees pay packets, so reduce the inflationary impact of the tax cuts, but would still deliver the balance of the promised tax cut into people's hands, via their superannuation accounts.

This method could also be used in the tax cuts promised (or "aspirational") for the next couple of years, slowly increasing the total compulsory superannuation contribution (SGL plus government levy) from 9% to 12%, which is often quoted as the level required to fund adequate retirement savings over the typical employees working life.

It would also help address the problem of funding the aged pension as the Australian population ages, by using current tax cuts to reduce the cost of the aged pension down the track.

Regards
xxxxxxxxxxx"

I've no idea who in the PM's department reads the PM's mail, but hopefully the gist of it will trickle through into the budget planning process which is in full swing [I'm probably kidding myself about that].

The concept as outlined is, of course, overly simplistic, and would get a bit more complicated in the detailed implementation - not every taxpayer has been promised a cut in tax rates of 1% or more, as the latest cuts were aimed mainly at the middle income taxpayers, and future promised cuts related to the top tax brackets. So a flat 1% government superannuation contribution wouldn't fit exactly with the promised tax relief. However, it could be used to fulfil the promised cut for those taxpayers that were going to get more than a 1% reduction in their average tax rate, and could either be applied fully to lower income tax payers as an additional benefit (Labor governments are keen on helping the "working poor") or else tailored by applying thresholds (perhaps related to the minimum taxable income threshold) which would target the benefit to lower and middle income taxpayers to match the promised tax relief. Upper income taxpayers could either have the change postponed until the years when the changes to the top marginal tax rates were due to change, or could be filtered out by means testing this new government superannuation contribution, in a similar way to the exising government "co-contribution" (which phased out for incomes between $28,980 and $58,980).

Copyright Enough Wealth 2007