The rationale for taxing unrealised gains
Since writing Monday’s post on the Albanese government’s forthcoming superannuation tax hike, I’ve had a bit more of a think about why it might be forging ahead with certain aspects of the plan. After all, this hasn’t been a particularly popular policy and there are good reasons it has been stuck in parliament for over two years.
I mean, just look at the support that has rallied against it. You’ve got Liberals like Tim Wilson and Andrew Bragg; Teals like Allegra Spender and Monique Ryan; former Labor Prime Minister Paul Keating; former RBA governor Philip Lowe; and even former Gillard government Treasury secretary Ken Henry. That group is unlikely to agree on much, yet they all agree that if you want to reform the tax system, this is one of the worst ways of going about it.
Yet Labor persists—so, I asked myself again: why is the Albanese government risking so much political capital on such a bad policy? I’ve since come up with a theory, based mostly on what a couple of relevant members of government have said about it.
Treasurer Jim Chalmers
The idea to raise taxes on superannuation clearly came from Jim Chalmers. He has been rattling on about the “the unfairness of the current superannuation tax concession system which is unsustainable and badly targeted” since at least 2015.
He’s also a big redistributionist, penning a 6,000-word manifesto in 2023 attacking neoliberalism for its “passive de‑prioritisation and the perverse outcomes and greater vulnerability that emerge over time”. Chalmers’ “values-based capitalism”, by contrast, seeks to have the government steer the economic ship—the allocation of capital and labour—more than it currently does.
But to achieve that vision Chalmers believes he needs more revenue, certainly much more than he can get by raising taxes only on the wealthiest 1% of the population (sorry, 0.5%). So, what he’s really after is a broad-based tax hike. And what better way to get there than by pretending he’s only taxing the rich, with inflation and bracket creep doing the hard work of broadening the tax base for him?
Additionally, by also taxing unrealised gains, Chalmers will effectively close a ’loophole’ that allows people to die before paying what he deems their ‘fair share’, thus ensuring a steady revenue stream for his grand spending plans.
As an added bonus, once the door to taxing unrealised capital gains has been opened, it won’t be all that difficult to expand the framework beyond superannuation.
Assistant Minister for Productivity, Competition, Charities and Treasury Andrew Leigh
Unlike Chalmers, Leigh is an actual economist. That means he knows—or should know—the economic dangers of taxing unrealised gains. For those seeking a refresher, basically:
- It distorts the incentives for working, saving, and investing, which are fundamental for long-run growth and prosperity, creating what we economists call deadweight losses.
- It’s a compliance nightmare to value illiquid assets every year, leading to additional socially-wasteful administrative costs, and invites inefficient behavioural changes in terms of asset allocation.
- The lack of a tax credit for unrealised capital losses means volatile assets just won’t be held by superannuation funds—so, buy real estate? Great…
- The above, combined with people leaving the country, parking wealth in things like tax-exempt homes, or buying difficult-to-track assets such as cryptocurrencies, may actually reduce revenue in the long-run (this is what happened in France and is happening in the Netherlands and Norway).
So, what did Leigh say when he was asked nearly a dozen times by Stephen Cenatiempo about the rationale for taxing unrealised gains earlier this week? Embarrassingly little of substance:
Leigh: Well, when you get into the detail of it, this is the way which has been recommended to us as the best approach going forward. It is an approach which is going to leave 99.5 per cent of people unaffected. The vast majority of your listeners I suspect would be saying to themselves, ‘I’d love to have $3 million in super’. And so really this is a modest approach which is about ensuring the sustainability of the super system.
Cenatiempo: All right Andrew, at the risk of doing exactly what I accused you of doing – putting words in your mouth. You’re an economics lecturer – a former economics professor so Andrew, your unwillingness to address the unrealised capital gains issue says to me you don’t believe in this either.
Leigh: Stephen, we have looked at a range of alternative approaches. Those alternative approaches are incredibly expensive. They would come at the expense of all members, not just those with high balances. So this is the simplest approach…
Cenatiempo: Well not if you say it’s just for people over $3 million.
Leigh: The alternative approaches would require a rejigging of the super system which would be expensive for all members. Our aim is to ensure that those top 0.5 per cent of people pay a slightly higher rate of tax. They’re currently paying a 15 per cent tax rate, which will go to a 30 per cent tax rate. Still below what they would earn elsewhere.
So I don’t think people need to be concerned that they will be paying a higher rate of tax than they would outside the super system. Super will still be concessionally taxed and we’re doing it the way in which Treasury has recommended because that’s the simplest path forward and the lowest cost path forward.
Notice that not once did Leigh address the issue of unrealised capital gains or the lack of indexation, each time electing instead to deflect back to the fact that this model was recommended by the ’experts’ (who were no doubt given a brief limiting their options), and it’s just a tax on a few rich people—nothing to worry about! Be happy you’ve got $3 million!
The fact that Leigh was unable to offer any economics in his answers leads me to believe that he knows full well this policy is trash, but he’s toeing the party line because doing so is personally advantageous. After all, if you want to be a full-blown Minister one day—perhaps even Treasurer—then you can’t go speaking your mind if that means upsetting the very popular present-day Treasurer!
It’s simply indefensible
The Greens hold the balance of power in the Senate, and they’re pushing for the threshold to be reduced to $2 million—enough to capture many more people than the 0.5% claimed by Chalmers and Leigh (incidentally a figure from 2022-23, so already well out of date!). But they will nevertheless support it, so barring some seriously bad polling or an internal Labor Party revolt, this looks like it will become policy next financial year.
And look, raising taxes on large superannuation balances is perfectly defensible; Boomers probably should pay more tax in an aging society, as there are fewer workers to support their demands on public services like heath care. There’s even a way to achieve that relatively efficiently and equitably—just go and read Ken Henry’s tax reform review from 2010 (!) for some ideas.
But raising taxes while also refusing to index the threshold, and taxing unrealised capital gains, is simply indefensible.
What Chalmers doesn’t seem to understand is that wealth must be created before it can be redistributed. By taxing unrealised gains, you open a can of worms that will reduce many of the ingredients necessary for wealth creation. The lack of indexation is just dishonest.
As for Leigh, the Australian tax system is incredibly complex and inefficient, and the superannuation model is deeply flawed. But that’s no justification to avoid “a rejigging of the super system”; indeed, that’s a great reason to do a rejigging! These are self-imposed constraints, and now that you have a majority there’s no excuse not to try and fix them. Adding another layer of crap onto the existing mound isn’t likely to make the country better off.
But whatever their true rationale(s) may be for supporting these tax changes—everything I’ve written above about their possible motivations is pure speculation—nothing changes the fact that they will lead to costly unintended consequences.
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