It found decision-making around savings was being skewed by the large differences in their tax treatments, hurting the overall economy by rewarding investment in areas for tax reasons rather than their financial benefit.
According to the report, a person earning between $20,000 and $37,000 faces a marginal effective tax rate on their savings of almost 14 per cent. For someone earning more than $180,000 the tax rate is less than 6 per cent.
Low superannuation taxes give substantial benefits to higher income earners while bank account interest is taxed in line with a person’s income tax rate.
A person aged under 20 and with 45 years of work ahead of them faces a marginal effective tax rate of 36 per cent on their super. Someone aged between 55 and 59 enjoys a tax concession on super worth 111 per cent of their savings.
Report co-author Robert Breunig said there should be no difference in the tax rates between savings measures, arguing this distorted the decisions of ordinary people when it came to putting their money away for the future.
“As review after review has shown, Australia’s current approach to taxing savings is a mess at best and a serious driver of intergenerational inequality at worst,” he said.
“Some savings measures are progressive, taxing higher incomes more heavily and some are regressive. Some favour the old but are punitive for the young.”
The review argues a dual tax system, used in some countries, should be introduced.
Income tax would remain a progressive system, but taxes on savings would be a single flat rate in a move the report’s authors argue could be done at no net cost.
There would be substantial changes to superannuation with all contributions made from post-tax income, with a potential upfront subsidy to help ease some of the financial hit from such a move, while super taxes for younger people would be lower.
Earnings would be taxed in the retirement phase with the revenue raised used to reduce the overall rate of super taxes.
Dividend imputation would be replaced with a flat tax rate on dividends, removing another difference between those in the workforce and those who have retired. It would also close the different tax rates between domestic and international shares.
Stamp duties would be axed, replaced with land taxes extended to all owner-occupied homes.
The federal government’s retirement income review, which has looked at the tax treatment of superannuation as well as issues around the aged pension, is due to be completed this week.
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Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.