How high is high-income?

If you're a super investor and AFL fan* you might have just copped a double whammy. It seems from our Prime Minister's recent speech that, not only might you be lining up to vote during an elimination semi-final, but your super contributions are again under attack.

According to Ms Gillard, speaking at the National Press Club on Wednesday, the Government will be cuttting tax concessions for high-income earners.

Which begs the question - what exactly is a high-income earner?

If we went by the 'super surcharge' introduced in the last budget, $300,000 (the level at which the surcharge kicks in) would be the benchmark. But, given $300,000 income earners are already paying 30% tax on their contributions it seems unlikely that's going to be the source of further major savings. Presumably they're going lower than that.

But how low is still high-income? Guessing from the various forms of mean testing they might target those with income over $150,000  or possibly $180,000 (where the top marginal tax rate kicks in).

There's lots of Government benefits that should be up for discussion but we really are verging on changing the fabric of the super system if we start targeting those on $150,000. You're obviously not on the poverty line, but if you're living in a capital city on this level of income then you're not exactly swimming in cash. With a bunch of rebates lost to means testing, it is going to be very tempting for those affected to wind back super contributions to the bare minimum.

There's a lot of discussion about taxing high-income earners but comparatively little on who constitutes one. Firstly, I would argue it is highly dependent on your location. Someone earning $150,000 in a regional area has much higher disposable income than a city dweller earning the same. Effectively our tax system (including any additional super taxes) taxes city dwellers on their higher rents, mortgage payments and school fees.

Secondly, a point that a good chunk of the population like to forget is that tax breaks are worth more to high income earners because they pay more tax in the first place. Like Myer christmas sales, if you pay more you save more when the price gets discounted.

Removing 'general' tax breaks is effectively a double punishment for being a high income earner (once via the higher marginal tax rates and a second time via loss of tax concessions).

Is $150,000 a reasonable income point for this? I'm not sure it is, even if you do live in regional Australia.

We've long accepted that we should have a progressive tax system and the marginal tax rates reflect this. If we're really that short on revenue it's the general tax rates we should be discussing, rather than whacking those trying to save.

Not that I think we should be raising taxes. Between income tax, GST, stamp duty, land tax, payroll tax, FBT, petroleum rent resource tax, mining tax and carbon tax we're hardly Leichtenstein. But this is a more appropriate discussion when we're talking about a lack of general revenue (or a lack of general profit). Targeting those who don't, or barely, hit our top marginal tax rate bracket with loss of tax concessions isn't a fair or balanced way to go about raising taxes.

What do others think? Is something like $150,000 or thereabouts high enough to be paying special penalties on top of higher marginal rates? Are we heading towards the removal of voluntary super contributions - and is that wise?

One final point. With all the political discussion about tax concessions for high income earners, it is easy to forget that our super contribution rules (theoretically at least) arguably favour lower income earners, due to the capping of concessional (deductible) contributions.

Table 1 shows the impact, on average rates of tax, of contributing 10% of income as super or the $25,000 maximum. You can see that a 10% contribution gives a fairly smooth reduction in the average rate of tax (higher income earners benefit slightly more due to their higher marginal tax rate). But if someone on, say, $75,000 is able to make the maximum $25,000 super contribution (which people close to retirement often can) then they get a far greater reduction in their average rate of tax than the higher income earners.

The danger at the moment is that what should be a debate over raising taxes generally, or cutting costs, is going to end up with a knife through the heart of a superannuation system that is lauded the world over.None of this is to say that high income earners are getting a raw deal under our present system, simply that it is actually quite fair and not particularly generous.

The super system isn't perfect. Rumours are that seven figure lump sum payouts are also in the firing line, which is a reasonable discussion to be had. But we shouldn't be denying the voluntary contributions measures to 'high-income' earners whose incomes really aren't that high.

* Apologies to NRL fans but I couldn't find a published semi-final draw.