Tax on savings
Australia’s current tax system taxes savings differently depending on the form of the saving. As a result more savings are held in superannuation and housing than would otherwise be the case.
The effect of the tax system on the aggregate level of domestic savings is uncertain. The effect of tax on domestic savings is unlikely to significantly affect the aggregate level of investment in Australia (which is determined largely by the decisions of foreign investors). This suggests that taxing income from savings (at least to a point) is a relatively efficient way of raising revenue. However, some level of concessional tax treatment for savings may be warranted to reduce any disincentives to save.
Taxing savings income also has distributional effects, in part because higher income individuals have a greater capability to save in lower taxed savings vehicles. However, distributional judgments must take into account the full amount of any income support received, such as the Age Pension.
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