Total humiliation for Jim Chalmers on super as Albo teaches him a lesson: You can’t tax money that people haven’t earned: PETER VAN ONSELEN

Treasurer Jim Chalmers’ humiliating backdown on super proves that taxing ‘paper profits’ was always a dud decision. Thankfully, the PM overruled his callow sidekick on this one.

This is a humiliating backdown for Jim. Experts tried in vain to convince him of the folly of the policy, but he refused to listen. Luckily, others did, chiefly the PM who had the authority needed to roll his Treasurer.

So the government has finally binned its plan to tax unrealised gains on super and will index the new tax thresholds, too. That’s where any credible reform should have started. 

Instead, we had two years of a stubborn defence of an indefensible design, followed by a scramble to fix what never should have been broken.

Chalmers insisted that he wouldn’t change it, over and over again. He now has, having been shut down by his boss. To have been a fly on the wall in his office before announcing the backdown.

Taxing unrealised gains was a textbook example of how not to reform the tax system. For Jim, it was only ever about the politics of envy coupled with a profound lack of economic understanding. All to try and fix his budget the easy way, rather than instituting proper, wide ranging tax reform.

Don’t forget Jim’s PhD is in politics – not economics.

You don’t tax people on money they haven’t actually made yet. Duh! Market values jump around. Paper profits vanish. It’s utterly ridiculous that Jim couldn’t see any of that.

The Treasurer wanted retirees and self-managed funds paying tax on valuations that could reverse a month later. For anyone with illiquid assets in their super (think property or unlisted holdings), the proposal risked forcing sales, just to meet a tax bill on ‘profits’ that existed only on a spreadsheet.

That’s not super reform, it’s economic vandalism, and the experts lined up to explain as much.

The Treasurer was either too ignorant or too pig-headed to listen. He would dig in each time they spoke. At least the PM knew better and fixed the mess.

The formal fix set to be made is simple and sensible: tax realised gains and index the thresholds. A 30 per cent tax on superannuation earnings on balances of $3m-$10m, rising to 40 per cent taxed on super earnings on balances above $10m.

That’s entirely reasonable.

In fact, the Greens’ preference for the 30 per cent tax rate to apply on balances over $2m wouldn’t have been unreasonable either, but Labor isn’t going there. For now anyway.

Realised gains are cash in hand, they can therefore fund a tax bill. Indexation stops bracket creep doing the dirty work over time. Freezing a dollar figure forever is just a slow, sneaky tax rise. Indexing it is good policy by comparison.

Chalmers’ problem was his judgment, or more accurately a lack thereof. He tied himself to a design that cut against basic tax principles, waved away warnings from practitioners and economists alike, and doubled down when the flaws were obvious to everyone else. He told voters there’d be no changes, period.

Credit where it’s due. The PM read the room and understood the economics, stepping in to make the changes. This is what competent political management looks like: course correct and move on.

There’s another quiet hero here: the new Assistant Treasurer, Daniel Mulino. He’s a Yale trained PhD economist who understands risk, liquidity and incentives. You don’t need an economics PhD to see why taxing paper gains is dumb. 

But it helps to have someone in the room who can explain, with authority, how perverse the incentives become when government pretends volatility equals income.

Mulino’s fingerprints are all over this correction, as they should be. And let’s not forget the new Cabinet Secretary, Andrew Charlton, who has an economics PhD from Oxford. He also helped guide the powers that be in the right direction, which was the opposite direction Jim wanted the PM to go.

Chalmers talked tough, promised no backdown and has now backed down. He can try to spin it as listening but that’s a desperate attempt to hide his humiliation. Voters aren’t mugs. If the Treasurer wants to salvage credibility, he should front up and say it plainly: the original model was wrong, this one is right, he finally gets that now and here’s why.

Anything less looks like a bloke who mistook stubbornness for strength and got caught out.

Superannuation is built on trust and predictability. People plan decades ahead. A tax on unrealised gains would have turned retirement saving into a valuation lottery. That kind of instability bleeds confidence out of the system. The fix restores some of that confidence.

It shouldn’t have needed a rescue mission from the PM, but at least it’s done now.