Labor’s dividend tax policy is smart, bold – and dangerous | Greg Jericho

The belief that there is no difference between Labor and Liberal hasn’t been true for a while now, but this week, with the ALP’s policy to end the Howard-Costello enacted cash refunds for excess dividend imputation credits, everyone knows where the line between the parties is drawn. And it marks Bill Shorten as a leader prepared to argue for the prime ministership instead of hoping to win it by default.

Remember the old days of the small-target strategy? Forget that. This week, the ALP saw Shorten stand up and tell everyone to take their best shot.

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Any policy that negatively affects retirees is a bold – and possibly politically dangerous – move. But it is also very much in keeping with Labor’s policy on negative gearing and capital gains tax. There again, they sought to undo a Howard-Costello policy that made things very favourable for older, wealthier people.

Among the many problems with John Howard and Peter Costello, one of their greatest was the desire to shovel as much money as possible to older people who didn’t need it. This not only took money out of the budget, it also did so in a manner that ensured problems that would remain long after their political time had expired.

It was also a policy that has served to entrench wealth inequality.


What is a dividend imputation?

When companies pay dividends to Australia​n​ shareholders out of after-tax profit, shareholders receive franking credits​,​ a credit against their own tax​ ​bill based on the tax paid by the company. This system,​ which is ​known as​”​dividend imputation​”, is unusual – only ​four other countries in the world use it.

However, in 2000​ ​the then treasurer, Peter​ Costello, made the system even more generous to shareholders by allowing them to claim a cash refund if they received more in franking credits than they owe​d ​in tax. Because income from superannuation is tax free for people over 60, high​-income retirees can use franking credits to get a cash “refund” of​ ​more than 40 cents for every dollar they receive in dividends.

The cash payments cost the budget $550m the first year they were paid. The ATO estimates that​ ​the measure cost $4.6​bn​ in 2012-13, and Labor claim​s that abolishing the payments​ ​from 2019​ ​will save $8bn a year.

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While income inequality often gets the attention, wealth inequality is even bigger, and with it comes intergenerational inequality.

The richest 20% of Australians hold about 40% of the national income but nearly 65% of the national wealth, and a majority of the wealth is held by those over 55. And our tax system is designed to help them not only keep it, but to garner more and then give it to their children (who then garner more and then give it to their children, who then …)

Our retirement system is based around tax-free holdings of wealth – through the family home, which is exempt from capital gains tax, and tax-free income from superannuation.

With those exemptions comes revenue forgone, and the cost of paying for our ageing population is an issue that is hitting us square between the eyes.

The prime earning age for workers is between 25 and 54. Between those ages, you are no longer studying, and not really thinking about retirement. These workers not only power much of our production, but also our tax revenue.

And right now the cohort is shrinking.

Currently just 41% of the population is aged between 25 and 54. The last time it was that low was in 1987, when the first baby boomers were entering their 40s.

Back then, it wasn’t a problem because only 10.5% of the population was aged over 65. But now those 40-year-old baby boomers are retiring and those over 65 account for 15.5% of our population.

That jump is the equivalent of about 1.2 million extra people aged over 65 – people who mostly don’t work (and nor should they be expected to), or pay income tax, but whose pensions and services need to be paid for by the revenue derived from those prime-aged workers.

So what is to be done?

You could – as is the government’s current policy – increase the retirement age to 70 (this policy is still on the Department of Human Services website). That might be fine for someone like me typing away at a desk but not for many others.

You could “crack down on welfare cheats”. The problem is, despite protestations from the government and conservative media, there aren’t many of those.

On Friday, the government announced that it had saved $43.4m – $17.8m in this financial year – from “more than 1,000 wealthy welfare cheats”. That’s from a $46.1bn annual budget for Newstart, DSP and Family Tax Benefit (and the aged pension is another $45.4bn).

Or you could, as the ALP is doing, seek to find extra revenue by cutting out rorts that were designed as electoral sweeteners and favours to the Howard-Costello key demographic.

When this imputation cash rebate was introduced, not many were affected but like any good tax rort, accountants soon caught wind. Add in the 2006 decision to make income from superannuation tax free for those over 60, and suddenly you had a lot of people with a high actual income but very low or zero taxable income taking advantage of it.

Further add in this weird belief that the retirement nest egg must not be touched, and you get a lot of idiotic reporting – such as in the Herald Sun, which had the case study of a woman with an income of $160,000, who we should feel sad for because she will lose her $12,775 rebate. She could, of course, sell some of her shares, but that would actually be using superannuation for its purpose and not as a tax-free inheritance fund.

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So it is a smart and needed policy, but also a dangerous one because it affects an area shrouded in confusion and thus very much susceptible to fear-mongering.

However, it also delivers the ALP big money. At about $5bn a year – rising to $8bn – this is not that much lower than what would be raised by applying a GST on fresh food.

Yes, the Labor party will use some of it to get the budget back to surplus, but it is also very likely to use it for tax cuts and education and health spending commitments – and they will all be fully paid for.

As I noted with Malcolm Turnbull’s promise of tax cuts, you need to ask how they’re being paid for. With this increase in revenue, the question becomes what it will be spent on – and the benefit of that spending could well be worth any political pain the ALP might suffer now.

– Greg Jericho is a Guardian Australia columnist