TALE OF TWO: COMPARE THE FIGURES
Daily Examiner, 4 April 2019
Susan is a primary school teacher, earning $67,000 a year. She pays $13,000 in tax. Susan would like to buy a home one day, but she’s struggled to break in to the property market. She doesn’t receive any government benefits, which she doesn’t complain about, given that she’s got a full-time job. Her main possession is a used car.
And then there’s John, a retired shareholder. When he was employed, he worked hard and saved frugally. He bought his home in the 1970s, when the average home cost about twice the average household income (today, homes cost about five times average income). John has all his investments in his share portfolio, which returns him $67,000 a year in income. On top of this, the Australian Government sends him a cheque for almost $29,000.
Is this fair? John’s cheque is a cash refund for excess franking credits, representing tax paid by the companies whose shares he owns. Because he doesn’t receive a government pension or allowance, Labor proposes to end this payment.
John might argue that the cash payment is rightfully his, because the government is effectively just withholding the company tax on a temporary basis. But let’s see where this argument leads. If every company was owned by someone in John’s position, the company tax would raise precisely zero revenue. We’d raise billions of dollars from Qantas, BHP, the Commonwealth Bank and Telstra. Then we’d refund it all to people like John. The policy would burn a massive hole in the budget.
Indeed, it’s not as though cash payments to people like John aren’t already starting to set the nation’s finances on fire. When Prime Minister Howard introduced them in 2000, these payments cost only about half a billion dollars a year. Now, they cost around $6 billion - more than the federal government spends on public schools.
John may think that he’s not receiving government support, but the fact is that he’s getting a payment from the government that’s larger than the full age pension. Whether the cheque comes from Centrelink or the Tax Office, the simple fact is that one person’s government payment is another person’s tax payment. In this case, cash payments for excess franking credits cost every Australian over $230 a year.
Cash payments to people who paid no tax aren’t the only fiscally reckless decision made by the Howard Government. In a series of decisions that the IMF says put the budget into structural deficit, it expanded superannuation tax breaks in a way that massively benefited the most affluent retirees. The superannuation reforms over the past decade have to a large extent represented an unwinding of these damaging changes, as even the Coalition began to see the mistakes that had been made. There is now a broad recognition that the purpose of superannuation tax concessions is to reduce reliance on the age pension, not to subsidise people with eight-figure superannuation accounts.
The damage done by the Howard changes weren’t merely fiscal, they also encouraged retirees to think about their savings in the wrong way. Rather than planning to draw down on both their earnings and capital, some began to structure their finances so as to live off their earnings alone. Indeed, a recent report by the Grattan Institute tracked retirees from their 60s to their 70s, and another cohort from their 70s to their 80s. In both cases, they found that average wealth was rising, not falling.
We shouldn’t think poorly of retirees who take this approach. Many are motivated by generosity towards their children. Some want to give their grandchildren a head start in the housing market. But as a nation, it makes no sense to provide excessive tax breaks to older Australians in the hope that some of it will trickle down to younger cohorts. If we want to raise the home ownership rate - currently at a six-decade low - we need to tackle the problem head on. The best way of helping Susan break into the property market isn’t to keep sending cheques to John.
Under Labor’s changes, no-one will lose a dollar of their superannuation savings. No-one will pay a dollar more tax. People receiving a government pension or allowance will not be affected. But we will have $6 billion more to spend on dealing with the crisis in aged care, to invest in social housing, to put into public schools, and to pay down government debt (which has doubled under the Coalition). We will cease being the only country in the world to provide cash payments to shareholders who pay no tax.
By the way, you may be wondering what John’s share portfolio is worth. A simple rule of thumb is that if someone tells you the size of the government cheque they get for franking credits, you can multiply it by 46. This assumes an annual return of 5 percent a year.
On this basis, John owns $1.25 million in shares. Since he owns his house, he’s among the wealthiest tenth of Australians. He can take pride in his hard work and savings. But does John really need to get a cheque from the government?
Patrick Deegan is the Labor Candidate for Page. Andrew Leigh is the Shadow Assistant Treasurer.
Authorised by Noah Carroll ALP Canberra.