Andrew Leigh

WHAT IF CASH REFUNDS FOR FRANKING CREDITS DIDN’T EXIST?

Australian Financial Review, 11 March 2019

Suppose that Australia - like every other country in the world - did not provide cash refunds of franking credits to anyone except pensioners.  

Now imagine that a government decided to implement such a policy. 

How would it fund it? For starters, the cost would be significant - nearly $6 billion a year. That’s over $200 for every man, woman and child in Australia. So it might raise income taxes on middle-income earners or increase the GST. Or it could rip money out of the health or education system.

Who would benefit? A government trying to put a system like this in place would quickly discover that 24 out of 25 people wouldn’t see a cent. But most of the cents would end up in the hands of those with plenty of dollars. Treasury analysis would quickly show that more than half of the cash refunds would go to people with more than $2.4 million in their superannuation accounts. 

What would it achieve? A government that planned to spend nearly $6 billion on refundable franking credits could hardly claim that it would help get retail sales out of the doldrums. After all, most of the money would go into savings rather than spending. The multiplier effect would be small. On the corporate side, the impact would be to encourage Australian firms to increase their dividend payout ratios, which is hardly an incentive for companies to buy new equipment, undertake more research, or employ extra staff.

If Australia didn’t have a system of refundable franking credits, we’d be hard-pressed to justify implementing one. Given that we do have such a system, it’s time that we reformed it. 

At a tax fairness forum in Adelaide recently, a self-funded retiree asked me to ensure that the debate was conducted with respect. I heartily agreed. As the saying goes, you can have your own arguments, but not your own facts. And there’s nothing remotely noble about lying in pursuit of a cause. 

Healthy public debate involves arguing about the issues, not fear and smear. When I hear our political opponents scaring pensioners into thinking they’re affected by Labor’s policy, it makes me think that they care more about their narrow partisan interests than the national interest. As the Speaker of the House noted recently, Tim Wilson’s taxpayer-funded committee hearings against Labor’s policy ‘could be seen to have caused damage to the committee’s reputation’. 

Opponents of reform like to say ‘if it ain’t broke, don’t fix it’. The trouble is that the Coalition has been sending the country steadily broke. Since they came to office, net debt has more than doubled, and now stands at more than $14,000 per person. If refundable franking credits were purely funded by international borrowings, you could think of them as adding $200 to that debt bill each and every year.

If cash refunds for franking credits are such a good idea, you have to ask yourself - why doesn’t any other country have them? And it’s not just those overseas who are bemused by our system. A recent video asking young people about refundable franking credits found that none of them knew about the system. When it was explained, the most common word they used to describe the system was ‘unfair’. If you think cash refunds for franking credits foster the Aussie fair go, try justifying them to a young person struggling to get by on Newstart in a place with double-digit youth unemployment rates.  

Like the introduction of the cane toad, no-one in 2001 foresaw what refundable franking credits would do to our tax system. Back then, the refunds cost just one-tenth of what they do today. In a decade’s time, their cost will be half as large again. That’s why we’re removing cash refunds for franking credits for everyone who doesn’t receive a government pension or allowance.

Every tax loophole has its defenders, which is why tax reform isn’t for the faint-hearted. It’s easier - as John Howard and Peter Costello did - to create tax exemptions than to close them. But unless we close unjustified tax loopholes, we simply won’t be able to tackle big challenges like inequality, climate change and wage stagnation. For the sake of the current generation, and those to follow, it’s time that we joined the rest of the world in removing cash refunds for franking credits.

ENDS

Authorised by Noah Carroll ALP Canberra.