Labor Is Coming After Apple Pie-Baking Nanas

On Thursday, Labor's Shadow Treasurer Chris Bowen said something that a politician is never supposed to utter.  At least not in public.

In response to those who will face higher taxes under Labor's proposed changes to Australia's dividend imputation system, Bowen said they were "entitled to vote against us".

On one level this is unobjectionable as it describes the democratic process — don't like one mob, just vote for the other.

But the reason that comment has rubbed so many people up the wrong way is it shows that one side of politics just doesn't care about those who would be hurt by their policies.

It sends a message that if you are not going to vote for Labor then Labor will not govern for you.

So much for the idea of the national interest.  But Bowen and Labor should care more.  Under their latest proposal to hike up taxes, cash refunds for retirees for so-called excess franking credits from shares they hold would be abolished.

This would result in some $55 billion in extra taxes being levied on Australian retirees.

It would also partially undo an important feature of Australia's tax system.  Without franking credits corporate income would effectively be taxed twice.

First corporate profits are taxed at the company tax rate, which is 30 per cent for large businesses.  This is close to the highest corporate tax rate in the world.

Second, businesses pay dividends out of income which has already been taxed.

This means when shareholders pay tax on those dividends, they are paying tax on income which has already been taxed.  The franking credit system gets around this by allowing the corporate tax rate to be deducted from the shareholder's individual tax rate.

This means the extra tax paid above the corporate rate is the difference between the corporate rate and the shareholder's marginal tax rate.

The rub is that many retirees do not work, or work very little, so they have a low or zero marginal income tax rate.  This means that the difference between the company rate and their marginal rate can be negative.  In this case the shareholder receives a rebate.  And it is this rebate that Labor wants to eliminate.

Labor likes to conjure up images that only old rich men chomping on cigars have the know-how to exploit this feature of Australia's tax system.

But recent analysis by Professor Sinclair Davidson revealed some interesting facts.

Davidson, who is a professor of economics at RMIT University, found that 56 per cent of those who receive the cash rebate are women, 68 per cent of whom are over the age of 60, and 47 per cent of whom are either single or widowed.

Labor is coming after apple pie-baking nanas, not monocle-wearing monopoly men.

What is worse, though, is that the changes would be retrospective meaning they would apply to decisions already made.

This is a particular problem for retirees given that plans for retirement are made over a period of years and decades.  Not that the Coalition government can complain.

It did, after all, propose its own retrospective tax hikes on self-funded retirees through the superannuation system in 2016.

If the Coalition was committed to lower taxes it would have more credibility in opposing Labor's tax hikes.

Perhaps one positive to come out of Labor's proposed tax hike, though, is it has brought up concerns about inter-generation political warfare.

Opponents of Labor's proposed tax hike claim Labor is setting up a battle between older self-funded retirees and younger working families.

This criticism has some merit but it misses the broader and intense inter-generations battle that has been raging for some time.

For years it has been the Baby Boomers who have dominated politics.  There are a lot of them and they are for the most part wealthy.

They have benefited greatly from the differential tax treatment of superannuation, rising asset prices from low interest rates, and rising property values.

At the same time as the boomers have amassed great wealth, their younger cohorts in Generation Y (or Millennials born between 1977-1995) and Generation Z (born from 1996 onwards) have been left with some $500 billion in gross government debt at the Commonwealth level alone.

And every last cent of this debt will need to be paid back by today's younger Australians through higher future taxes.

Inter-generation inequity is a legitimate concern but the best way to resolve it is to reduce government spending and pay down the debt, not hit nanna with another tax.