Franking refunds a principle, not a perk

It may just be misplaced nostalgia for a bygone era of rational policy debate that never really existed, but it does seem there was a time not so long ago that proposals to change tax policy were anchored in tax policy principles.

Nowadays, the argument seems to be more about who is affected by a change. Identity politics has spread its tentacles into taxation policy. The merits of a policy change are argued in terms of whether the politically favoured groups of the day benefit and those out of favour are penalised. We hear little about principles that should apply across the board.

This is the case with the current furore over refundable dividend franking credits. The Labor advocates of stopping the refunds want us to believe the losers will be affluent retirees sponging off unjustified tax concessions. Their opponents portray the losers as deserving types – widows and orphans, or thrifty people on modest incomes who saved to fund their own retirement.
On a ‘whatever it takes’ view of politics, practitioners of the art of the possible may resort to whatever tactics are needed, provided there is a higher policy purpose to be reached.

The problem in this case is there is no higher purpose to be achieved by changing the policy. There are sound principles at stake and Labor’s ‘stop the refunds’ policy would violate them rather than promote them.
It’s not that Bill Shorten and Chris Bowen haven’t attempted to justify abolishing refunds on grounds of principle, just that the principle they cite is a red herring: that there should be no tax refunds when no tax has been paid.

This has superficial appeal, but does not withstand scrutiny in the case of franking credits. The imputation system is meant to ensure shareholders pay tax on franked dividends at their marginal rate after taking into account the company tax already paid on the profits that fund those dividends. This is what the principle of ‘no double taxation’ means.

In an imputation system, company tax becomes a prepayment of the shareholder’s own tax — whether personal or super fund tax. In the case of a zero taxpaying shareholder, it means the company tax has to be refunded in order to keep their tax at zero. In the case of many taxpayers, it means they pay more tax to top up what the company tax has already paid on their behalf.

‘Crazy principle’

Refunds are a logical feature of the imputation system. Cash refunds are as legitimate as credits against tax payable.

Some economists say imputation has outlived its usefulness. That may or may not be the case, but it is a separate issue. For as long as the imputation system remains in place, refunds should remain as part of it.

Shorten now says refunds are “a crazy principle” — yet they were introduced 19 years ago after rigorous review of the business tax system. The ‘crazy’ principle was supported by the Labor opposition at the time, and went unchallenged by Labor governments for six of those 19 years. Far from being crazy, the principle on which refunds is based is a sound one.

The problem with the conservative side of politics is it seems no longer able — or willing — to argue their case on principles. Instead it is only too willing to indulge in the politics of identity. This backfires when some diligent researcher finds out what they are claiming isn’t quite true, or produces facts that muddy the waters.

So we have a situation where defenders of the status quo are appealing to identity politics to defend a principle they can’t, or won’t, articulate; and the advocates of change are ostensibly acting on principle while their real motive is something else.

The ‘something else’ is partly in the realm of identity politics, in that those with most to lose from the abolition of refunds identify with a group Labor really doesn’t like and thinks it can score political points by bashing.

But above all the ‘something else’ is revenue. They want lots of it to fund spending promises while leaving a surplus (at least a projected one, even if it is never realised). Scrapping franking credit refunds will contribute a significant amount of revenue quite quickly — and they’ve calculated they can get away with doing it.

Robert Carling is a senior fellow at the Centre for Independent Studies and the author of the policy paper, Dividend franking credit refunds: Principle vs revenue.