Canberra Report: Ending a costly loophole for the wealthy

Under Bob Hawke's leadership, Paul Keating remodelled the Australian economy.

In addition to big changes like the floating of the dollar, financial services deregulation, enterprise bargaining and the extension of superannuation to all, they introduced massive reforms to our taxation system.

The reforms were designed both to make us more internationally competitive and to make the system fairer. For example, while wage and salary workers paid tax on almost every dollar they earned, wealthier people were deriving income from capital gains without paying any tax. Keating fixed that by introducing a capital gains tax. Similarly wealthy people were receiving aged pensions they didn't need. Keating fixed that by introducing an assets test on pensions. It was well targeted and no one who deserved a pension was adversely affected.

That's the trick when striving for reforms that help balance the books - protecting those on modest incomes from harm. The recent changes to dividend imputation rules are designed to balance the Budget and free up money for other priorities. Because of Paul Keating's assets and income tests only seniors who need help receive income support. On that basis, those on with low retirement incomes will need to be somehow protected.

But providing a cash tax rebate to higher income earners who don't pay tax makes no sense. When Keating introduced franking credits he did so to ensure company profits were not taxed twice; once by the company and then by the shareholder earning dividends. But if a shareholder isn't paying tax on shares because he/she isn't liable to pay tax, there can be no issue of double taxation.

The question then becomes: why are they receiving a tax rebate?

The cash rebate introduced by John Howard was a vote-buying exercise when the global economy was delivering strong revenue to the Government. Within the next few years, this concession will cost the Commonwealth Budget $8 billion a year - more than we spend on public schools, or child care. It's three times what we spend on the Australian Federal Police. The overwhelming lion's share of the additional revenue the change will deliver will come from wealthy individuals. The Budget deficit has deteriorated since the election of the Abbott Government. In addition to Budget repair, we need more money for pensions, health, education, the NDIS, training and roads.

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