Generational tax divide is real, but will take years to fix


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The pressure from retiree groups will not go away. They believe the deeming rate is too high and should be set by an independent authority rather than a federal minister. The government might want to listen to them before the next election.

The question about the dividend rules was more complex. It was not just about the sustainability of the tax refunds, but about how Labor might change (or abandon) its policy to claw back $58 billion in these refunds over a decade.

Labor faults the government for not giving part-pensioners a more generous increase in their payments, but cannot be sure how it might pay for such an increase itself. The Labor policy platform for the next election remains a mystery.

The government, in turn, tells part-pensioners it cannot afford to spend more than $150 million a year on the deeming rate changes, when in the same breath it defends franking credit rules that cost $4.4 billion a year.

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Everything turns on how this expense might grow. Labor’s election costing, based on estimates from the Parliamentary Budget Office, showed the enormous cost of the cash refunds on franking credits and the way they would rise over a decade.

The document showed Labor would raise $4.4 billion in the year to June 2021 by halting the refunds, with exemptions for pensioners and part-pensioners, and that this would rise to $7.1 billion by 2030.

That is a significant annual burden for Scott Morrison while the Prime Minister is promising a budget surplus and substantial income tax cuts.

Morrison and his ministers are clearly comfortable with their position in the wake of their election victory, and they have the advantage of knowing exactly where they stand while Labor endures a painful review of policy and political strategy.

Even so, Morrison and his team are the ones running the budget. What if more people start embracing franking credits now they have seen how well they can work? Can the government accept the steady increase in this line item?

Yet the challenge for Anthony Albanese is significant. Under Bill Shorten, Labor went too far with its rhetoric about the franking credits policy – not least with claims that it was somehow a “gift” for its recipients.

Weren’t retirees merely relying on tax rules that had been in place for decades, dating back to Paul Keating and John Howard, and therefore planning ahead just as politicians had urged them to do?

It was ugly, at times, the way Labor supporters on social media would rejoice at the idea of slashing a fellow Australian’s income – and not those like Smith with $500,000 to spare.

The Labor attack became clumsy, heavy-handed and divisive. Labor was so hungry for money to pay for its promises that it went too far and too fast with a change that would take effect almost immediately after the election – on July 1 – and would cost households thousands of dollars.

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Remember, the Labor policy was announced without a “pensioner guarantee” to exempt those on the pension and part-pension. Those concessions only came two weeks after the original plan and they were only announced under political pressure. The message to those pensioners was brutal: we will back off this time, but we see you as a target.

In what world was that smart policy?

The hard truth is that the inequities in the system cannot be fixed in this way overnight. The generational divide is real, because younger Australians can be lumbered with student debt at the same time they confront high housing prices and incur income tax, while older Australians lucky enough to own their own homes and a healthy investment portfolio can live on tax-free income.

But this divide has been decades in the making and will take years to rectify. In the search for fairness, the process has to be fair as well. That should mean no lightning cash grabs that demonise the targets.

It is so easy, sitting in Parliament House or a policy think-tank, to think up ways to raise money by rewriting tax or pension rules without giving taxpayers time to adjust. The amount of money raised depends, in fact, on taking taxpayers by surprise. All sides do it, but nobody should be surprised that voters do not like it.

The message to all politicians is not hard to hear: if Australians have saved their money under the rules you legislated, and you decide you want to change those rules, the onus is on you – not them – to make the case.

Labor supporters now look for someone to blame for the fact that some older Australians turned away from their party. They need to wake up. The blame game stops with the Labor shadow cabinet and the decisions it made to endorse the franking credit policy. Any other answer means fighting the last campaign all over again and getting the same result.

Morrison faces a test with the budget: can he justify the significant expense of the franking credit policy when more stories like Dick Smith’s emerge?

Yet Albanese has to adjust to the reality of the election defeat. Can he stand by the policy in its current form? It seems unlikely. Labor will need more than the “pensioner guarantee” to curb the concerns over its policy.

One option should be to phase in any changes more slowly, even if this means sacrificing some of the revenue in the early years.

A cap on the value of the tax refunds is another option. This idea was raised in March last year, in the period between the original announcement and the revised policy, but Labor rejected it at the time.

A simple cap, combined with pensioner exemptions, might have made it easier to defend the policy when the polling booths opened.

The level of the cap is open to debate, but it could be set at a level that is generous enough to appease the part-pensioners now unhappy with Morrison over their deeming rates.

And there’s no doubt it could capture Dick Smith if and when he is ready to hand back his $500,000.

David Crowe is Chief Political Correspondent.

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