Paul Keating (right) introduced dividend imputation. Credit:Andrew Taylor Paul Keating introduced full dividend imputation in 1987 to eliminate the double taxation of company dividends. Domestic shareholders are given "franking [tax] credits" worth 30¢ in the dollar on those dividends that have already been taxed at 30 per cent in the company's hands. Dividends are taxed at the shareholder's marginal tax rate, but less their franking credits. Should they not owe enough tax to extinguish the credit, the balance is refunded to them. The effect of this for Australian shareholders and super funds is to render company tax little more than a withholding tax, like the income tax businesses withhold from their workers' pay packets. Offshore boon

This means the only significant continuing purpose of company tax is to tax foreign shareholders. Malcolm Turnbull has ordered an ACCC review of electricity prices Credit:Getty Images Since the franking credit rate moves up or down with the rate of company tax, Australian shareholders have little or nothing to gain from a cut in the company tax rate. Only foreign shareholders – present or prospective – would benefit. When you remember how often the nation's chief executives make speeches claiming to have only their shareholders' interests at heart, it makes you wonder why the big business lobby has been so insistent on the need for lower company tax. One possibility is they see their interests as managers as differing from their local shareholders'. Another is that outfits such as the Business Council of Australia are dominated by executives who owe their allegiance to foreign bosses and owners.

It hasn't suited the government to admit that its promised $48 billion, 10-year phase-down of company tax holds no benefits for local shareholders, only foreigners. So anxious are the econocrats promoting lower company tax to avoid thinking about the implications of imputation that Treasury got caught overstating the (remarkably modest) benefits in its modelling. A rival modeller had to point out the error. Small biz benefits Smoke signals from Canberra suggest that all the government will manage to get through the Senate is a reduction to 27.5 per cent in the tax rate applying to companies with turnover of less than $10 million a year. In other words, only small and medium incorporated businesses will get a cut.

Trouble is, almost all the shareholders in such businesses – many of them owner-managers – would be locals, not foreign investors, meaning they're already eligible for dividend imputation and so have little to gain from the lower tax rate. In which case, their behaviour – their enthusiasm for creating "jobs and growth" – is unlikely to change. But get this, since almost all the shareholders of small and medium-sized companies get franking credits, the reduced measure's net cost to the budget (less company tax collections, offset by a corresponding reduction in franking credits) is likely to be minor. It's only when you're handing tax cuts to the foreign shareholders in much bigger companies, as originally planned, that the (mainly unfunded) cost starts to mount up in later years. Zombie killing time

So if the smoke signals are right in predicting that, once the government's got the most it can get through the Senate, it will ditch the rest of its original plan, this will greatly improve the 10-year projections of the budget balance. That's particularly so because the 10-year phase-down was partially funded by the tax increases announced in last year's budget: the further huge hikes in tobacco excise, the cut back in super tax concessions and the crackdown on multinational tax dodgers. Further smoke signals say that, once the government's got through the Senate what it can of the unpassed, "zombie" spending cuts from its disastrous 2014 budget, it will abandon the remainder. That will have quite an adverse effect on the 10-year budget projections – which is the very reason it has refused to kill the zombies until now. Loading