Most of the total dollar benefit of refundable franking credits goes to wealthy Australians, regardless of how many people might receive a token cash refund.

From my vantage point in the US, and after being in Australia last week, it struck me how shallow the tax debate is Down Under.

The US has just undertaken the biggest shake-up to the tax code in three decades. Australia seems incapable of a rational debate on tax.

Labor's reasonable proposal to cap the generosity of franking has broken out into uninformed, vested-interest hysteria.

Labor's proposed curtailing of refundable franking credits on dividends is sensible policy. AAP

Similarly, a populist Shorten decries a proposed company tax cut as a handout to big business and CEOs, when really the goal is to boost investment and jobs.

On franking credits, I'd take with a grain of salt the complaints from the superannuation lobby. The lightly taxed super industry is on a government-mandated $2.5 trillion gravy train, clipping the ticket on nearly 10 per cent of incomes for our entire working lives.

Dividend imputation was originally introduced in 1987 by treasurer Paul Keating to prevent double taxation - not to literally pay people finite taxpayer money for investing in shares.


The refundability of excess credits did not arrive until John Howard and Peter Costello decided to add some goodies for the Baby Boomers and older voters, many who receive the government pension while living in multimillion-dollar homes.

The US has just undertaken the biggest shake-up to the tax code in three decades. David Rowe

Almost no other country in the world has dividend imputation, especially refundable credits.

An even better – braver – policy, according to economist Nicholas Gruen, would be to scrap dividend imputation entirely and slash the corporate rate in a revenue-neutral way to 19 per cent. It would make Australia a magnet for marginal foreign investors who don't benefit from franking credits.

Alas, Labor's modest policy is nothing as drastic as that, not that you would know from the brazen headlines. The national broadsheet simultaneously called Labor's policy "class warfare" and an attack on "low income earners". Which is it?

They may be low-income earners, but many are asset rich, a fact conveniently omitted by critics.

Paul Keating introduced the scheme to prevent double taxation. Jim Rice

Suddenly conservatives are carrying on about fairness, when really we should be talking about a tax system that promotes productive economic activity.


Many of the critics are the same groups who regularly deplore a lack of real tax reform in Australia.

Reasonable reform

Actually, Australia has the basis of a potential reasonable tax reform package. It might not be of the magnitude of broadening and increasing the GST and abolition of state property stamp duties, but there's a decent option on the table.

The Turnbull government, quite reasonably, wants to cut the 30 per cent company tax rate to 25 per cent to ensure the country is internationally competitive to attract business investment, to create jobs and boost productivity.

Both major parties are intent on trimming personal tax - rewarding the incentive to work and lifting take home incomes after years of meagre wage growth.

Labor's "fairness" measures of curtailing franking refundability, limiting tax minimisation through trusts, winding back negative gearing and capital gains tax breaks are a sensible means to pay for cuts to company and personal tax.

I guess a little bit of bipartisanship is out of the question?

Such a bipartisan package in a tight budget environment would divert scarce taxpayer resources from economically less productive investments in passive assets such as housing and financial instruments, to encourage business investment and work.


Capping franking credits could also encourage firms to invest more rather than defaulting to dividends to meet the demands of short-sighted investors.

For 35-year old me, it would also seem to even up the ledger from losing to the taxman almost half the marginal dollar I earn, compared with Baby Boomers like my Dad paying little tax for the next few decades from betting on shares.

They've done more than alright from a tax-free housing boom, negatively geared investment properties and concessionally taxed super.

I guess on tax policy Australians are headed for an intergenerational tussle between Baby Boomers who have ridden the booms of the past 20 years and the rest of us seeking to keep a little more of our hard earned.

John Kehoe is US Correspondent for The Australian Financial Review and a former federal Treasury official.