There was no subtlety in Labor’s approach this week. The Opposition Leader framed his tax revenue increase as a move to close a “loophole” that favours the “wealthy” – an incendiary message to older voters who do not feel rich. The Labor policy is highly targeted, because it does not affect millions of investors who can claim the franking credits as a deduction – as long as they do not qualify for a cash refund. Yet the message looks like an insult to older Australians who thought they were doing what Canberra wanted: saving for their own retirement without needing all of the age pension. The protests from older voters have forced Shorten into promising to look after pensioners – without saying exactly who he will help or how he will do it. The Greens are warning about the damage to people on low incomes, making Saturday’s by-election in Batman an early test for this policy. Loading Replay Replay video Play video Play video There are two great merits to Labor’s proposal. The first is that it confronts the dire state of the federal budget by shutting down a rule that sacrifices a huge amount of money. The Labor policy would start by collecting $5.6 billion in the year to June 2021, adding to the projected surplus of $10.2 billion in that year and supporting the job of getting the federal budget back to health. Nobody should lightly dismiss that ambition.

The second is that it halts some very generous cash refunds to big investors who have turned this rule into a much larger drain on the budget than was ever intended. The refunds cost $550 million when first introduced and should have increased to about $800 million today as a result of inflation. Instead they have soared tenfold. This is proof of how attractive these refunds have become for savvy investors. Labor’s treasury spokesman Chris Bowen is warning his shadow cabinet colleagues to avoid big spending decisions that give away all the money raised. He wants to use the revenue to produce a better budget than the Coalition – a goal that shows he and his colleagues are thinking hard about being ready for government. Loading The problem is the harsh edge to the Labor policy and rhetoric. Voters who are living in retirement on incomes of less than $18,200 a year do not like being told they are wealthy. And there is no safety valve in the policy – yet – to protect people who get a cash refund of a few thousand dollars a year. Labor must give thought to a softer option, such as capping the refund rather than cancelling it outright.

This is not the first time a tax rule from a happier time has had to be wound back. It will not be the last. The refunds were never part of Paul Keating’s dividend imputation regime in the 1980s but were added by John Howard and Peter Costello in 2000 when tax revenue was buoyant. And those days are over. Consider the long list of decisions that have turned off the tap for taxpayers since the mining boom stopped pouring cash into Canberra. Under Julia Gillard and Wayne Swan, Labor scaled back family tax benefits and cut payments to single mothers. The Coalition took this approach into overdrive with $7.4 billion in cuts to family tax benefits as well as a deficit levy on the wealthy and an attempt to force young people to wait before they could get Newstart. Every time one side of politics looked for savings, the other bayed for blood. Tony Abbott railed against Labor’s cuts and then went further with his own. The hypocrisy reached an apex over the last few years when the Coalition put forward savings on superannuation tax concessions and the pension assets test. Shorten exploited Turnbull’s vulnerability with angry Liberal Party voters, pretended to champion the victims and then banked all the savings with no plan to reverse the measures. To compound it, Labor added $1.5 billion in additional super taxes of its own. Loading

Now Shorten raises revenue from some of the very same older Australians he claimed to defend. Scott Morrison thumps the table on behalf of the same retirees he targeted just two years ago. This is the “whole dreadful spectacle” of Australian politics, to borrow a phrase from former Treasury secretary Ken Henry. Total hypocrisy. No consistency. Each side plays to its own base and is too scared to negotiate an outcome in the middle ground. Instead of a lasting settlement, taxpayers get a new policy lurch every two or three years. This is a political class that will always choose a stalemate over a solution. One reader, Leona Ross of northern NSW, has a message for both sides of politics in Parliament House: “Stick it to the lot of them.” What neither side acknowledges is the reason this franking credit refund is so important to older Australians on low incomes – the fact that Swan tripled the tax-free threshold to $18,200 six years ago. Of course those in retirement are entitled to enjoy this benefit for their incomes from shares, savings or property.

More importantly, neither side has been willing to confront the totemic tax rule in this arena – the fact that earnings from super are free of tax for those of pension age. Few other Australians get this tax-free treatment of their income. The great largesse in Costello’s 2006 budget continues to shape political debate, years after it seemed so easy to pay for. Instead of a lasting settlement, taxpayers get a new policy lurch every two or three years. The moment to deal with these pressures was five years ago or more, when the global economy destroyed the fantasy of an easy return to surplus. This is why the toxic politics in Canberra is so maddening for Australians who stand to pay more tax or lose more benefits. Howard’s crusade, seeking to champion an aspirational group of shareholders as a new force in Australian politics, is giving way to a new divide. This is a divide between the generations. Labor knows it antagonises older voters who watch their incomes fall from changes to their super, their pensions and their share dividends. Yet Labor also knows it is appealing to younger voters who feel they are in the economic slow lane.