So much to gain for so little pain

But after two decades of experience we now know that the revenue we forgo (around $20 billion) actually increases the supply of capital to Australia’s companies very little.

If you want to know why start by asking a project analyst for an Australian company how much they value the imputation credits for the company’s shareholders. They usually count the value of credits at zero.

And on the sharemarket, the best econometric estimates find credits valued at between zero and 50 cents in the dollar. You see foreigners in our sharemarket are the “marginal investors”. It’s their demand for our equities that does most to set their price. And franking credits only help you pay tax in Australia. So foreigners don’t value them.

If we did what the Irish did and abolished dividend imputation, and then used the revenue to cut the company rate, we could lower it by around 10 points or perhaps more - down to 19 per cent. All without touching a cent of the surplus. Of course some will object. But if they’re enjoying franking credits now, they’ll get generous compensation for their removal - as share prices jump in response to lower company tax rates.

It’s hard to think of a change that would generate so much gain for so little pain.