It’s hard to imagine poverty in our cushy middle class lives. But try for a minute.
Imagine feeding your family was a weekly crisis. And that the future looked bleak.
Now imagine that someone just like you has risen through the ranks. They work their way to the top of the political ladder and say they’ll change everything.
They promise no more poverty. There will be no more haves and have nots. There will just be prosperity for all.
Wouldn’t you support someone like that?
Of course you would. Such a promise sounds terrific in dire need.
Well, that’s exactly what China’s rural population did. They backed a fellow farm boy by the name of Mao Zedong in 1949.
Government controls ruin lives
‘The Chinese people have stood up,’ Mao said as he took office. But standing up would ultimately cause their death in a few years’ time.
In his Five-Year Plan, now known as the Great Leap Forward, Mao tried to follow the Soviet model. He would focus on heavy industry to grow the economy.
He took huge sways of people off the farms and put them to work, making steel and iron.
There would also be no more private food production. Instead, people would buy things under a collective ownership.
The lack of farmers and consecutive bad harvests saw food supplies dwindle. But to save their head from the chopping block, members of Mao’s party lied about grain production.
And because Mao believed China had food in spades, he took more for the state, making a bad situation worse.
Rural farmers had little to nothing for themselves. And in a very short time, China had its largest ever famine, killing millions.
Now it would seem the Labor party has similar plans. They want to balance out the haves and the have nots.
But to do so, they could end up ruining retirement for a whole bunch of Australians.
Governments have nothing and take everything
Any kind of government control should be fought. In my mind, the government should only have two roles: protect the rights and property of citizens and defend against any outside force.
But of course, governments do a whole lot more than that. They believe in helping out those less fortunate, and nudge us ever so slowly towards socialism.
To get anything done, build something, create affordable housing or reduce the cost of healthcare, the government needs money.
How do they get this money? They can borrow it by issuing bonds. Or more often, they take it from people like you and me through taxes.
And if Labor gets into government in 2019, they plan to take even more money from you.
Let me explain how.
A system unique to Australia
What do you think of when I say franking credits?
Some of you might have fallen asleep already. But others have dollar signs in their eyes.
Unlike the US, Aussie investors don’t have to pay taxes on dividends. And that’s because we have a dividend imputation system.
Under the system, the Australian Tax Office recognises corporations have already paid taxes on profits. This ‘already paid tax’ can then be accredited to investors, who use franking credit to reduce their tax.
For those with a marginal tax rate lower than corporate taxes (30%), they’ll get a refund for the difference.
But it’s probably easier to explain through example.
Say a company pays the standard tax rate (30%) on pre-tax profits. If they earnt $1 per share, they’ll pay 30 cents per share in taxes.
Let’s assume they pay 100% of their after-tax profits (70 cents per share). Come tax time, you’ll still pay tax on $1 (70 cents plus 30 cent franking credit).
But if your marginal tax rate is 15%, then you’ll receive 15 cents per credit, rather than pay additional tax.
Now imagine you’re a retiree and have a marginal tax rate of 0. You’d receive a nice cash bonus of 30 cents per credit.
Not a bad deal, hey?
But it seems Labor wants to put an end to these cash bonuses.
As The Australian Financial Review wrote on Monday:
‘Following a warning last week by shadow treasurer Chris Bowen that Labor again had its sights set on loopholes enjoyed by the so-called wealthy, he and Opposition leader Bill Shorten will announce today that the cash refunds will be abolished from July 1, 2019, if Labor wins the next federal election.
‘Mr Shorten will stress that those affected – about 200,000 of the 600,000 who use self-managed superannuation funds along with another 1.2 million taxpayers – will not pay any more tax. But they will not be entitled to a cash refund if their imputation credit on their dividend is more than their total tax bill.’
But as The West Australian explains, ‘…many retirees pay no tax and get the franking credit (also called an imputation credit) as a cash payment from the tax office.’
So not only will it hurt the so-called wealthy, it will hurt those with no taxable income who enjoy the cash bonus in retirement.
Of course there are investors on the other side of the fence. Such a plan might encourage businesses to reinvest rather than payout a majority of earnings.
Such reinvestment could increase earnings long-term, making shareholders better off.
But what about those who’ve set up plans to benefit from these franking credit cash bonuses? Is Labor going to toss them to the side to win votes from the have nots?
In any case, I don’t believe the Robin Hood mentality of all political parties will change anytime soon. As long as there’s a gap between rich and poor, politicians will pander to those on the bottom for re-election.
If you’re an Aussie income investor heading into retirement, don’t get too rattled. I suspect Labor won’t get very far with their plan.
Already, lobbyists for super funds and investment managers are trying to shut down this plan. I’m a firm believer Australia will remain a top yielding market for Aussie income investors.
Editor, Money Morning