by Ebony Bennett
[Originally published in the Canberra Times, 8 Feb 2019]
One of the first things you learn as a child is not to be greedy. It’s a fairly straightforward lesson. Yet, greed is the ultimate culprit identified by Justice Kenneth Haynes in his banking royal commission report. Worse still, the current hysteria surrounding franking credits shows a culture of greed has spread beyond the financial sector. If we don’t confront this culture of greed, we’ll be having another banking royal commission in ten years’ time.
Greed is the opposite of a fair go. Greed is targeting Aboriginal people under 30 for funeral insurance. Greed is cold calling a young man with Down Syndrome and spending 20 minutes persuading him to hand over his debit card number over the phone, for insurance he cannot afford and does not understand. Greed is charging dead people fees for services they cannot possibly use from beyond the grave. Greed is allowing wealthy retirees who pay zero tax to continue to use a loophole that perversely allows them to claim refunds of thousands of dollars for tax they didn’t pay. Is this the kind of Australia we imagined for ourselves by 2020?
It was depressing to watch financial stocks surge in the share market – to the highest levels in nearly a decade – profiting off the back of a report detailing the obscene greed, misconduct and malfeasance on the part of banks, financial planners, mortgage brokers and insurance companies. You can be 100 per cent sure that if the average Australian stole money from a bank they’d go to jail, but it’s not yet clear that any bankers will go to jail for effectively stealing from their customers – though it is still possible.
Not a single bank CEO has been sacked. Instead of heads rolling at the major banks, they are retiring with sacks of money.
In 2017, the CEOs of the NAB and Commonwealth Bank earned, respectively, 108 and 93 times average weekly earnings. They don’t work 100 times harder than the average worker. They certainly don’t deliver 100 times the customer service. They are, perhaps, 100 times more effective at ripping off customers. But surely we don’t want to reward that behaviour with massive CEO salaries.
The chairman and CEO of NAB are the latest to resign, belatedly, after Justice Haynes singled them out for particular criticism. Haynes effectively described Ken Henry as arrogant and unwilling to accept any blame on behalf of the board, and Andrew Thorburn as indifferent to the pain his bank had inflicted on its customers. A couple of the other banks have already cleared house at the board and CEO level. But it’s concerning that CEO pay at the banks is creeping up again.
Anger at bankers was white hot after the financial sector plunged the entire world economy into the global financial crisis. Millions of people lost their jobs, their retirement funds and their own homes. But ten years on from the GFC there has been no true reckoning for the financial sector, and the share price surge this week shows that shareholders see the royal commission as a slap on the wrist.
Australia’s biggest four banks have allowed a reverse-Robin-Hood culture of greed to flourish, enabling them to make a pre-tax profit of $43.4 billion per annum in a sector rife with rip-offs and rorts, targeted at the poor. The bank’s pre-tax profit dwarfs the Commonwealth education budget (about $34.7 billion) and the defence budget (about $31.2 billion).
If cutting penalty rates is good incentive for hospitality workers to work harder and longer, it’s about time we talk about reigning in CEO pay to incentivise some better behaviour from bankers. Options to tackle CEO greed include setting a maximum wage, just like we set a minimum wage, introducing a new top marginal tax rate or simply forcing companies to pay tax on excessive payments to executive staff.
Australia Institute research shows more than three quarters of Australians would back any one of these measures.
Most people have never heard of and do not understand dividend imputation, let alone franking credits. And a small number of very wealthy people who pay no tax are relying on this lack of understanding to keep open a very lucrative tax loophole, which allows them to claim thousands of dollars back from the government for tax they did not pay.
Quickly, what are franking credits? Franking credits are a way to deal with concern that dividends from businesses are not taxed twice. So, when a company earns a profit it is taxed at 30 per cent (after deductions). But dividends paid out to shareholders turn into income for those shareholders. To avoid ‘double taxation’ (where both the company and the individual pay tax on the same dividends), the tax office allows businesses to basically attach a note to the dividend that says this income has already been taxed at 30 per cent. Shareholders, when they do their tax return, receive a credit for the income deemed to have been paid on their behalf by the company. Of the 34 OECD nations Australia is one of only four nations that calculate franking credits in this way. But Australia goes further and provides a refund for any excess franking credits for shareholders who pay no tax, such as retirees and people who can afford to pay accountants enough to reduce their taxable income to zero. Of all the OECD nations, only Australia is that generous.
To be clear, there is no proposal for these wealthy people to pay any tax at all. They will still pay zero tax. Any shareholder who pays tax will not be affected. Under Labor’s proposal, pensioners will not be affected.
The proposal is to end the loophole that allows them to cash out excess franking credits and receive a refund for tax they did not pay. This system of franking credits costs Australia approximately $6 billion per year.
There is no better word to describe this system than greedy. Australia Institute research shows that the top 10 per cent of households by income receive about 75 per cent of the benefits of franking credits that go to households. To get $25,000 in refunded franking credits (as one person complained he would lose under Labor’s plan) a person would have to have about $1.5 million in shares in a self-managed super fund, earning average market yield returns. To put that in perspective, half of women aged 60-64 in 2017 retired with a superannuation balance under just $36,000, according to the Association of Superannuation Funds of Australia. I know which retirees I’d prefer we prioritise.
Millennials – who have been saddled with massive HECS-HELP debts, have been priced out of the housing market, and who rely on ever more precarious and insecure work, with low wage rises and penalty rate cuts – could only dream of being treated so lavishly.
Economists think about things in terms of opportunity cost. Every dollar we spend on refunds for excess franking credits is a dollar we can’t spend on universities, hospitals, schools or decreasing congestion in cities with proper public transport.
Hopefully, the greed laid bare by the Royal Commission will spark an appetite for some fairness.
Ebony Bennett is deputy director of the Australia Institute. You can follow her on Twitter at @ebony_bennett.