Neither mainstream party is offering tax relief to personal taxpayers as part of their policies for the coming election. But there is one easy win in tax that neither side has been willing to touch.

The Liberal Party is offering some reduction in company tax to smaller companies, spreading to all companies in perhaps 10 years.

Our government relies on taxation of income from personal effort and from business profits for about 85% of its revenue.

The history of federal taxation shows that over the past 30 years the rate of tax on earned income has barely changed, whereas the effective tax rate on company profits has more than halved, from 49% in 1986 to about 20% today. The headline company tax rate today is 30%, but about $20 billion per annum or roughly one-third of this money is handed back to shareholders via franking credits, so the effective rate is about 20%.

Now the Liberals propose further reductions in company tax. This policy tallies with the view of conservative political parties everywhere that the best solution to any economic problem is a tax cut for the wealthy. This is trickle-down economics, and as much as it has been debunked by economists, this fantasy lives on in conservative folklore.

The ALP is silent on the question of tax relief for wage and salary earners.

What are the fiscal conditions under which tax relief for ordinary Australian workers might be feasible?

There is only one potential “magic pudding” left out there: Keating’s bastard child, the dividend imputation (DI) system, currently costing the budget about $20 billion.

The original rationale for DI was twofold. It was supposed to improve capital formation, and also to avoid the double taxation of company profits through taxation of dividends.

[All hail the economic panacea of company tax cuts]

With capital formation, the view of most reputable economists (notably Nick Gruen, who examined the issue for the Committee for the Economic Development of Australia) is that DI is ineffective as a mechanism for assisting capital formation because the marginal investor in Australian equities is a foreigner whose investment decisions are unaffected by DI, because they are excluded from it.

With double taxation, any weight that argument might have once had has been severely diminished by the steady migration of Australian share ownership from individuals to superannuation funds, which enjoy a tax rate between zero to 15%.

The heavy weighting towards fully franked shares in the portfolios of super funds raises the concern that far from company profits being taxed twice, they are increasingly hardly being taxed at all. An example of this would be if a company were wholly owned by pension phase super funds and paid out 100% of its profits as franked dividends, the net company tax paid on its profits would be zero.

Full-on DI is only in force in two significant countries, Australia and New Zealand, and the Kiwis had no real choice in the matter given that they compete with Australia to attract investment.

It needs to be understood that DI puts Australia at a huge disadvantage compared to similar economies when it comes to balancing its budget, because we are handing out the equivalent of 1.5% of GDP to our richest citizens every year, for no obvious economic benefit.

Assuming we re-joined the rest of the developed world and scrapped DI, saving our budget about $20 billion, we would then have the wherewithal to offer tax relief to ordinary wage earners.

There are about 12.7 million individual taxpayers in Australia. One way to divvy up $20 billion equally between them would be to simply lift the tax-free threshold from its current level of $18,200, where the 19c in the dollar rate currently cuts in, to about $26,500. With 12.7 million taxpayer’s, this would cost about $20 billion.

Who are the winners and losers if such a radical proposal were implemented?

The answer is that any taxpayer who collected less than $1600 per annum from franking credits would be a net winner. Any taxpayer who collects more than $1600 per annum would be a net loser.

A rough calculation would be that collecting $1600 in franked dividends requires owning about $100,000 worth of shares, given that not all companies are profitable and not all dividends are fully franked.

[Corporate tax cuts — great for big business, terrible for voter support]

How many of Australia’s 12.7 million taxpayers are collecting $1600 per annum in franking credits?

ATO statistics offer some clues.

In 2012-13, ATO stats show that, in respect of individual taxpayers, only 2.9 million taxpayers out of 12.7 million claimed franking credits. So 9.8 million taxpayers do not own any shares that are generating franking credits.

If we look at the 2.9 million taxpayers who had franking credits we need to go to the $70,000-$80,000 taxable income cohort to find a group of taxpayers who would on average have collected $1600 or more in franking credits. The number of taxpayers who earned above $70,000 per annum and who claimed franking credits was 684,000.

So only 684,000 of 12.7 million taxpayers can be identified as losers from the ATO statistics.

Superannuation funds are the other source of winners and losers. According to the Association of Superannuation Funds Australia, in 2011/12 only 14.2% of superannuation fund members had balances in excess of $100,000.

[Is Treasury another victim of the great corporate tax heist?]

As the average super fund is about 30% invested in Australian shares, only 14.2% of superannuants would have a beneficial share ownership in excess of $30,000, whereas about $100,000 worth of shares would be required to put someone into the loser category.

The numbers suggest that at least 90% of Australia’s taxpayers would be better off if DI were to be scrapped and the savings redirected to all taxpayers by simply raising the tax-free threshold from $18,200 to $26,500.

DI is a popular policy because it involves a government handout, but closer examination suggests that, in spite of its warm and cuddly image, DI is, in reality, the fiscal policy equivalent of a feral pest, which is eating the federal government out of house and home.

It’s time for Bambi to get the bullet.