New year brings new tax ideas

It is a sign of things to come in 2016 that the year is just two weeks old, we are still in holiday season, yet new tax ideas are already being launched. One of them this week is to apply capital gains tax to principal residences (the family home), or at least those above $2 million in value.

Owner-occupied housing is the main form of household saving — much larger than superannuation. On average in 2013-14 households had wealth of $594,000 in owner-occupied homes. That figure would be well above $600,000 now, and clearly much higher again in some cities.

Proponents of increased government revenue see this vast pool of assets as a tax base going to waste. The family home is exempt from state land tax and Commonwealth capital gains tax (and tax purists would also point out that the implicit rent paid by owner-occupiers to themselves is exempt from income tax).

One idea is to remove the exemption from state land tax. This has some merit, but only if the state transactions tax (stamp duty) were removed at the same time, which would rather spoil the enjoyment for those seeking additional net revenue.

Scott Morrison likes to say everything is on the table, but the idea of applying capital gains tax, even with a threshold of $2 million, was quickly given a frosty reception by the main political parties this week. History shows that it is indeed politically fraught. But it’s also bad economics, as recognised by the Henry tax review five years ago.

There is a strong economic case against any capital gains tax, let alone pruning the current 50% discount (as some propose) or extending the coverage to owner-occupied housing. Besides, the amount of revenue claimed for the family home tax with a $2 million threshold is grossly exaggerated.

Those who want to increase tax revenue will have to look elsewhere or accept the problem is that governments are spending too much, not that taxes are too low.