Labor’s capital gains tax myths need busting

Labor has long held an axe over the capital gains tax 50% discount and negative gearing; campaigning on it in 2016 and 2019.

In the last two elections it denied any such intentions, but we learnt in Albanese’s first term what such denials are worth when Treasurer Jim Chalmers launched previously-denied raids on superannuation and income tax cuts.

Now CGT kites have been flown, rumours are rife, and it is clear there will be some change — possibly also to negative gearing — in the May budget, if not before.

What we don’t know is whether it will be a cut in the discount, a reversion to the Hawke/Keating CGT that indexed for inflation so you only paid tax on real gains, or whether it will apply only to housing or to all assets.

Whatever the exact form, it means increasing the tax —potentially by a very large amount. Halving the discount, for example, means increasing the tax by at least 50%, and more ifthe larger taxable amount pushes more income into higher tax brackets.

For example, someone on a wage income of $120,000 realising a $300,000 gross capital gain from the sale of an investment property would pay capital gains tax of $63,850 under the current system but $99,100 if the discount were 25% instead of 50%. That’s a capital gains tax increase of $35,250 or 55%.

A tax increase of such magnitude cannot but affect people’s savings and investment decisions. There is an old saying that if you tax something more, there will be less of it — in this case, less supply of housing for rent. For buyers, the evidence is that any price falls will be small as owner-occupier buyers substitute for investors.

The whole CGT debate is skewed, as the discount has become a scapegoat for unaffordable housing. Some people think higher taxes for investors are the key to housing affordability, but this is an illusion.

It is just one of the myths, distortions and half-truths that skew the current CGT narrative in favour of higher tax. For example, the 50% discount is claimed to be massively more generous thanthe indexation system it replaced in 1999, but on average it is not. It is said to be costing $247 billion in lost tax revenue, but this is a nonsensical calculation.

Chalmers appears poised to announce a CGT increase — in whatever form it takes — as a ‘reform’ that will address perceived inequities in the tax system. But changing CGT rules would barely shift the dial on income and wealth distribution.

Neither does a change in CGT on its own deserve to be labelled ‘tax reform’. It could be a part of tax reform that cuts marginal income tax rates and removes anomalies in the ways different forms of saving are taxed; but nobody in government is talking about anything so sensible.

The government’s base motive is to satisfy its voracious appetite for more revenue, and to do so mainly at the expense of the top 10% or 20% of income earners.

But even here, increasing CGT will leave Chalmers disappointed, as a big tax hike leads those affected to change what they do with their savings and assets. The burden of CGTcan be reduced simply by holding assets longer, and there will be plenty of that. Sorry Jim, less revenue.

Sound tax policy should be grounded in economic reality, notmythical beliefs or political expediency. And on that basis, the present treatment of capital gains continues to serve Australia well.

It is simple, well understood and achieves a balance of revenue, efficiency and equity considerations in a pragmatic way.

Robert Carling is a Senior Fellow at the Centre for Independent Studies and a former World Bank, IMF and Treasury economist.