More tax is not reform, Carling and Tulip tell Senate inquiry

After trying to tax unrealised gains in superannuation balances, the Albanese government’s new tax kite threatens to slug the illusory inflation component of capital gains to help pay  for increased debt-financed government spending.

The pre-budget kite-flying targets the 50% discount on capital gains brought in by Treasurer Peter Costello in 1999. Since then, taxpayers have paid tax (at their marginal income tax rate) on 50% of the capital gain for assets held for more than one year.

Proposals to increase this capital gains tax (CGT) burden, say by reducing the 50% discount, are often portrayed as tax reform. Or a way to raise revenue to shrink the budget deficit. Or to make housing more affordable by hitting wealthy housing investors, thus improving ‘intergenerational equity’.

But they’re not really any of those, as Centre for Independent Studies’ researchers Robert Carling and Dr Peter Tulip told a Senate Select Commission on the CGT discount on Wednesday.

The economic growth reasons for taxing nominal capital gains less than ordinary income are well established, as recognised in Paul Keating’s original 1985 CGT. Carling and Tulip note that Costello’s 50% discount is not much more generous to investors than Keating’s version, based on indexing the cost base of assets for inflation before calculating taxable capital gains.

Their key point is that the 50% discount was meant to be a general incentive for saving and investment. Hitting the returns on capital investment wouldn’t revive Australia’s stagnant productivity. Nor reduce housing prices propped up by planning and zoning supply-side restrictions. Nor move the dial on income and wealth distribution.

Halving the 50% discount to 25% “would impose tax on purely inflationary gains as well as real gains,” our researchers said. We already do that for personal income tax generally and it leads to persistent bracket creep tax hikes.

Moreover, as Keating ally and former ACTU secretary Bill Kelty told the same Senate committee this week, Costello’s 50% per cent discount had the virtue of being simpler. By itself, winding back the discount wouldn’t be “tax reform”. It would be “just another tax increase” that might also hit housing renters.

Even more telling was how Kelty and Costello both damned the acceleration in big government spending that is now feeding inflation, pushing up interest rates and forcing wage earners to shoulder a bigger bracket creep tax burden.

Kelty proposed a tax-and-spending package trade-off. Reduce the CGT discount from 50% to perhaps 30%. But only if the top marginal personal income tax rate also was also cut from 47% to 39%. And only with the sort of spending cuts delivered by Keating in the late 1980s and Costello in the mid- to late-1990s.

While moderating a panel featuring Costello on Tuesday at John Anderson’s massive Aspire conference in Sydney, I invited the former Liberal Treasurer to back the former ACTU secretary’s tax-and-spend reform package.

Put on the spot, Costello didn’t bite on the CGT discount — and he could also have recalled how Kelty unhelpfully knee-capped Keating’s proposed consumption tax in 1985, leaving the GST job to Howard and him. But, like Kelty, he readily backed lower income taxes and smaller government.

There’s a pro-growth and aspirational tax-and-spend reform package in there somewhere. But it will likely require a treasurer more like Keating or Costello. And a prime minister more like Hawke or Howard. And a union boss more like Kelty, who effectively is calling for the abolition of Australia’s uncompetitive top marginal personal tax.