Tell him he’s dreamin’. There is no way Bill Shorten’s 50 per cent hike in capital gains tax will raise the almost $9 billion shadow Treasurer Chris Bowen needs to help pay for the ladles of lollies Labor looks to lavish on us if it wins next month’s election. In keeping with the unbalanced Wayne Swan school of budget chaos, Labor’s sums simply do not add up. With real estate providing almost two thirds of Australia’s $30 billion in reportable capital gains and with the downturn in house prices being a factor in Treasurer Josh Frydenberg’s 2019 Budget downgrading of tax receipts over the next four years by $17 billion, where will Shorten’s money come from? There is no joy to be had by relying on a continuation of the doubling in capital gains tax revenue from individuals and trusts over the four years to 2017-18; Treasury expects no further meaningful rises for the next four. And Labor has yet to learn that raising the rate of tax does not necessarily bring an equivalent rise in revenue – just as Frydenberg hopes to demonstrate yet again that lowering tax rates can lead to better returns.
There is also little comfort for Shorten in the high commodity prices that are expected to rescue tax receipts over the next two years from the budget’s downward revisions both in property and other non-farm income. And the repeated use of ‘uncertainty’ in the budget papers (along with an occasional ‘significant uncertainty’) does nothing to give credibility to Shorten’s revenue wish-list
With almost a million Australians reporting a capital gain yearly, there are a lot of voters with skin in this game. As Frydenberg says, more than 60 per cent of them earn less than $80,000, so they spread far and wide outside safe Liberal seats (or formerly safe seats like Wentworth!). And while many of them may be in the 25 per cent of capital gains that relate to listed public company shares rather than big-ticket dwellings, Shorten wants to hit them with an effective 50 per cent rise in the sum on which they pay capital gains tax – and at their (consequentially higher?) marginal tax rate.
To counter Frydenberg, Bowen focuses on the dollars involved to demonstrate that by far the greatest impact of Labor’s plan to cut the capital gains discount from 50 per cent to 25 per cent, will be clearly on the ‘big end of town’ of high-income earners (along with older Australians and women who will share the pain). The two per cent with taxable incomes of more than $1 million get 37 per cent of reported capital gains (and the relevant tax discount) and the top 10 per cent get almost three-quarters of the tax benefit, while the 60 per cent with incomes under $80,000 account for only 16 per cent. Unfair? Or just the consequence of a progressive tax system?
The Labor ‘fairness’ song-sheet justifies the tax rise by claiming that the capital gains tax discount combined with negative gearing have given investors an unfair advantage over first-home buyers, with investors three years ago outnumbering owner-occupiers in new housing loans for the first time. But without investors, there would be fewer homes available to renters; the problem has been shortage of supply in a market stimulated by low interest rates. And with every significant change there are unintended consequences, with the Centre for International Economics reckoning that Labor’s tax changes would lower Australia’s GDP by $3.7 billion a year, cut real wages by about $600 a year and reduce states’ revenues by $1 billion.
Then there is the impact on other investment. Twenty years ago when the Howard government replaced the administratively-burdensome inflation adjustment for calculating the appropriate capital gains tax with the simpler automatic discount after 12 months, Australians increased their involvement as owners of corporate Australia. There is the added benefit of an incentive to invest in high risk innovative capital hungry start-ups whose ultimate success could, with the 50 per cent capital gains discount, provide a reasonable risk/reward ratio. With Australia’s outstanding record of successful research but pathetic development of that research to commercial success (where foreigners reap rich rewards by providing the D of R&D), Australia would be moving in the wrong direction by removing this investment incentive.