Labor’s proposal to overhaul negative gearing and capital gains tax has some design flaws but is better than the current system, according to leading economists who appeared before a parliamentary inquiry today.
The first day of hearings was shaped by warring contributions from elated progressive groups, who argued the tax package would improve generational fairness, and furious business groups who warned that it would chill investment.
But a handful of independent economists invited to address the Senate’s economics committee came down in favour of the government’s proposal to replace the flat 50 per cent capital gains tax discount with a discount linked to inflation, despite misgivings.
Michael Brennan, a former Productivity Commission chair and chief executive of the e61 Institute, said there was “scope for improvement” and disagreed with the decision to impose a 30 per cent minimum tax on discounted gains, among other things.
But he called the discount a “principled approach” and said it should apply to a broad range of assets, not just property as some have suggested. “If you ask me what does an ideal capital gains tax system look like, it has inflation indexation at its heart,” he said.
Independent economist Saul Eslake also objected to the 30 per cent minimum but said the proposal would improve equity in the tax system by bringing the tax treatment of investment income closer to the tax treatment of wage income.
“Why should people earning a similar amount of income be asked to contribute different proportions of that income to the cost of providing schools, hospitals, policing and other public services simply because they earn it in different ways?” he asked.
Robert Varela from the ANU’s Tax and Transfer Policy Institute, which often collaborates with the Treasury, said Australia’s current arrangements for taxing investment income were “a mess” and this was “a step in the right direction”.
“They remove some but not all of the distortions across investment types, they remove some but not all of the margins for tax planning, and they remove some but not all of the incentives for leveraged investment,” he said.
Government grapples with business fury
Treasurer Jim Chalmers is consulting with business groups on possible carve-outs to the new capital gains tax discount, likely to be granted for startups and perhaps some small businesses, whose owners pay capital gains tax when their businesses are sold.
This may go some way to pleasing the Tech Council, which will front the inquiry tomorrow, and argued in its written submission that the inclusion of startups “would disproportionately damage Australia’s early-stage innovation economy”.
But other business groups are outright opposed. An alliance of peak bodies, including the Business Council and the small business lobby COSBOA, signed a joint statement on Sunday urging the parliament to reject the bill and slamming the swift inquiry.
Those groups do not oppose the decision to apply higher taxes to established investment properties, or to restrict negative gearing for those properties, but told senators the application to other assets would harm productivity.
Bran Black of the Business Council said the changes would “reduce investment and add significant complexity and compliance burdens to an already complex system … at a time when Australia needs more investment, not less”, saying the process was “rushed [and] piecemeal”.
Skye Cappuccio of COSBOA said existing small business concessions, including an additional 50 per cent capital gains tax discount, had “not kept pace with modern business realities” and would exclude many business owners who would stand to pay more tax.
“For many small business owners, the business is not simply an investment, it is their life’s work, their retirement plan and the result of years, often decades, of personal sacrifice,” she said.
Mr Chalmers, Prime Minister Anthony Albanese and colleagues have signalled openness to broadening small business concessions but have given no indication they plan to make any widespread changes.
Assistant Treasurer Daniel Mulino told the ABC today that changes would be focused on “special circumstances”.
Mr Eslake supported a carve-out for startups, but Mr Brennan was less convinced. “As a matter of pragmatism, there may be a role for some carve-outs… [but] the intention is to try to maintain maximum consistency,” he said.
“When we talk about startups where either the founder or some employees are effectively being paid in the form of shares… this is a substitute for wage income and it’s actually not clear that we should be taxing that with a 50 per cent discount.”
His e61 Institute colleague Matt Nolan said it was more important that the income tax system have “integrity” and consistency, and that support for startups should be achieved with separate policies, as the government has proposed.
“The income tax system needs to tax income in a consistent way, and then we can have additional policies to the side [such as] research and development tax credits or venture capital incentives,” he said.
“Trying to do something within the income tax system and cutting holes just leaves a gap for other people to run into and other people to reduce their tax liability.”
In its submission, the Tech Council argued an inflation discount “was not designed for modern companies that can scale globally for a small capital base” and would “weaken the incentive to put capital into risky but productive businesses”.
Eslake: CGT fuelled ‘nation of leveraged property speculators’
Progressive think tanks Per Capita and The Australia Institute told the committee the proposal would improve fairness in the housing market, a view echoed in submissions from the Australian Council of Social Services and several unions.
The Australia Institute’s Greg Jericho said the 50 per cent capital gains tax discount and negative gearing had “turned the housing market from a place to buy a home to live into a market for speculators to use to build wealth”.
Mr Eslake said he did not believe the tax system was “the sole reason or even the single biggest cause of the deterioration in housing affordability” but that it was “undoubtedly a significant contributor”.
“The current CGT regime turned Australia into even more of a nation of leveraged property speculators than we already were,” he said.
Susan Lloyd-Hurwitz, chair of the government-funded National Housing Supply and Affordability Council, agreed, saying that while the policies would have a mild chilling effect on housing supply it was worthwhile because it would boost home ownership.
“The good argument around accepting that [trade-off] is intergenerational inequity and the fact that we are building a society that is being divided into Australians that have housing wealth and those that don’t,” she said.
But a trio of property industry groups told the inquiry the tax package would have a greater chilling effect on the housing market than the government claimed.
Mike Zorbas of the Property Council said Australia was “taxing the life out of” construction.
“We tax it like tobacco … This is a project feasibility-killing set of new taxes,” he said.
Denita Wawn, CEO of Master Builders Australia, said the taxes would “stifle” property business and were “likely to cause a private investment strike”.
Mr Brennan said Labor’s proposal would be improved if investors could access an inflation discount for capital losses as well as capital gains and that “income averaging” should be allowed, letting taxpayers spread their tax over several years.
Mr Eslake agreed, noting it was a feature of the pre-1999 capital gains tax system set up by Paul Keating and that it would match the treatment of other “volatile” income.
The second day of hearings will feature prominent tax academic Miranda Stewart, the Australian Council of Trade Unions, the Tech Council and Treasury.
