Slashing tax breaks for property investors might not put much of a dent in house prices, but that’s not to say it can’t make a meaningful difference to home ownership rates over the coming years.
Reading through the submissions to the Greens-led Senate committee on the capital gains tax discount and talking to economists delivers a series of convincing arguments for why the government might be on a winner if it finally finds the courage to prosecute this reform.
For decades there has been a powerful constituency of so-called “aspirational Australians” who want to keep generous tax breaks to help smooth their way to the dream of property wealth, and so have rejected any attempt to curb concessions such as the 50% capital gains tax discount and negative gearing.
Once political poison, it’s an idea whose time may have finally come.
There is a raw and deepening anger about housing affordability.
Jim Chalmers in his recent interview with Guardian Australia described housing as “the defining issue when it comes to intergenerational fairness”.
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It’s apparent there is a profound inequity that needs to be addressed when it comes to tax breaks for investors.
The wealthiest fifth of Australians receive nearly 90% of the benefit of the CGT discount, while the top 10% of earners receive more than 80% of the benefit.
The top 1% of income earners, who are on more than $362,900 a year, will get nearly 60% of the benefit from the CGT in this financial year, according to a newly released analysis from the Parliamentary Budget Office.
The benefits are also heavily skewed towards older Australians.
That means scaling back the CGT discount will deliver a much-needed rebalancing in the tax system, says Brendan Coates, the director of the Grattan Institute’s housing and economic security program.
Economists overwhelmingly agree that 50% is too generous and should be reduced, or even abolished for a return to the pre-1999 regime where capital gains were simply adjusted for inflation.
Reducing the capital gains discount would “give this nation a less biased tax system”, says Chris Richardson, an independent economist.
Greg Kaplan, Matthew Maltman and Matt Nolan at the e61 Institute agree that the current concession for capital gains has to change as it “overcompensates high-income earners and undercompensates low-income earners”.
“This is not just inequitable, but distorts the way Australians work, save, invest, and finance their investments – generating broader productivity costs and reducing the ability for the tax system to raise necessary revenue,” they write.
But would it make a big difference to house prices?
Economists don’t think it would.
Various research papers suggest scaling back property tax breaks for investors would reduce home values by between 1% and 4%.
That’s certainly better than nothing for those who feel they are locked out of the housing market.
But it’s small beer considering property values rose by 10% last year alone.
There is, however, more to the story.
It may sound counterintuitive, but Coates points to research that estimates abolishing negative gearing and halving the CGT discount for landlords could boost home ownership rates by three percentage points and go a long way to reversing a decades-long trend.
That’s because renters would find themselves less likely to be outbid by investors, who at the margin would be less likely to put their money in the property market.
Hugh Hartigan, a former head of research at Housing Australia, agrees that discussion about the impact of taxes on overall housing affordability is “blown out of proportion”.
“You’re not going to see a big impact on prices and affordability, but you probably are going to change the composition of the housing market,” he says.
“You don’t have a material impact on the level of demand [for housing as a result of reducing investor tax breaks]; you change that composition of demand.”
In other words: “You’ll likely have less investors and probably more home owners.”
That’s something most of us can get behind, and underlines the potential for CGT reform as a tool for shifting the balance back towards homes as shelter, rather than as an investment.
Still, economists say a change to the CGT system shouldn’t just be seen through the lens of the property market.
“The main case for this reform is that it helps fix the budget bottom line and reduces the inequity of the budget,” Coates says.
How much it would boost the commonwealth’s bottom line depends hugely on how deep any cut to the CGT discount would be, and, in the short term, whether it was made retrospective.
Coates estimates halving the CGT discount and applying it to all new and existing investments would save a hefty $6.5bn in this financial year.
If housing affordability is the overriding issue, that money could be used to boost commonwealth rent assistance, or fund more social housing, he says.
Alternatively, it could be used to reduce personal income tax or pay down debt. Both would improve the intergenerational fairness of the budget.
But Hartigan reckons any changes should be grandfathered to respect the fact that people have made investment decisions based on the rules as they were.
If that were the approach, as it was back in 2019, then the reform would be lucky to generate $1bn over the next five years, if earlier PBO costings are any guide.
Whatever step Labor chooses to take when it comes to reforming the CGT discount, it would be in the right direction.
• Patrick Commins is Guardian Australia’s economics correspondent
