Media Releases
No Gain in High Capital Tax Burden
The review of the tax system currently being undertaken by Treasury Secretary Ken Henry (The Henry review) should work towards alleviating the high tax burden on capital through extending the current concessional treatment of capital gains tax (CGT), argues a report being released this Thursday.
In Reforming Capital Gains Tax: The Myths and Reality Behind Australia’s Most Misunderstood Tax, CIS Research Fellow Stephen Kirchner argues that an improved capital gains tax regime would see a substantial increase in economic efficiency.
‘The current taxation of capital gains raises relatively little revenue, but inflicts significant costs on the Australian economy,’ he says.
The reforms of CGT instituted by the Ralph Business Taxation Review in 1999 lowered the effective marginal tax rate on some capital gains. However, the implications of the Ralph reforms vary widely across different taxpayers, assets and inflation environments.
‘The Henry review should reinstate inflation indexation of capital gains and focus on extending the current concessional tax treatment in conjunction with broader reforms aimed at easing the overall tax burden on capital.’
There is a widespread belief that the principal residence exemption from CGT and the concessional treatment of capital gains has added to the demand for housing and put upward pressure on house prices, but this ignores the supply-side of the housing market.
‘Removal of the principal residence exemption and the concessional treatment of capital gains would have adverse consequences for housing supply. Like stamp duty, CGT is a tax on transactions and would lower turnover in the housing stock,’ Kirchner says.
Applying capital gains tax to owner-occupied housing would establish the tax deductibility of mortgage interest payments. This would encourage increased leveraged on the part of home buyers, putting upward pressure on house prices and offset any increase in capital gains tax revenue.
‘Options for reform include a low flat tax rate on capital gains, the re-instatement of indexation for inflation and the abolition of minimal holding periods before qualifying for concessional CGT treatment’ Kirchner said.
All media enquiries to CIS Hannah Treloar p: 02 9438 4377 m: 0413 055 680 e:This e-mail address is being protected from spambots. You need JavaScript enabled to view it.
The report is available online http://www.cis.org.au/policy_monographs/pm103.pdf
