Ideas@TheCentre
A Not So Capital Idea
It only took until 2pm last Saturday afternoon for the Treasurer to pour cold water on a report in The Weekend Australian that the Henry tax review was modelling a capital gains tax (CGT) on family homes over $2 million. The proposal was portrayed in the media as good economics, but bad politics.
Journalist David Uren commented that ‘the tax treatment of savings is a dog’s breakfast…savings are taxed on an entirely different basis, depending on whether it is money in the bank, superannuation, shares, trusts, investment property or the family home.’ In this context, the principal residence exemption from CGT is seen by some as distortionary. But another way of looking at it is to ask why we persist in taxing other forms of saving. The Henry review has identified Australia’s relatively high tax burden on capital as a priority for reform. Alleviating the tax burden on other forms of saving would be a better approach to reducing any distortions arising from principal residence exemption.
The 1999 Ralph reforms discounted by 50% the CGT payable by individuals and funds, a measure also widely criticised as distortionary. Yet CGT payable by individuals increased by 317% between 1999-00 and 2006-07, compared to only a 146% increase in CGT payable by companies, which are not eligible for the 50% discount. Realisations rose 302% for individuals compared to 193% for companies over the same period. The Ralph reforms demonstrate that easing existing taxes on saving is potentially revenue positive.
The principal residence exemption is often said to lead to over-investment in housing, but this argument is looking increasingly threadbare against the backdrop of a chronic national housing shortage. This shortage is not just a cyclical issue, but reflects what RBA Governor Glenn Stevens has called ‘serious supply-side impediments to producing…affordable shelter’. While portrayed as a ‘wealth tax’, it is worth recalling that 42 Sydney suburbs had a median house price in excess of $1 million prior to the onset of the financial crisis. In the absence of indexation, even a ‘wealth tax’ would capture a growing share of the housing stock.
Dr Stephen Kirchner is a Research Fellow at The Centre For Independant Studies.
