Treasurer Jim Chalmers and the new shadow treasurer, Tim Wilson, both say they are keen to do something about “intergenerational inequality”.
That theme figured in both of their maiden speeches, Chalmers in 2013 and Wilson three years later, and they still talk about it frequently.
Chalmers is the only one who can do something about it for a while, specifically with Treasury’s seventh Intergenerational Report due soon and the budget in May.
Will he? He says he will. And would Tim Wilson support him if he did? Probably not.
But I’ve got news for both of them: inequality, and specifically the intergenerational kind, will only be addressed by taxing the people who have the money, not by cutting taxes for those who don’t.
The latter is much nicer, preferred by all politicians, but it won’t work.
That’s because the government can’t afford to do more than a little bit of that, and even a little bit of it will worsen the structural budget deficit and end up worsening inequality by cutting government services.
To help reduce inequality, government services have to be expanded, not cut back.
More broadly, capital and wealth are not taxed enough, and labour is taxed too much, especially now as we enter the new era of AI that replaces labour.
A widening gap
In the past 50 years, the labour share of the economy has fallen from 62 to 54 per cent and the capital (profit) share has done the reverse. The gap is now likely to widen much further as capital, in the form of AI and robots, replaces (human) labour — to an unknown extent.
Apart from the generational inequality it produces, it leaves the government underfunded, with a structural deficit already of about $40 billion.
Reducing the capital gains tax discount and limiting negative gearing would be a start, but only a start.
A kite with those ideas on it has been hovering over Parliament House for a few weeks now, with Chalmers responding to questions about what the kite is doing there by saying: “We haven’t changed our tax policies.”
He went on to say, in an interview with The Monthly: “As we think about what tax reform might come next, we’re guided by this idea of intergenerational fairness, especially for working people.”
Tim Wilson has opposed any changes to the capital gains tax discount. (ABC News: Brendan Esposito)
Tim Wilson, meanwhile, has vehemently opposed any change to the CGT discount, on the grounds that it’s A TAX INCREASE!
On September 20, 1999, the 14th anniversary of the introduction of the capital gains tax, a 50 per cent discount replaced the previous inflation adjustment.
It was absurdly generous: Inflation in the year to September 1999 was 1.8 per cent. The average holding period for an investment property is eight years, so a 50 per cent adjustment was more than three times the previous inflation adjustment.
Even if you take the average inflation rate over the subsequent eight years — 3.2 per cent — which is also what the Reserve Bank is currently forecasting for the next three years, the new CGT discount in 1999 was, and still is, twice as generous as it needs to be to offset inflation.
That begs the question of whether capital income should be adjusted for consumer price inflation at all.
Capital must be taxed more
Personal income tax scales are not adjusted for inflation (indexed), so we get bracket creep that is occasionally, and partially, offset by “tax cuts”. But capital income from investing is over-adjusted by about double the inflation rate.
The result is a clear signal that capital income is preferred over labour income, which is why house prices started rising at double the rate of incomes from September 20, 1999, leading to a housing affordability crisis 25 years later.
It’s true that the arithmetic difference to house prices that halving the CGT discount would make now is less than 2 per cent, but the psychological impact was far more powerful in 1999.
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That impact was amplified by the fact that most people don’t know what the inflation rate was over the previous few years and certainly couldn’t average it in their heads, but everyone understands a 50 per cent discount.
The world has changed, so what that psychological impact would be now is impossible to say. But whatever it is, it’s important in principle to rebalance taxation towards capital and away from labour to improve intergenerational fairness — and to raise more money.
The younger generations tend to make more (all?) of their income from labour, while older generations, especially retirees, make it from capital.
The basis of the generational unfairness that both Jim Chalmers and Tim Wilson say they want to address is that capital is taxed less than labour — a lot less — in terms of gains in prices and company profits.
That inequality is worsened by the fact that wage earners have gone backwards over the past year — wages grew 3.4 per cent and prices 3.8 per cent — while housing gave a total 12-month return of 13.3 per cent and the ASX 200 share index gave a total return of 14.9 per cent.
So not only are the owners of capital getting returns that are four and five times inflation while employees go backwards, but they are taxed less as well.
This cannot be addressed solely by cutting taxes on the employed — that’s already been done, with a structural budget deficit the result. Capital must be taxed more.
LoadingTwo big holes in the regime
Removing, or at least halving, the CGT discount is a start, but nowhere near enough.
Part of the reason the imbalance exists, apart from the advent of neoliberalism in the 1980s, is that capital became more mobile with the invention of the internet.
Capital taxation has become a matter of competition between countries trying to attract it or to be the place where rich people say they live.
That isn’t going to change, which means capital taxation must focus on immobile capital — that is, minerals in the ground as well as housing above it, neither of which can be relocated to the Bahamas.
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Australia doesn’t tax its mineral wealth anywhere near enough, which everyone knows.
Labor tried to do something about that in 2010 with the Resource Super Profits Tax, and then the Minerals Resource Rent Tax in 2012, both of which were opposed by the Coalition and the mining industry (of course), and eventually repealed.
Presumably, the Coalition would oppose it again but, as it did with the GST, would introduce it once in power, having opposed it in opposition.
Which brings us to inheritance and the primary residence, the two big holes in Australia’s capital taxation regime.
In a way, they lead to the same thing: the perpetuation of inequality, dealt with to some extent by the Bank of Mum and Dad, but only for those with well-off parents.
Australia had inheritance taxes from 1915 to 1975, after which they were abolished during a frenzy of state competition for rich retirees, which ended up being a nil-all draw.
It won’t be brought back, but it should be if improving “intergenerational inequality” is the goal.
Alan Kohler is finance presenter and columnist on ABC News and he also writes for Intelligent Investor.