“Being fiercely independent, widely respected, and non-partisan, advocates for reform will naturally seize on our research to prosecute their case. Unfortunately this is not always done in good faith, as the Treasurer reminded us this week in Question Time,” said Adam Creighton, Chief Economist at the Institute of Public Affairs.
During Question Time on Wednesday 27 May, Treasurer Jim Chalmers told parliament: “The Institute of Public Affairs said indexation is a more rational and economically efficient way to tax capital gains,” referring to an IPA working paper on capital gains tax authored by Adam Creighton titled Discount or penalty? How high inflation turns the capital gains discount into a hidden tax on investment.
“In a desperate attempt to find third-party support for the government’s controversial and destructive capital gains tax changes outlined in the latest federal budget, the Treasurer was – at best – disingenuous in what he said to the parliament and the Australian public,” said Mr Creighton
The Treasurer selectively quoted from the conclusion of the 15-page working paper that explained the insidious effect of inflation on capital gains tax. The report concluded:
The objective of tax reform should not be to maximise revenue. As much as possible, taxation should be efficient and minimise distortions at the least level of complexity. While the CGT discount is much less complex to administer, the indexation method, while a little more complex to administer, is a more rational and economically efficient way to tax capital gains, and should be available to taxpayers.
“The IPA has long played a major role in public debates in Australia by championing individual rights, private enterprise, and the virtues of smaller government and lower taxes.”
For the avoidance of doubt: the IPA does NOT endorse the proposals in the budget. Given that the public policy process has been poisoned by the uses made of research published in good faith, we unequivocally call for the changes to be scrapped, and for Australia to stick with the system it has.
“This paper cited by the Treasurer, published way back in March, was in no way a prospective endorsement of the new proposed capital gains tax system,” said Mr Creghton.
“Replacing the existing 50 per cent capital gains tax discount with an inferior version of the original CGT system in place from 1985 to 1999, including a minimum 30 per cent tax on capital gains and removing the ability to net off losses against gains, represents a significant tax increase for millions of, especially young, taxpayers.”
“It’s great the Treasurer is reading the IPA’s material but his attempt in Question Time to argue the IPA supports the government’s budget changes is highly misleading.”
“My March research paper on CGT, published months before the budget, argued against taxing inflationary capital gains, pointing out that in high inflation environments the so-called CGT 50% Discount was not a discount at all,” said Mr Creighton.
The research paper found:
- The role of inflation is widely misunderstood in weighing the merits of capital gains tax systems.
- One rationale of the prevailing 50 per cent capital gains tax ‘discount’ is to provide a simple method of accounting for the effects of inflation for assets held longer than 12 months.
- The ‘discount’ is not a discount at all in environments of even modestly high inflation, producing an effective tax on real capital gains often above 100 per cent.
- Where inflation exceeds half an asset’s nominal return, the indexation CGT system, previously in place for assets purchased up to 1999, produces lower rates of taxation than the prevailing 50 per cent discount.
- Reducing the CGT Discount from 50 per cent to 33 per cent, especially in today’s higher-inflation environment, would see many investors taxed on purely illusory gains.
- The economic cost of taxing inflation is significant, as it increases the effective tax rate on long-term capital formation, penalises investors who hold assets with moderate real returns, and exacerbates the ‘lock in’ effect whereby investors choose not to sell assets even though doing so would be in their own and the economy’s best interests.
To read the full report click here
“A CGT system that didn’t tax inflation coupled with much lower income tax rates would be an improvement on the current system, but that is not remotely what has been proposed in the budget. Instead what has been proposed has been a massive increase in tax and complexity that will imperil innovation and business formation at the very time the economy needs it the most,” said Mr Creighton.
