Indexing capital gains makes tax system fairer: e61
e61 Institute
Tonight's Budget decision to index capital gains tax, which the e61 Institute had advocated for, makes the tax system fairer and less distortionary.
“The 50% CGT discount incentivises individuals to invest in capital gains-generating assets, borrow excessively, and reclassify earnings as capital gains,” said e61 Research Manager Dr Matt Nolan.
"It’s also inequitable, punishing investors with modest gains while subsidising those with large gains. Indexation makes much more sense - it taxes every investor on what they actually earned in real terms, no more, no less.” This inconsistency was highlighted in Box 4.2 of Budget Paper 1, referencing recent e61 work on the issue.
e61 research earlier this year found the CGT discount encourages over-borrowing by making bad property investments profitable when they would otherwise have made a loss.
The study also demonstrated the discount’s inequity, finding a typical investor in the highest tax bracket with no mortgage pays an effective tax rate of 31%, compared to just 19% with a 90% mortgage.
“Tonight's reform is the right foundation. The next step is to allow income averaging for investors and then extend this logic across the board, to savings accounts, bonds, and other forms of capital income, so the tax system consistently measures and taxes real income, not inflation.” said Dr Nolan.
e61 has consistently argued that inflation indexation is the right solution to CGT reform, raising the issue at Allegra Spender’s tax roundtable, publishing analytical research on housing leverage and effective tax rates, and submitting to the Senate Select Committee inquiry. In each case we have cautioned against arbitrary discount cuts in favour of an approach that taxes every investor on their real gain, no more and no less.
Separately, e61’s firm-level research on innovation and economic dynamism was highlighted in tonight’s Budget, referenced on three occasions in Budget Paper 1. Our analysis finds that new and young firms are large drivers of net job growth in the economy, and that high-performing young firms are over 40% more productive than incumbents in their industry.
“The Government’s efforts to better target innovation support at young firms, rather than old small firms, is a welcome step in the right direction.” said e61 Research Manager Lachlan Vass.
Contact details:
Charlie Moore: 0452 606 171