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Room for nuanced outlook on taxation

Article originally published in the Financial Review 11 June 2021

John Kehoe’s article suggesting that Labor should pledge to reduce the capital gains tax discount to fund cuts in personal income tax rates for middle-income earners raises some valid arguments.

He’s not wrong that using what would be a CGT hike to fund personal tax cuts is better politics than Labor’s previous attempt to remove the discount.

However, the arguments for removal of the CGT discount are not necessarily as black and white as Kehoe presents them, and several critical questions are left unanswered. The focus of Kehoe’s comments is on property, but his proposition appears to apply to all assets, which the CGT discount now does. Not all assets have risen as inexorably and consistently as property on Australia’s eastern seaboard in the last few years.

And not all commentators are sure the rise will continue or the unrealised gains sustained. Is real estate to get its own treatment? Is the discount to be removed or reduced?

Would the same arguments have been proposed in the aftermath of the GFC in 2008? Or after the dotcom bubble?

At times like those, capital gains seemed like a faint hope. It cannot be ignored that investing in assets is inherently risky – good times don’t last forever, so perhaps a 50 per cent CGT discount is not as generous as it sounds. And that is why we have capital losses that can be offset against capital gains.

Kehoe’s comparison of wage and salary earnings to capital gains is instructive. Wage are taxed as they are earned, that is, as they are paid. The reason capital gains are taxed only when realised is sound: it’s only then the taxpayer has cash to pay the tax.

It is suggested that Labor should form a policy to use a reduction in the CGT discount (which “benefits the top 10 per cent”, Kehoe points out) to cut personal tax rates for middle-income earners.

Curiously, as support for this, Kehoe refers to Paul Keating’s comment in 2018 that Australia’s 47 per cent top rate of personal income tax is “way too high” – given that Tax Office statistics released this week show that only 3.5per cent of people pay tax at the top rate, it is difficult to understand the relevance of this to middle-income earners.

Furthermore, Keating’s comment was made in an entirely different context – nothing to do with any proposed reduction of the CGT discount. He was defending the dividend imputation system, which he founded, also at a time when his former colleagues were looking to increase the highest marginal rate, and who shortly thereafter adopted the ill-fated policy platform to abolish refunds of franking credits.

An argument for tax reform presented as being “better politics” is not the same thing as an argument for better tax policies. The former is one-eyed and prone to hyperbole; the latter requires balance, bipartisanship, and consideration of the whole picture. Ina week where a corporate global minimum tax rate of 15 per cent was agreed to at the G7 meeting – 50 per cent lower than Australia’s 30 per cent headline corporate tax rate – there is much to consider beyond the CGT discount and personal tax rates.

By the way, Keating is right – 47 per cent is too high.

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