The tax reform debate is opportunistic, self-interested and ignores key issues

In my view the days of high capital gains are largely behind us.

First of all, inflation and annual wage rises are now less than two per cent per annum compared  with up to 10 per cent and higher during parts of previous decades.  Secondly, big cuts in interest rates, which contributed to some of the rises in housing prices over the past decade, have largely run their course and could reverse.  The bottom line is that most experts don't expect much in the way of further capital appreciation in real estate (some are even spruiking a bust).  Sydney and Melbourne housing may well be over-priced, and the stock market has already experienced more capital losses than gains since 2008.  Also, Labor's proposals will themselves scare off many investors.  In short, I think Labor's prediction of "an annual $7 billion boon to the budget bottom line" from its proposed CGT and negative gearing measures is fanciful. 

Labor is also ignoring that capital gains tax is levied on nominal and not real capital gains, which is why they are taxed at a lower rate in most countries.  Lowering the CGT discount from 50 to 25 per cent may in many cases result in many taxpayers, who in reality had assets that barely kept pace with inflation, ending up with real after-tax capital losses.

On top of all this, politicians almost universally are ignoring the inequity in how capital losses are treated.  While capital gains are subject to income taxation, net capital losses can only be carried forward and claimed against future capital gains (which in some cases will never eventuate during the taxpayer's lifetime). 

It gets worse.  If a taxpayer does not pay an income tax bill straight away, the Australian Taxation Office hits them with a "general interest charge", which is currently an extortionate 9.22 per cent per annum.  On the other hand, if a taxpayer suffers an overall capital gains loss, the ATO does not pay any interest on the amount of tax overpaid (i.e. deferred tax benefit) so that this inequity in real terms compounds over time.  Given that investments like the stock market are on average still 25 per cent approximately below their pre-GFC peak, this is a major problem/inequity for some taxpayers.

In respect of superannuation, there is already broad consensus that, for those on high incomes, the tax breaks for superannuation are excessive, and there is broad support for some tightening for equity reasons.  Treasury has estimated that superannuation concessions cost almost $30 billion annually.  At least some (and probably the majority) of these concessions, however, are justified because those who self-fund their retirement (rather than relying on the Age Pension) deserve some reward.

More controversially, a subject rarely discussed is the 9.5 per cent of an employee's earnings that employers are required to contribute as part of the Superannuation Guarantee.  What is odd, is that employees, in cases where their only superannuation is that under the Superannuation Guarantee, are not required to also make a direct contribution themselves.  There is scope for all employees to be required to make a contribution of some sort from their wages (somewhat akin to national insurance or social security contributions that are mandatory in many developed countries) so that the burden of funding superannuation for the lower paid is shared more evenly between employers and workers. 

In terms of the Budget, there is also a problem that, for persons relying on the Superannuation Guarantee as their only form of superannuation, little or none of their (admittedly modest) superannuation payouts after retirement currently goes towards savings in age pension entitlements. In other words the Superannuation Guarantee is not bringing about the savings in age pension outlays that it ought to.  For a FULL age pension, a single person can have income (including superannuation) up to $4,212 a year, while a couple (combined) can have income up to $7,488 a year.  It will thus not be until entitlements from the Superannuation Guarantee build up further, that it will have much effect in reducing age pension outlays.

Overall, my take on the current tax reform debate is that it is almost entirely driven by partisan party politics, and people's responses are largely driven by self-interest.  Labor's proposals seem designed to present a pretence of dealing with the Budget deficit (through extravagant claims about the amount of revenue likely to be raised by their limited tax reform measures) while the Government's own efforts seem to be less than enthusiastic window-dressing.  None of the proposals currently on the table are likely to generate a lot of money so that our Budget deficit problem won't be greatly affected by either the Government's or Labor's proposals.

The basic issues that are yet to be addressed are excessive public spending and high rates of income taxation.  High marginal rates of income taxation provide the incentive for individuals to engage in tax avoidance (and tax evasion for that matter) in the first instance.  It is notable that an average full time employed adult male now falls into a tax bracket, where they are paying a marginal rate of 39 cents in the dollar (including levies).   This does not provide much incentive for work effort.  On the receiving end, fully HALF of Australian families now receive more in welfare than they pay in income tax, and we have seen a heap of new spending programmes (Gonski, NDIS, Innovation Package) in recent years without the prospect of revenue to pay for them. 

The reality is that all of this is not going to change anytime soon.