Taxing Capital Gains and Negative Gearing. By Flat White in The Spectator.

After decades of dreaming of and planning a full-fronted assault on the key drivers of economic prosperity, free market capitalism and individual aspiration, the Australian Labor party has finally achieved its goal — the destruction of the great Australian dream. …

Despite multiple reassurances to the contrary, negative gearing and the capital gains tax discount, both essential to a vibrant property market and the pursuit of individual financial security, have been unceremoniously tossed on the scrap heap. …

Paul Keating tried and swiftly reversed course, Bill Shorten gave it a crack and failed, and in the process landed Scott Morrison an unlikely victory …

The lying is off the charts, with Prime Minister Albanese having repeatedly — by his own admission over 50 times — denied that Labor would ever touch negative gearing or the CGT. …

Labor MPs are amongst those public servants who have benefited the most from playing Australia’s property market, with one Labor MP said to own no less than seven properties, several with four or more, and many with two or more including the Prime Minister himself. These individuals have secured their own future security via the Australian property market and its idiosyncratic rules, yet they now seek to deny those very same opportunities to all future generations of Australians….

Labor have the gall to pitch this theft of opportunity as a measure to help young people get into the housing market. …

This Labor government is determined to push the once great and free nation of Australia into a pale version of a European welfare state, where high immigration, massive regulations and a vast government bureaucracy push more and more young people into working for the state or being beholden to the state for housing, income and raising children. …

Comrades:

Finance Minister Katy Gallagher … this same week insisted that childcare by the state should start as early as humanly possible. Collectivism is in, individualism is out.

Negative gearing is logical and fair. It is a normal part of doing business. The principles are that (a) you are only taxed on the profits after all expenses — including interest expenses —  and (b) all your economic activity is a taxed as a single entity. It is allowed in every circumstance, except now the Labor Government wants to ban it in the special case of used houses from July 2027. Inconsistent and unprincipled. The ban on negative gearing for houses will be reversed within a few years.

How heavily to tax capital gains is more of a moral choice. Most people who are wealthy today made their money as capital gains. They bought assets, waited, and sold the assets when they had become more expensive. In most cases it took almost no effort and not much skill — buy an asset, wait, and it just goes up in price. How wonderful, but why?

Since 1982, low interest rates have been set artificially low. They are essentially set by bureaucrats (such as at the Fed or the RBA), not the market. The resulting tsunami of enhanced money manufacture (the money is created by the banks in order to buy assets, using the assets as collateral) then ensured that asset prices have soared compared to wages. Yes, the CPI has been low since 1990, but the CPI basically omits assets — houses, stocks, bonds, gold, collectibles etc. With the exception of gold (which is hated and feared by banks and government), all asset prices have now risen to nosebleed levels by historical standards. The standard formula for getting rich for the last 40 years has been to buy an asset — perhaps using “borrowed” (i.e. newly manufactured) money for leverage — and wait for the low interest rates to work their magic. Financial geniuses everywhere.

So, should capital gains be taxed at the same rate as labour? The Labor Government thinks not, and wants to tax them at the same rate — hence the removal of the 50% CGT discount. Fair enough, because this will help lessen the polarization of society into wage earners and those who make their money by capital appreciation. On the other hand, that discount on CGT is needed to encourage investment in risky or more entrepreneurial projects, such as developing tech or building mines. The case is not clear either way, so it comes down to a moral choice.

For reference, all other first world countries tax capital gains at lower rates than Australia. And they all have increasing income inequality as some grow rich on the asset appreciation caused by artificially low interest rates. Choose our poison.