Has the halving of capital gains tax benefited the economy?

[sydboy007]

I've often wondered if the halving of the capital gains tax for assets held over 12 months did more harm than good for the economy. I think most would agree it was a mjor component of the house price boom we saw soon after it's introduction. Not sure how much an impact it had on shares, but pretty much it made higher income earners see "capital gains" as a much better way to increase their income, than well working hard.

My understanding is when Costello asked John Ralph to do a taxation review he had a specific section looking at capital gains taxation. Ralph seemed to go even further than what Costello was looking at but basically halving the marginal tax rate on capital gains, with the associated loss of capital indexation to CPI.

Maybe it's hindsight, but surely anyone would have realised what that would have done to the property market, yet he said instead he expected the cut to bring about a surge in sharemarket investment, "particularly in innovative, high-growth companies". Still don't see how that would have been a benefit to the companies, as unless you are issuing new shares it's not having an impact on the funding of these companies.

To quote Costello “There is no conclusive evidence that the taxation system has had a significant effect on house prices.”

I'd also argue that the new system is actually detrimental to the longer term investor due to the loss of capital adjustment due to CPI. Seems the longer you hold an asset the worse off you could be depending on the rate of inflation and how you asset value holds up.

A lot of what I read reckons at the end of the day the changes were revenue neutral - considering the $8B or so in negative gearing losses each year I have my doubts.

Anyone know of some historical stats that show how much tax revenue has been lost to the halving of CGT?

Anyone like to share if it did / didn't change the way they plan their investments.

I'll come out and say I don't see why tax on income should be discriminated in favour of that earned by capital gains compared to wages or interest earned. Seems to foster the mentality of going for broke, rather than being a bit more fundamental about the income an investment will make.

As an aside, I hope we don't follow the republicans who want to remove taxation on capital gains.

 

[tech/a]

Re: has the halving of capital gains tax benefited the economy??

I hope we don't follow the republicans who want to remove taxation on capital gains.

Hell I do.


Hold shares for 12 mths and you get a 50% reduction.
No capital gains on shares or property---won me!

 

[drsmith]

Re: has the halving of capital gains tax benefited the economy??

With negative gearing left unchanged, there is no doubt in my mind that it helped to fuel the subsequent residential property boom.

The reasons are obvious. By replacing CPI indexation with the 50% discount after 12 months, it rewarded shorter term speculation and penalised longer term investment.

A broader reaponse to the impact of high marginal tax rates on capital gains should have been considered. Perhaps a cap at the corporate tax rate in conjunction with the maintainance of CPI indexation. At the same time, negative gearing should have also been reformed. This may have provided additional scope to reduce marginal income tax rates.

The only good thing it had going for it is that it was simpler than the CPI indexation method it replaced.

 

[tech/a]

Re: has the halving of capital gains tax benefited the economy??

Hell I do.


Hold shares for 12 mths and you get a 50% reduction.
No capital gains on shares or property---won me!

Perhaps youll get some more SELF FUNDED retirees.

About time the Govt got serious with providing real opportunity to achieve it.!

 

[McLovin]

I'm all for getting rid of CGT. Just let me know what exactly the government will be cutting in order to pay for it. I have some ideas, see the Wasteful Liberal thread.

I can already see the headlines in the Tele...

"Families to pay for fat cat handout".

 

[sydboy007]

Re: has the halving of capital gains tax benefited the economy??

Perhaps youll get some more SELF FUNDED retirees.

About time the Govt got serious with providing real opportunity to achieve it.!

Shouldn't the tax system be neutral?

To my way of thinking all income should be taxed in the same way, unless we've moved into all the income is equal, just some income is more equal than others world

I think you can see what happens when tax becomes the primary consideration by looking at house prices in Australia

 

[notting]

Re: has the halving of capital gains tax benefited the economy??

OK, I'll do it.

To my way of thinking all income should be taxed in the same way

I hope the treasurer never thinks like you.

I know what you think you mean, however, Napolean

One reason you might not like to think like you is this:

If you buy your family home for 500,000 sell it 5 years later for 800,000.
You will be paying income tax on 300,000 for the year you sell it in.
That's income for that year.
You won't be upsizing in a hurry

If that's not enough swill for thought
You might make a capital loss share trading during the financial crises of 10mil
Then make a capital gain the next year of 10mil and have to pay your tax on the 10mil even though you have made nothing.
Not even fair for Piggy.

 

[FlyingFox]

Re: has the halving of capital gains tax benefited the economy??

OK, I'll do it.



I hope the treasurer never thinks like you.

I know what you think you mean, however, Napolean

One reason you might not like to think like you is this:

If you buy your family home for 500,000 sell it 5 years later for 800,000.
You will be paying income tax on 300,000 for the year you sell it in.
That's income for that year.
You won't be upsizing in a hurry

If that's not enough swill for thought
You might make a capital loss share trading during the financial crises of 10mil
Then make a capital gain the next year of 10mil and have to pay your tax on the 10mil even though you have made nothing.
Not even fair for Piggy.

Good points. This will cause liquidity issues in certain asset classes as people will not sell as easily. Alternatively they may not invest in the first place.

Much less of an issue if you have a flat tax rate for example.

 

[Julia]

I think you can see what happens when tax becomes the primary consideration by looking at house prices in Australia

Prices are very similar in New Zealand. They have no CGT there.

 

[medicowallet]

I think that the 50% is rubbish too, it promotes speculation in both RE and shares.

BUT

I think the greater contributor to the housing bubble is the change in marginal tax rates.

They were absolutely ridiculous, but I think the liberals went a bit too far, and we need to allow bracket creep to take back some taxation.

Between taxation relief and middle class welfare, we are lucky imports have become so cheap over the past 10 years.

MW

 

[drsmith]

I think the greater contributor to the housing bubble is the change in marginal tax rates.

They were absolutely ridiculous, but I think the liberals went a bit too far, and we need to allow bracket creep to take back some taxation.

I would have to disagree. The problem is not the rates but the base.

If marginal tax rates were reasonable then the need for measures that compromise the base would not be considered necessary.

By reasonable, I mean a top marginal income tax rate similar or the same as the corporate rate.

 

[medicowallet]

I would have to disagree. The problem is not the rates but the base.

If marginal tax rates were reasonable then the need for measures that compromise the base would not be considered necessary.

By reasonable, I mean a top marginal income tax rate similar or the same as the corporate rate.

Hang on, so are you saying that you don't think that changing of the marginal rate does not help promote a bubble. I am really not understanding what you are trying to say (ie what you are disagreeing with)

MW

 

[Superb Parrot]

Re: has the halving of capital gains tax benefited the economy??

1.If you buy your family home for 500,000 sell it 5 years later for 800,000.
You will be paying income tax on 300,000 for the year you sell it in.


2.You might make a capital loss share trading during the financial crises of 10mil
Then make a capital gain the next year of 10mil and have to pay your tax on the 10mil even though you have made nothing.

?

1.There is no capitol gains tax on the family home, providing you reside in that home.

2. Capitol losses are carried forward.

 

[drsmith]

Hang on, so are you saying that you don't think that changing of the marginal rate does not help promote a bubble. I am really not understanding what you are trying to say (ie what you are disagreeing with)

MW

Marginal rates in isolation do not bias one form of investment over another.

It's compromises to the income tax base such as negative gearing and the deep discount to capital gains tax for assets held longer than one year that influence investment decisions. Super is another.

To fund these compromises, marginal rates are higher than they otherwise need to be and that enhances their effect.

 

[tech/a]

Re: has the halving of capital gains tax benefited the economy??

?

1.There is no capitol gains tax on the family home, providing you reside in that home.

2. Capitol losses are carried forward.

Nottings reply was related to

To my way of thinking all income should be taxed in the same way

From Syd.

 

[Superb Parrot]

Re: has the halving of capital gains tax benefited the economy??

Nottings reply was related to



From Syd.

My errror....

 

[medicowallet]

Marginal rates in isolation do not bias one form of investment over another.

It's compromises to the income tax base such as negative gearing and the deep discount to capital gains tax for assets held longer than one year that influence investment decisions. Super is another.

To fund these compromises, marginal rates are higher than they otherwise need to be and that enhances their effect.

Well you are wrong, because when the liberals dropped marginal rates (and changed when they kicked in) it resulted in more $$$ in the consumers hand (hence why we are so lucky certain goods decreased in price mainly thanks to China et al)

So if I made $30000 more because of marginal rate reductions and geared it up, then if I can bid $300000+ more for a property now with my new income, and everyone else gets more $$$ at a certain level, I am sure that this contributes to price growth.

I never said marginal rate changes affected decisions, I just said that it contributed to house price growth, can you not see how this is so? Remember negative gearing was around well before these changes started coming in.

MW

 

[drsmith]

I never said marginal rate changes affected decisions, I just said that it contributed to house price growth, can you not see how this is so? Remember negative gearing was around well before these changes started coming in.

Actually, you described it as the greater contributer. It's that I disagree with.

Any post tax increase in income is of course going to increase the consumer's spending power, but if where arguing against that, where really arguing against higher living standards.

In your example above, your ability to service a loan and hence the amount you could borrow and would be reduced if you didn't have access to the cashflow that negative gearing provides. Also, if there was no (or a reduced) CGT discount, the temptation to speculate would be further reduced.

It's the combination of tax cuts, negative gearing and the capital gains discount that led to the explosive house price rises that we saw, but that doesn't make the tax cuts in themselves wrong. It's the other elements that required the appropriate reform and the whole mix needed to be considered in that broader context. That was the failure of the Howard government. He could have used the revenue from the resources boom to undertake a broad reform of tax transfer and at the same time minimise any potential losers but instead concentrated more on short term populism with his tax/welfare changes.

In that broad context I would also say that his government overall doshed out too much of the resources boom revenue too quickly resulting in higher interest rates which were ultimately a contributing factor in his government's downfall, but that again doesn't make the tax cuts in isolation wrong.

 

[FlyingFox]

Actually, you described it as the greater contributer. It's that I disagree with.

Any post tax increase in income is of course going to increase the consumer's spending power, but if where arguing against that, where really arguing against higher living standards.

In your example above, your ability to service a loan and hence the amount you could borrow and would be reduced if you didn't have access to the cashflow that negative gearing provides. Also, if there was no (or a reduced) CGT discount, the temptation to speculate would be further reduced.

It's the combination of tax cuts, negative gearing and the capital gains discount that led to the explosive house price rises that we saw, but that doesn't make the tax cuts in themselves wrong. It's the other elements that required the appropriate reform and the whole mix needed to be considered in that broader context. That was the failure of the Howard government. He could have used the revenue from the resources boom to undertake a broad reform of tax transfer and at the same time minimise any potential losers but instead concentrated more on short term populism with his tax/welfare changes.

In that broad context I would also say that his government overall doshed out too much of the resources boom revenue too quickly resulting in higher interest rates which were ultimately a contributing factor in his government's downfall, but that again doesn't make the tax cuts in isolation wrong.

Agreed. Add to this the FHOG + large LVR. Plus all the media and real-estate hype about the property millionaires.

 

[medicowallet]

Actually, you described it as the greater contributer. It's that I disagree with.

Any post tax increase in income is of course going to increase the consumer's spending power, but if where arguing against that, where really arguing against higher living standards.

In your example above, your ability to service a loan and hence the amount you could borrow and would be reduced if you didn't have access to the cashflow that negative gearing provides. Also, if there was no (or a reduced) CGT discount, the temptation to speculate would be further reduced.

It's the combination of tax cuts, negative gearing and the capital gains discount that led to the explosive house price rises that we saw, but that doesn't make the tax cuts in themselves wrong. It's the other elements that required the appropriate reform and the whole mix needed to be considered in that broader context. That was the failure of the Howard government. He could have used the revenue from the resources boom to undertake a broad reform of tax transfer and at the same time minimise any potential losers but instead concentrated more on short term populism with his tax/welfare changes.

In that broad context I would also say that his government overall doshed out too much of the resources boom revenue too quickly resulting in higher interest rates which were ultimately a contributing factor in his government's downfall, but that again doesn't make the tax cuts in isolation wrong.

You are possibly unintentionally making a strawman against me.

I am making an argument for what has made the contribution for what has changed. Negative gearing was in place long before this bubble started.

You are arguing for whatever in the entirity of existence? for which I must say that the property boom in Australia is more related to the Captain Cook voyage than negative gearing, and hey why stop there, why not go back to either god or lightning strikes, whichever tickles your fancy.

Even going back to your argument, you could argue that deregulation of the banking industry and hence greater gearing ratios has more of an effect than negative gearing, as negative gearing only applies to IP with loans and gearing applies to all investments with loans.

I guess I disagree with the possible strawman, and I stand by that of the changes made, lowering of the marginal tax rates has provided much more cash to be geared (for personal or investment properties) for purchase price increases, a bit like the FHVB allows geared speculation as well.

MW