As pressure builds on the Government to address housing affordability and repair the Budget, calls to reduce Australia’s capital gains tax discount have resurfaced.
In substance, this would amount to an increase in the tax on capital gains and reflects a growing misunderstanding across Australia’s political, policy and commentary circles of how capital, investment and economic growth function in a modern economy.
Proposals to lift CGT are often presented as a modest technical adjustment, or even a moral necessity, justified in the language of intergenerational fairness, budget repair or housing affordability.
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Yet the belief that higher taxes reliably deliver lower prices, or stronger economic performance is deeply flawed. No country has ever taxed its way to prosperity.
At the centre of the debate is the so-called CGT “discount”. The terminology itself is misleading.
This is not a discount or concession in the ordinary sense, but a pragmatic approximation of economic reality. Capital gains are not wages, nor are they earned in a single pay period.
A substantial share of any nominal capital gain reflects inflation rather than a genuine increase in real wealth.
When CGT was introduced in 1985, gains were taxed at marginal income tax rates but fully indexed for inflation.
This was elegant and internally consistent: only real, after-inflation gains were taxed. By the same logic, if income tax brackets were fully indexed, only real wage growth would be taxed.
In practice, however, indexation proved administratively burdensome, particularly for assets acquired or improved over time, such as shares, farms, businesses and investment property.
Because gains are taxed on realisation, indexation required detailed record-keeping over long periods, increasing compliance costs, disputes and enforcement difficulties.
The framework also failed to account for international competitiveness. Capital is mobile, and investors compare after-tax returns across jurisdictions.
New Zealand, Singapore, Switzerland and the United Arab Emirates do not levy a comprehensive CGT. The United States and the United Kingdom maintain CGT rates well below personal income tax rates, explicitly recognising the need to attract, retain and incentivise investment.
The 1999 reform replaced indexation with a simpler adjustment: taxing 50 per cent of the nominal gain. It was not a loophole, but a workable compromise that balanced economic coherence with administrative reality.
Reducing the CGT discount now would be a straightforward increase in the effective tax rate on nominal gains and would further weaken Australia’s investment competitiveness.
Capital is not abstract. It is the pool of savings that finances businesses, funds housing, supports innovation and underpins productivity growth. When capital is taxed more heavily, its required rate of return rises.
As required returns rise, fewer investments proceed. This is not ideology; it is arithmetic.
Projects that once stacked up no longer do. Risk-taking declines. Investment is deferred or redirected offshore.
Over time, the result is weaker productivity growth, slower wage growth and fewer opportunities, particularly for younger Australians already struggling to accumulate wealth.
At a time when productivity must lift, raising the cost of capital moves policy in precisely the wrong direction.
The housing argument is where the case for higher CGT unravels most clearly. Housing is produced using land, labour, and capital.
Increasing the cost of one of those inputs cannot logically reduce the final price. Yet Australians are repeatedly told that higher taxes on housing investors will improve affordability, including based on Treasury modelling that receives more deference than its record warrants.
Treasury forecasting has a mixed record: repeated budget miscalculations, policy costing errors and inaccurate growth and inflation projections. Treating Treasury projections as settled fact is not evidence-based policy; it is confirmation bias.
Even analysis from the Australian Greens–aligned Australia Institute should give policymakers pause.
It argues that the CGT discount has inflated housing prices and that reducing it would likely trigger a fall in housing values. Such an outcome would not only devastate CGT receipts, mirroring the failed revenue expectations from higher tobacco taxes, but would also elevate risks to the banking system and the broader economy.
It is not credible to claim that cutting the CGT discount would materially improve housing affordability, particularly for younger Australians, when Australia’s underlying tax problem is not undertaxed capital but overtaxed labour.
Successive governments have relied heavily on bracket creep to expand revenue without transparent legislative change. The Albanese Government’s decision to reintroduce the 37 per cent tax bracket will only accelerate this process, especially in an inflationary environment.
Even if a higher CGT did not immediately depress existing house prices, it would reduce incentives to invest in new housing supply.
Fewer investors mean fewer rentals, tighter vacancy rates and higher rents. The burden would fall not on wealthy landlords, but on renters and first-home buyers competing in an even more constrained market.
Supporters of reducing the discount often point to large headline figures of “lost” revenue or so-called tax expenditures. This framing assumes that capital gains should be taxed at full marginal income tax rates and that asset prices would remain unchanged.
By the same logic, this supposed “cost to the budget” could be eliminated by cutting income tax rates or addressing inflation-driven bracket creep. This is a political talking point, not an economic argument.
Ultimately, this debate exposes a deeper policy failure: an increasing reliance on tax increases to finance uncontrolled spending growth rather than addressing inefficiency, waste and program blowouts.
Capital taxation becomes an easy target precisely because its economic costs are dispersed, delayed and poorly understood.
Australia does not suffer from a shortage of tax revenue. It suffers from weak productivity growth, declining investment and spending growth that has outpaced the economy’s capacity to sustain it.
In such an environment, deliberately raising the cost of capital is not reform. It is a policy choice that risks entrenching the very problems it claims to solve.
Dimitri Burshtein is a senior director at Eminence Advisory. Peter Swan is professor of finance at the UNSW-Sydney Business School
