Reducing inequality means taxing capital more — including inheritances

Treasurer Jim Chalmers and Shadow Treasurer Tim Wilson both express concern over “intergenerational inequality,” a theme central to their political careers since their maiden speeches in 2013 and 2016, respectively. With the seventh Intergenerational Report forthcoming and the budget due in May, Chalmers has the immediate opportunity to address this issue.

A Widening Gap

The core of the problem, according to analysis, lies in a shifting economic landscape. Over the past 50 years, the share of the economy attributable to labor has decreased from 62% to 54%, while the capital share has increased correspondingly. This trend is expected to accelerate with the rise of artificial intelligence and automation, potentially displacing human labor to an as-yet-unknown extent.

Did You Know? On September 20, 1999, a 50% capital gains tax discount replaced the previous inflation adjustment.

This shift not only exacerbates generational inequality but also contributes to a structural budget deficit, currently estimated at around $40 billion. Addressing this requires a re-evaluation of tax policies, with a focus on increasing taxation on capital and decreasing it on labor.

Current tax policies favor capital income over labor income, contributing to rising house prices – which have increased at double the rate of incomes since 1999 – and a housing affordability crisis. While halving the capital gains tax discount might only have a small arithmetic impact on house prices now, the psychological impact could be significant.

Capital Must Be Taxed More

Personal income tax scales are not adjusted for inflation, leading to “bracket creep,” while capital income benefits from adjustments exceeding inflation rates. This disparity signals a preference for capital income. Reducing the capital gains tax discount and limiting negative gearing are identified as potential starting points for reform.

Expert Insight: The discussion around capital gains tax highlights a fundamental tension in economic policy: balancing incentives for investment with the need for equitable distribution of wealth and revenue generation for essential government services.

However, these measures alone are insufficient. The increasing mobility of capital in a globalized world necessitates focusing taxation on immobile capital, such as minerals and housing. Australia’s past attempts to tax mineral wealth, like the Resource Super Profits Tax and the Minerals Resource Rent Tax, were ultimately repealed following opposition from the Coalition and the mining industry.

the current tax regime lacks adequate taxation of inheritance and primary residences, perpetuating inequality. While Australia previously had inheritance taxes from 1915 to 1975, they were abolished due to competition among states for wealthy retirees.

Frequently Asked Questions

What is intergenerational inequality?

Intergenerational inequality refers to the unfair distribution of resources and opportunities between different generations, as highlighted by both Treasurer Jim Chalmers and Shadow Treasurer Tim Wilson.

What is the current structural budget deficit?

The current structural budget deficit is approximately $40 billion.

What changes to capital gains tax are being considered?

Reducing the capital gains tax discount and limiting negative gearing are being discussed as potential reforms, though Chalmers states that current tax policies have not changed.

How might these proposed tax changes affect the broader economy and future generations?