Lower taxes can lead to a bigger take

The ALP, in its 2007 national platform, committed itself to keeping tax as low as possible, while maintaining a sound revenue base.  This is an admirable goal but needs to be implemented if it is more than mere rhetoric.  In this regard, it is well worth considering what has happened to capital gains taxation over the past decade.

In 1999, the Howard government introduced a 50 per cent discount to CGT for individuals and trusts.  This discount has been vehemently criticised by most observers as favouring the rich.  Others have partly blamed it for fuelling the so-called housing bubble.  Every year somebody calls for the discount to be abolished either on equity or revenue grounds.

Much is made of CGT, as if it were the linchpin of the Australian tax system.  In 2007-08, the government expects to raise more than $198 billion in income tax revenue.  The CGT is expected to raise well over $10 billion (about 2 per cent of revenue) and the CGT discount will lead to forgone revenue of under $5 billion.

The other important point is that revenue from the CGT has increased dramatically since 1999 when the discount was introduced.  According to Australian Taxation Office data, the CGT raised $5.2 billion in 1998-99, and Treasury conservatively expects it to raise more than double that amount this financial year.  Looking only at individual taxpayers, they paid just over $2 billion in 1998-99 and just over $4 billion in 2004-05, the last year of ATO data.  Over that period, CGT revenue from listed companies that cannot access the discount actually fell.  In other words, with a decline in the tax rate, tax revenue grew.

This is not an isolated occurrence of the Laffer curve working.

The important point, however, is that the CGT discount does not favour the rich per se.  Looking at 2004-05 ATO data, 47 per cent of net capital gains were declared by taxpayers with taxable income of less than $100,000, yet they pay only 29.95 per cent of the CGT raised from individuals.  People with a taxable income over $100,000 declare 53 per cent of net capital gains and pay 70 per cent of the CGT from individuals.

To place those figures in context, about 5 per cent of the taxpaying population have incomes over $100,000.  They earn 20.5 per cent of taxable income and pay 31.7 per cent of net income tax.  In other words, the CGT is highly progressive, just like other aspects of the personal income tax system.

The tax system needs to be more focused on financing the activities of government and less focused on social engineering.  Rather than condemn the CGT discount, we should learn the lesson from this episode.  Lower taxes can lead to more revenue and are likely to promote growth and investment.

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