Housing, Tax and the Politics of Redistribution

Try as we might, we're finding it difficult to uncover much genuinely independent positive commentary on the Government's Budget and its proposed changes to capital gains tax concessions and negative gearing.

There are, of course, supporters. Former Prime Minister Paul Keating has been one of the more enthusiastic voices. But then, as Christine Keeler famously observed in another context: "Well, he would say that, wouldn't he?"

Our concern is not so much with the politics as with the underlying economics.

At its heart, the Government's approach appears to be based on a transfer of wealth and opportunity from older Australians to younger, more aspirational generations. That may make for an attractive political narrative, but it ignores an important reality. Most young Australians do not exist in isolation. They are sons, daughters and grandchildren. Weakening the financial position of parents and grandparents does not automatically strengthen the position of younger family members. In many cases, quite the opposite occurs.

The so-called housing boost announced in the Budget is a good example. The Government estimates that its measures will generate an additional 75,000 homes over ten years. On the surface, that sounds impressive. Break it down, however, and it equates to roughly 7,500 additional homes per year.

Against a backdrop of severe housing shortages, rapidly rising rents, strong population growth and a housing deficit measured in the hundreds of thousands of dwellings, 7,500 homes annually barely moves the needle. It may help at the margin, but it is difficult to see how it materially alters the supply-demand imbalance currently confronting the housing market.

Separately, if the changes to negative gearing and capital gains impact the housing market more than the government's projections, those wanting to get into the market may benefit, but at the expense of those home owners with a mortgage already in it. Lookout when the banks come knocking and looking for a top up to adjust your new LVR.

More broadly, our greatest concern lies elsewhere.

Australia's tax system continues to rely increasingly on personal income taxes while allowing bracket creep to do much of the heavy lifting. As wages rise, taxpayers are gradually pushed into higher tax brackets, even when their real purchasing power has barely improved. Governments benefit from a steadily rising tax take without having to announce explicit tax increases.

The result is that workers and investors continue to carry a growing share of the tax burden.

At the same time, discussion of broadening or increasing consumption-based taxation remains politically untouchable.

Yet there is a strong argument that a well-designed consumption tax is one of the fairest methods of raising government revenue. Individuals have considerable control over how much they consume, but far less control over how much tax is extracted from their earnings. A system that taxes spending rather than productivity arguably creates fewer distortions, encourages saving and investment, and distributes the tax burden more transparently.

Of course, any shift towards greater reliance on consumption taxes would need to be accompanied by appropriate protections for lower-income households. But that challenge is hardly insurmountable.

What is becoming increasingly difficult to justify is the steady expansion of government spending as a share of GDP while relying ever more heavily on income taxpayers to foot the bill.

The Budget may win political support from some quarters, but whether it meaningfully addresses Australia's structural housing problems or creates a fairer long-term tax system remains open to debate.

For now, we remain unconvinced.