Millennials expected to be no worse off than parents as capital gains tax among federal budget targets
Research into the generational income struggle has found that young Australians will eventually become as wealthy as their parents, but in their 30s they will struggle with the impositions their parents never had to face.
Research compiled by independent think tank e61 Institute suggests that young people with wealthy parents with large inheritances will fare best in the coming years, and that inheritances will be the biggest driver of inequality among millennials.
Chancellor of the Exchequer Jim Chalmers and Prime Minister Anthony Albanese said next month’s federal budget will tackle the issue of “intergenerational equity” by appealing directly to people in their 20s, 30s and 40s who believe the economy and housing markets are working against them.
The current capital gains tax and negative gearing, which critics argue is putting upward pressure on rents and house prices while benefiting older Australians, are expected to be overhauled in the May 12 budget.
But e61 chief economist Jack Buckley said while intergenerational inequality may be a central theme of the budget, it ignores how the mix of income wealth and taxes changes as people age.
The median income for a 35-year-old in 2023, adjusted for inflation, is about $90,000, which is nearly 80 percent higher than the median income for a 35-year-old in the late 1980s, he said. But average household wealth is about $380,000 today, just as it was for previous generations at the same age.
According to Buckley, older Australians had benefited greatly from the huge increase in the value of assets such as housing, which were also lightly taxed.
“The reality is that young Australians are unlikely to be worse off than their parents throughout their lives,” he said. “Income growth has slowed early in their careers, in part because young people are spending longer on education, but they are likely to see stronger earnings growth later in life.”
According to e61 research, people in their 30s are under the most pressure from policies that their parents did not face and that will ultimately give them increased income in later years.
More years in education, large HELP and HECS repayments and a 12 per cent pension guarantee are eating into the available incomes of people just as they are trying to save for a house and start a family.
This meant that young Australians’ income growth was slower than in previous generations. But over time, higher wages and the pension system will increase their wealth to the same level as their parents.
Buckley said the rise in house prices, which is boosting the wealth of older Australians currently experiencing an “inheritance boom”, would contribute to a huge jump in inequality between generations, but not between them.
“Older Australians are reaping a windfall from rising asset prices, and much of this wealth will be transferred unequally through inheritance,” he said.
“This inheritance boom will increase inequality within a generation far more significantly than any gap between generations.”
The research confirms that older Australians are better off than younger generations in some respects. The after-tax income of people over the age of 60 currently accounts for 95 percent of the income of people aged 18-60. In the 1990s, this rate was around 61 percent.
In the same period, the share of taxes paid by people over 60 did not increase.
Buckley said reforms such as the inheritance tax, mooted in Henry’s 2010 tax review, could encourage older people to tap into their wealth rather than establish inheritances, but they were likely to be politically unacceptable.
Support for changing capital gains tax in next week’s budget remains high among a wide range of organisations, from the ACTU to the charity St Vincent de Paul Society.
This imprint revealed earlier this month that the government is likely to abandon the current 50 per cent tax concession introduced by the Howard government in 1999 and revert to the original inflation adjustment system introduced when the Hawke government introduced the CGT in the mid-1980s.
Any changes to the CGT concession, which applies to assets including shares and cryptocurrency, are expected to apply only to new purchases and not retroactively.
Westpac chief economist Luci Ellis warned that a change to CGT could boost government revenues but this was not guaranteed depending on how quickly asset prices were climbing.
He warned that simply “tweaking” the tax system may not be the only or best way to deal with a problem such as a shortfall in government revenue or housing affordability.
“While global economic and geopolitical developments create challenges, new technology and an expanding, aging workforce create opportunities,” he said. “We shouldn’t assume that fine-tuning the tax system is the answer to every problem.”
Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up for our weekly Inside Politics newsletter.
Shane Wright is senior economic correspondent for The Age and The Sydney Morning Herald.Connect with: X or email.
