‘Dumbest option’: top economist slams housing tax break
Australia’s tax rules need to be massively rewritten to make them fairer and more efficient, one of the country’s leading economists has warned.
Former Treasury secretary Ken Henry, who led the 2010 tax review, said the current system could be modernized by introducing a 25 per cent blanket tax on all income from investments.
“I would like to see a complete overhaul of the taxation regulations that apply to all forms of capital income – interest, rent, dividends, capital gains, trust distributions,” he told a parliamentary inquiry on Wednesday. he said.
It is suggested that the federal government will consider reducing the capital gains tax deduction for investment properties, which could be announced in the May budget.
Senior Labor figures have been tight-lipped about the change in recent weeks, refusing to rule it out, instead pointing to previously announced income tax changes as their priority.
The discount was introduced by the Howard government in 1999 and allowed for a 50 per cent reduction in the tax bill on the sale of investment properties if they had been owned for at least one year.
Dr Henry said it was a fundamentally flawed measure because it failed to create incentives for investment and innovation.
“A 50 percent reduction in capital gains is the stupidest of all options for achieving this admirable policy goal,” he said.
“This benefits, for example, purely speculative investments in assets that do not create anything special because they are in the hands of the investor rather than in the hands of someone who owns them.”
A Scandinavian-style tax system, where income from investments is taxed at a flat rate, might be a better idea, he said. Henry called on the government not to introduce any reforms for fear of further complicating the tax system.
“I hate it,” he said when asked if a transition period was needed.
“(It causes) terrible distortions that put you on a bit of a slippery slope when it comes to policymaking.”
Fellow economist Saul Eslake also supported this view and warned that grandfathering could risk worsening inequality.
“This, in essence, privileges people based on when they were born or when they made certain decisions,” he told the inquiry.
“But if grandfathering is necessary to make any changes to the (capital gains tax) regime, then I would never want to let the perfect be the enemy of the good.”
