Following in the footsteps of his former leader, Peter Costello has urged the Turnbull Government not to touch superannuation, capital gains taxes (CGT), or negative gearing. From The AFR:
“The one thing I’d say about superannuation is that it is an unbelievably complex system already and the more they touch it, the more complex it gets and the less faith people have it in”…
“I don’t think we should be increasing capital gains. I think would be a mistake… The whole world is competing for capital”….
Mr Costello said he did not see a case for changing the existing rules [on negative gearing].
Costello’s hypocrisy around superannuation beggars belief. He complains that it is a “complex system” and people need certainty, and yet this never stopped him from making a raft of costly changes that made the system far less sustainable and equitable, costing the Budget billions.
In 2005, Costello also introduced generous ‘transition-to-retirement’ rules, which effectively allows those aged over 50 to lower their income tax – affectionately described in the industry as the super saver’s version of “having your cake and eating it”.
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The Productivity Commission recently slammed Costello’s’transition-to-retirement’ rules, noting that they “appear to be used almost exclusively by people working full-time and as a means to reduce tax liabilities among wealthier Australians” and called for a review of their “efficacy and sustainability”.
Finally, in 2006, Costello reduced the tax rate on superannuation earnings for those aged over 60 from 15% to zero – a move dubbed by Saul Eslake as “one of the worst taxation policy decisions of the past 20 years”. As a result, younger Australians must pay full income tax on their wages/salary earnings and 15% tax on their superannuation earnings, whereas older Australians get to pay absolutely nothing.
Again, it is precisely Costello’s meddling with superannuation that has greatly worsened the equity and sustainability of the retirement system, undermined the progressiveness of the tax system, and blown major holes in the Australian Budget. He has no right to lecture anyone about reform.
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Of course, it was also Costello who halved the rate of CGT in 1999, which pushed up house prices, overwhelming benefiting the rich, and now costs the Budget some $4 billion in revenue foregone.
Shortly after CGT was halved, loans to investors surged, growing almost exponentially over subsequent years (see below chart).
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This growth was driven by a massive increase in the number of negatively geared investors, whose numbers have roughly doubled since 1999 at the same time as the number of positively geared investors has remained roughly stable (see next chart).
Indeed, the slashing of CGT made negative gearing a much more effective tax shelter.
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It is also a key reason why the value of rental losses exploded after the CGT discount’s introduction (see below charts).
As noted by Deloitte’s “Mythbusting Tax Reform”report, released in October, Howard’s CGT discount has also had adverse equity and efficiency impacts:
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Table 1 shows there are really big incentives for some taxpayers (such as high income earners) to earn capital gains, versus little incentive for others (such as companies)
The discounts Australia adopted back in 1999 assumed inflation would be higher than it has been – and so they’ve been too generous.
By the way, ‘overdoing it’ on the CGT discount doesn’t just come at a cost to taxpayers. It hurts the economy too. As the discount does not target particular sectors or types of assets, it provides stimulus to invest in both productive and unproductive assets…
It is also part of the reason why Chart 7 shows that those who earn more than $180,000 a year account for a much bigger share of net capital gains…
Our conclusion? The current CGT discount is too generous, to the extent that it undermines the very principles of this nation’s progressive personal income tax system. It’s time for a change. Reform of the concession is long overdue.
It’s fair to say that Peter Costello shares some of the blame for Australia’s housing bubble, so we should not be surprised that he continues to defend it.
It was Peter Costello’s halving of CGT that first put a rocket under negatively geared investment which continues to plague the housing market today, to the detriment of first home buyers. It was also him that allowed self-managed superannuation funds to leverage into property.
If the Budget deficit has any hope of being eliminated, and the “age of entitlement” addressed, the Government must right Costello’s Budget wrongs. The same can be said for Costello’s vandalism of housing affordability.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
