The International Monetary Fund’s (IMF) annual review of Australia has proposed an overhaul of the nation’s tax system in order to make it fairer.
Amongst other things, the IMF has suggested restricting access to capital gains tax concessions on the sale of a family home:
“That’s a very costly tax exemption and benefits disproportionately the wealthy households,” Harald Finger, the IMF mission chief to Australia, told The Australian Financial Review.
“It’s also more generous than what you see in many other advanced economies.
“So reviewing that and doing away with, not fully, but to streamline that benefit and make it less generous, would be helpful in generating tax revenues and making the tax system fairer.”
I disagree with the IMF that CGT should be applied to one’s principal place of residence. Applying CGT on sale would have the same deleterious efficiency impacts as stamp duty. It would discourage housing turnover and unnecessarily penalise people that move to homes that better suit their needs. Obvious examples include baby boomers downsizing from large family homes and young growing families upsizing to bigger family-friendly homes.
In turn, such disincentives would encourage a less efficient use of the housing stock, such as empty nesters occupying large homes with multiple spare bedrooms, simply to avoid paying CGT on sale (much like stamp duty). Applying a capital gains tax on one’s home would also hinder labour mobility, since it would discourage workers from selling up to relocate closer to employment.
Rather than closing the capital gains tax exemption, it would make far more sense to apply a broad-based land tax (preferably in place of stamp duties). Such a reform would encourage a more efficient use of the housing stock and improve labour mobility, penalise land banking and vagrancy (increasing effective land supply in the process), and help to make infrastructure investments self-funding for governments (since any land value uplift brought about through increased infrastructure investment would be partly captured by the government via increased land tax receipts).
To its credit, the IMF makes a similar recommendation regarding land taxes:
“At the state level we think a better system would be to transition out of stamp duties and into a broader land tax type system, which would make a more stable tax base for the states” [Harald Finger said].
Eliminating stamp duties and then introducing a CGT on one’s principal place of residence doesn’t make much sense as they are basically the same thing. One’s a transaction tax on purchase and the other is a transaction tax on sale.
