A budget that truly bridged Australia’s inequality – Fat Tail Daily
A year ago, I wrote this article reflecting my concerns about whether Australia would head down the path of socialism.
Would our country finally trade individual hard work and business talent for mediocrity and dependence on the state?
A year since, we just saw the Treasurer, Dr Jim Chalmers, unveil possibly the most ambitious Budget. He claimed it would restore intergenerational equality and address the longstanding imbalances in our economy, especially housing affordability.
Among other things, our country would phase out negative gearing on investment property. Only newly built houses would be eligible, while those who already own properties would still enjoy the benefit of this scheme.
There would also be a phasing out of the 50% discount on capital gains taxes for assets held for more than 12 months. Moreover, a minimum of 30% tax would apply on all capital gains.
On personal income taxes, the government would reduce the tax rate on the lowest tax bracket. This would grant a small tax break for Australians.
While the message sounded good on paper, the Budget appears to take away from everyone and hand benefits to the government agencies, tax accountants, lawyers, and lobby groups.
I believe the younger generation of Australians won’t be the beneficiaries of the changes as promised. The arrangements are unlikely to deliver an easier leg-up into the property market. Moreover, they’ll probably even suffer further as they take the alternative route to build their wealth and pay more taxes on that as well.
The younger generation may have less life experience and knowledge. But it’s pure idiocy to underestimate their ability in recognising deception, especially at their expense. As a demographic, the policies have deprived them the most.
We only need to see how the recently introduced government’s home equity scheme worked against them. The prices of homes purportedly covered by this scheme rose sharply, increasing unaffordability.
Around ten years ago, I was tutoring my neighbour’s son in Year 8 mathematics. On one occasion, we covered consumer arithmetic – calculating simple interest, compound interest, salaries and wages, and tax.
The young man was working on an exercise, calculating the taxes payable for different income levels under the progressive income tax structure. This structure means we pay more tax for each $1 we earn as our income increases.
Midway through the calculations, he suddenly said in despair, ‘I don’t want to work hard and earn more money!’
His epiphany struck me. I’m 20 years older than him and only realised this irony a few years before he did!
You get what I mean? Understanding incentives doesn’t need a university degree. It’s commonsense.
Mixed signals in our incentives structure
The principles behind the incentives are straightforward.
Subsidise something if you want to encourage more of it – education, healthcare, and childcare services.
Impose fines and taxes to deter certain activities – tobacco, alcohol, and dangerous/criminal activity.
But you’ll see how our government seems to deliver mixed signals in formulating policy.
For example, income is taxed, alongside consumption. Meanwhile, those unemployed are paid social welfare, effectively a subsidy.
What message is this providing to the public?
First, I want to clarify that I may have oversimplified the purposes of subsidies and taxes in making my point. You may argue that income tax, GST, fuel excise, etc. are levies that contribute to the administration and provision of related services. These are necessary to fund government personnel who oversee and maintain the system so it functions properly.
That’s a valid point.
Let’s go back to the tiered personal income tax rates. This is different from the GST and corporate tax, which are flat.
This structure treats productivity of business owners differently from that of its employees.
So business owners aren’t penalised for generating more profits, but employees must pay more for their productivity. This is ill-conceived.
In terms of investing, Australia’s tax structure is among the world’s most complex. We’re one of the few nations that offer negative gearing for property investors. Introduced some 40 years ago as a temporary measure to boost the housing market and property construction, it allowed investors to offset losses from maintaining their investment properties against income. This was effectively a subsidy for investors to take a large mortgage to buy a property with a view to making a profit from price appreciation rather than rental income. Negative gearing has been a major contributor to our runaway house prices, made worse by a loose immigration policy and bottlenecks in urban planning and construction.
For asset investments, the Howard government introduced in 1999 a 50% discount on capital gains tax for assets held for more than 12 months. This replaced the inflation-indexation method, where a capital gain is the difference between the sale proceeds and the purchase price, adjusted for inflation. The aim was to encourage long-term investing over short-term trading and speculation. A publicly listed business may enjoy more stable access to capital because investors are encouraged to take a long-term approach.
For all the quirks on how Australia taxes investment gains, there are aspects that yielded positive outcomes as they encouraged prudent behaviour. But with any incentive structure, there is room for abuse and unintended consequences.
Our major political parties have built their campaigns around these incentives structure to win supporters. In some cases, these issues determined who won or lost. They became sacred cows that many knew needed reform, but were too costly to tamper with.
Until our incumbent Labor government in this year’s Budget…
Butchering the sacred cows
and burning the carcases
As I said in the introduction, the proposed Budget measures, especially those on investment taxes, are likely detrimental to our economy and productivity. Done in isolation, they may have helped smooth out some abuses or longstanding imbalances in our economy.
This is true of negative gearing, which encourages indebtedness and turns property into a speculative asset class.
The younger generation may have benefited from removing negative gearing if there is a way to deter property speculators or increase housing supply. Also, policies to help the younger generation accumulate wealth to keep up with property prices would be a no-brainer.
The younger generation has increasingly found it harder to save up from working, given youth unemployment and low pay relative to living costs. They’d need to invest in market securities including shares, managed funds, crypto, etc., to bridge the gap.
Yet, this is where removing the capital gains tax discount on investment assets reflected the folly of Jim Chalmers and his policy team. They effectively cut out a chunk of the younger generation’s ladder and assured them that it is now easier to climb higher.
The Albanese government has dealt with the investment sacred cows – by butchering them all at once and burning the carcases.
Orchestrating one’s own downfall to perfection
Until recently, I had resigned myself to the Labor government retaining power for two more terms. No Party could build enough momentum to change the landscape.
That said, the recent South Australian State Election, and the by-elections in the seats of Nepean and Farrer have revealed Pauline Hanson’s One Nation Party as a rising force. Time will reveal whether it grows further.
Regardless, Dr Jim may have answered my concerns. The 2026 Budget might be the moment that spells their downfall in the next Federal Election.
This Budget may have brought equality – our collective resentment and ridicule.
Remember the Labor Party proposed the Mineral Resources Rent Tax, the Clean Energy Act, and the tax on unrealised capital gains. They were short-lived and reaped much less revenue than expected.
This Budget may go down the same path, ineffective and consigned to the dustbin of history.
No one should stand in the way. They couldn’t have done it any better.
