Stranger than fiction. Who Labor's capital gains tax changes will really hurt

The losers from Labor’s capital gains tax policy aren’t all where you would expect them to be.

man upset about money

by Ben Phillips, Australian National University and Matthew Gray, Australian National University

Labor is going into the election promising to tax capital gains more heavily. Depending on who you listen to, it’ll either hit the very highest of earners, or middle earners – people such as teachers and nurses. The same critics have claimed different things at different times.

The truth is even stranger. In part because people who present as being part of one income group are often better described as being part of another.

It’s certainly stranger than fiction.

What are capital gains?
Capital gains are the profits made from buying something at one price and selling it at another. These profits are typically taxed at only half the rate of other income. (Technically, only half of each capital gain is taxed.)

The discount, introduced by Prime Minister John Howard in late 1999, was sold as ensuring that profit takers wouldn’t be taxed on the workings of inflation, a concession that was already built into the system, although in a more complicated way.

But because inflation had fallen so dramatically, the 50% discount went much further. It taxed capital gains, so-called “unearned income”, at a much lower rate than income earned in the form of wages and salaries, and also at a lower rate than bank interest and other forms of income.

In the lead up to the coming election (and the last one) the Labor Party has promised to wind back the discount, cutting it from 50% to 25% for newly-purchased assets held for more than a year, meaning that for those assets three quarters of each gain will be taxed instead of one half.

There are two (apparently contradictory) views about who the changes will hit, both of them spelled out in the pages of The Australian, and both sourced to the treasurer Josh Frydenberg.

Frydenberg/Bowen tweets
On January 5 the treasurer said investors would pay the “world’s highest tax” under Labor’s changes.

But that would only be the case if they were the very highest earners, on more than A$180,000. And it would only be the case for a short time where the capital gains are a one off.

Mr Frydenberg quoted a rate of 36.75% for capital gains tax, which would be three quarters of 49%, which itself would be made up of the top marginal rate of 45% plus the 2% Medicare levy plus the 2% temporary budget repair levy that Labor plans to reintroduce for two years.

That top marginal rate only applies to Australians on more than A$180,000.

Then ten days later on January 15, Mr Frydenberg said most of the workers hurt would be on much lower incomes, of up to A$80,000.

Then shadow treasurer Chris Bowen entered the debate, calling Fyrdenberg’s second claim “silly”. He said 70% of the total amount of capital gains tax discounts claimed was claimed by the top earners.

But he didn’t address the treasurer’s contention that most of the beneficiaries are lower earners.

What the data says
The Australian National University’s microsimulation model of the tax and social security system, PolicyMod, and the Australian Tax Officie’s Taxstats 2015-16 enable us to get at the truth.

Using a 2% sample of the tax returns submitted, including the information about capital gains and capital losses, we are able to work out who is the hardest hit by capital gains tax by income, age and gender.

At first blush we find that almost all capital gains tax collected - 85% - is paid by the top 10% of income earners. The bottom 10% (and also the bottom 20%) pay nothing.

It shouldn’t be surprising. High earners pay more tax than low earners because they earn more. The top 10% of earners also pay 51% of personal income tax.

Not many people pay capital gains tax
Around 900,000 Australians report capital gains per year, a figure used by the treasurer to suggest capital gains are widespread.

But after taking losses into account, the number reporting net capital gains falls to 670,000. Only about 540,000 of them pay capital gains tax. The others have taxable incomes below the tax-free threshold.

Of the 540,000 who do pay capital gains tax, 29% are in the top 10% of earners by taxable income.

A very high 12.7% are in the top 3% of earners, meaning they are on the very highest tax bracket, earning A$180,000 or more.

Small in number though they are, the Australians in the top 3% who pay capital gains tax, pay 74% of it. They pay 30.7% of all personal income tax.

They’re often retirees, and women
Older Australians pay only 5.6% of all personal income tax but about 29% of all capital gains tax.

Surprisingly, partnered women are also over-represented, paying 19.4% of personal income tax but an outsized 28.7% of capital gains tax. This is what you would expect if couples planning to minimise tax put the asset they were planning to buy and sell in the name of the lower paid partner.

Persons with wages and salaries are underrepresented, paying around 88% of personal income tax but only around 47% of capital gains tax.

But these figures are misleading.

It gets stranger still
By definition, most people’s incomes will be high in the year in which they pay capital gains tax. Examining their total income in that year, as we have done, will wrongly make it look as if it is mainly high income people who pay capital gains tax.

An alternative measure would be to rank people by their taxable income after deducting their capital gains. It’d rank them by something more like their normal income.

When we do that we find that the share of capital gains tax paid by the top 10% of earners is nothing like the 85% we first found. It’s a much lower 38%.

This measure produces another, very odd, result.

The bottom 10% turn out to pay, not none of the capital gains tax collected as we had thought, but an overweight 20%.

Stranger still, the next-bottom 10%, the people who fit somewhere between the bottom 10% and the 20%, pay only 4% of the capital gains tax collected.

Our lowest earners embrace capital gains…
There’s something odd at the bottom for those reporting capital gains. The clue lies in what they are at the bottom of. They are at the bottom of the taxable income scale.

And they are indeed odd.

The bottom 10% claim an awful lot of capital gains - an average of A$161,000 per capital gains tax payer, which is more than that claimed by any other income group, including the top 10%.

Capital gains make up a large share of their taxable income, larger than for higher income groups, and far lower than for other low income groups. Only around 8% receive government pensions or allowances.

Although their taxable incomes, after deducting net capital gains, are in the bottom 10%, their actual wealth and living standards are likely much higher up the distribution. Many own shares and businesses or have negatively geared investment properties. They get dividend imputation cheques and report business losses.

…although they don’t act like low earners
To get closer to the unvarnished truth, we would need to compare capital gains by household, examining the combined income of each household, which is less easy to manipulate than the income of an individual. But Australia’s tax system is built around individuals, so it’s hard to do. We would also like to know more about their typical income and whether capital gains were likely a one off or something more permanent.

Here’s what we can say:

Labor’s change will “grandfather” existing assets, meaning they will continue to be taxed under the present, more generous, arrangement. This means Labor’s change won’t have much of an effect for years, making any simple guess of how much money it makes an overestimate.

Read more: Capital gains tax concession is too generous: economists poll

At the moment, personal taxpayers pay A$6.7 billion per year in capital gains tax. Labor’s changes could potentially reap half that amount, but they would build up to it slowly, and by the time they got there, fewer people would look for capital gains as a means of escaping tax, meaning they would never get there, and giving a boost to other kinds of tax revenue.

It’s pretty certain that those who would feel it most would be higher income earners, older Australians, partnered women, quite often on behalf of their higher income partner.The Conversation

Ben Phillips, Associate Professor, Centre for Social Research and Methods, Director, Centre for Economic Policy Research (CEPR), Australian National University and Matthew Gray, Director, ANU Centre for Social Research and Methods, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


    To make a comment, please register or login
    24th Jan 2019
    I think "honest John's" changes fed the housing bubble. Prior to the changes, you needed to hold an investment for a decent period to get a decent CGT discount. After his changes, you only needed to hold it for a year to get a 50% CGT discount. This encouraged speculators IMO.
    24th Jan 2019
    They should take it back to before Howard in my opinion. Those nurses, teachers, firefighters just trying to get ahead are being slammed every which way. They won't pay them what they are worth, promise retirement benefits and then renege and now want to stop then earning a bit on the side so they can continue to work as public servants for what society can afford.
    24th Jan 2019
    The truth comes out. The government has told the next LIE to gain voted.

    The real problem with capital gains tax is not the tax itself but rather the fact that IT IS NOT INFLATION ADJUSTED. Investors may make a capital gain but if the cost of living has risen at the same rate as the value of their investment then the gain would no more than the same as it was when the product was purchased. That's what the lying bastards do not tell you. Nor do they tell you that the cost of an investment used to be adjust for inflation with figures published by the ATO. They did away with that because the government gets more money by offering a 50% CGT deduction. This gets worse the longer an asset is held as well.

    Nobody should believe one word of this government's spiel. It is a highly discredited government of thugs and low life who get their lies out every day via their comrades in arms in the big media which do not pull the lies apart. That started with Abbott and his "you have high electricity prices because of the Carbon Tax". No media outlet has rebuffed this for the blatant lie it was.
    24th Jan 2019
    I agree with you, Mick. Any tax reform in this area needs a thorough inquiry into the far-reaching effect and impact on the economy as a whole. It isn't just a matter of who can afford to pay more tax. It has to be what is the best to satisfy the objectives of the tax reforms.
    25th Jan 2019
    Yes MICK it is a risky investment if inflation isn't accounted for and becomes riskier the higher the inflation rate climbs. Howard and Costello did lots of damage either through ignorance or deliberate malice.
    24th Jan 2019
    I believe the tax concession that Labour has designed is correct for it only involves those with high earnings, far above ordinary people who won't suffer the change as laid out in Labour's policy. As for Josh Frydenberg, he is very skilful in duping the public with his lies and deceptions - I would not trust him for a moment.
    24th Jan 2019
    Please re-read the article
    24th Jan 2019
    The ALP's proposed changes impact small "mun & dad" investors - those that get their income predominately from salary & wages. Large investors with large investment portfolios are not impacted nearly as much.
    25th Jan 2019
    Those with high earnings fr above ordinary people don't earn income and Capital Gains can be manipulated down as they don't earn income. The rich live high on cashflow and low taxed capital gains by the use of tax minimisations that only they can access. It's the PAYG on around $80 000 that will suffer from Shortens attempts to kill off SMSFs and force workers back into Industry Funds which is the only reason for the policies.
    24th Jan 2019
    Renowned British Prime Minister Winston Churchill once wryly noted: "The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of Socialism is the equal sharing of miseries" (House of Commons speech, Oct 22, 1945.
    On the Ball
    24th Jan 2019
    Hmmm. Rubbery figures indeed!
    Dont forget a lot of so-called low income earners are wealthy people that use various "strategies" to reduce their taxable income, sometimes to zero. Strategies that are not available to genuine low income earners (who are subject to CGT unless they sell an INVESTMENT property for a big profit - both very unlikely.
    When a property is bought for PROFIT there is an expectation that the seller will pay their share of tax on that profit, just like us wage earners have to.
    Also, dont forget, CGT is based on the profit of the sale after all deductions and costs are taken out, including the purchase price, renovations, fees and charges (that haven't already been claimed as a deduction if the house was rented before it was sold.
    Halving the CGT rate (by the Howard administration) was just a gift to the wealthly landlords. I have had 3 investment properties, and sold (so far) one. the CGT (calculated as if it was not discounted) was not any more excessive than my normal income tax (except I had to work to pay the Government that!)
    A question: From what I remember I paid tax on the after-costs profit of the sale, based on my marginal rate. If this was the case, pensioners would pay CGT at all?
    And no, its NEVER on the family home.
    25th Jan 2019
    Yes and it's great for those who can manipulate marginal rates down below the $18 000. The really wealthy can do that with the help of tax advisors and trusts and loans through various entities. Thinking Labors policies will catch them out is silly.

    A transaction tax on money transfers certainly would but that hasn't been mentioned as far as I can see.
    24th Jan 2019
    The debate on tax concession on CGT and negative gearing has had a myopic effect on the top end or the bottom end of the taxpayer spectrum. First of all, the federal budget is a macro-economic base and the tax system is on an individual base. The classification of the top 10% and the bottom 20% of our taxpayers does not justify the individual base system to resolve the problem at the macro-economic level. In other words, the cause and effect arising from tax concession on CGT and negative gearing may not be an answer to returning our national budget to surplus or a fair share of the distribution of income for all Australians.

    The original ideas of the tax concession and negative gearing have been based on stimuli for the construction industry, providing housing, employment within and outside the construction sectors. If these stimuli are withdrawn in any degrees, the housing market, real estate industry, building contractors, building suppliers, and property buyers would suffer greatly, their contributions to the GDP will shrink in multiple effects. This ripple effect will, in turn, contract our overall economy and may even have an impact on our balance of trade.

    When we look at our tax reform system, we need to have a holistic approach to our overall economy and not just which top or bottom end of our taxpayers to share the burden. If we work on the principle of "a fair go" system, all Australians should share the burden for a healthy economy. It is up to the politicians to make the appropriate and equitable legal framework for all Australians' interests. Single out one special group against another is not a solution and it is dangerously making a good idea into an evil schism of our taxpayer groups.

    24th Jan 2019
    Labor isn't even in government and it is demanding billions of more taxes.

    What is worse, Shorten and his shadow ministers are recycled from the failed Rudd and Gillard governments.

    Remember Julia's infamous words that old people don't vote Labor? Shorten is all promises now, but it will be all shrugs for the elderly later when they are suffering from the rent increases from Labor's extra taxes from the milch cow of residential property. Death taxes to come and extension of gains tax on the sole residence?

    They have more front than Myers.
    24th Jan 2019
    What rot LJ, I don't know how you come to these conclusions, Labor has not put out any policy ideas along the lines you suggest, if I want to write fairy stories I could make up things about the Greens and the Coalition too, doesn't mean they are true.
    24th Jan 2019
    The truth certainly is strange. Who would have thought that Teacher's and nurses are exempt from a Bill Shorten Capital Gains Tax. LOL
    Make no mistake this Hard Left Labor Party is coming after all of us.
    24th Jan 2019
    Adrianus, is your real name Clive Palmer?
    24th Jan 2019
    The truth is that Labor has to find billions of extra taxes to pay for its big spending promises.

    Shorten isn't even in government yet and it is spent, spend, spend.
    25th Jan 2019
    A massive $200 Billion in new taxes, which will slow the economy, create higher unemployment and Labor still will not balance the budget.
    24th Jan 2019
    I don't know why people, pollies included, always refer to Nurses, Teachers and Police as if they are struggling, I can tell you they earn very good money, maybe not so much early on in their careers but later on they do and that is not to say they do not earn every penny because they certainly do, I was a DC Nursing Sister for a few years until my children came along and I changed jobs, became a School Assistant at our local school for 25 years so I know what sort of salary teachers get as well as nurses.

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