DIMITRI BURSHTEIN: CGT changes the latest manifestation of Canberra’s policy insanity

Albert Einstein defined insanity as doing the same thing over and over again and expecting different results. And for nearly four years, the Albanese Government has raised taxes, lifted spending, and thickened regulation, all the while expecting an outcome different from the one history, and its own first term, has reliably delivered. The coming Budget looks set to continue the experiment.

If, as widely speculated, the Government raises capital gains tax, it will mark another significant broken promise from a Prime Minister fond of telling Australians that his word is his bond. By that point, the only honest rating left for the Prime Minister’s bond will be junk.

Start with the politics. The capital gains tax debate in this country has been hijacked by housing.

It is presented as a contest between property investors and first home buyers, between speculators and aspiring owner-occupiers.

The framing is convenient because housing is emotive and the politics simple. It is also misleading. Capital gains tax also applies to shares, farms, small businesses, and capital investment more broadly.

It applies, in other words, to the entire architecture of private investment in the Australian economy.

Yet at the heart of this policy posture sits a contradiction. The Government talks about productivity. It convenes roundtables, commissions reports, and delivers speeches about its importance.

But productivity, as most economists will explain, is driven by investment in capital, technology, innovation, and new business formation. And yet the same Government is once again openly canvassing measures that would reduce the after-tax returns on investment, thus disincentivising it.

This sort of policy schizophrenia should not surprise anyone, because it now characterises the Australian bureaucratic enterprise. The government taxes and regulates energy to make it more expensive, then subsidises energy to make it cheaper.

It runs planning and immigration settings that drive up the cost of housing, then offers subsidies when housing becomes unaffordable. It pursues expansionary fiscal policy while the Reserve Bank pursues contractionary monetary policy, each undoing the work of the other. Canberra has perfected the art of being arsonist and fire brigade at once, which has the convenient feature of doubling the number of press releases.

Meanwhile, even if capital gains tax changes are somehow limited to property, the damage from merely discussing an increase will not be confined to whatever is ultimately legislated. The threat alone of increased capital taxes does the damaging work.

Capital is mobile. Entrepreneurs and investors make decisions on horizons longer than a political cycle, and they are acutely sensitive to the policy environment they expect to face across that horizon.

The Government has already shown, through its proposed tax on unrealised gains in superannuation, that it is willing to treat paper gains as though they had been banked. The current speculation around capital gains tax operates the same way. It is a warning shot, and capital responds to warning shots by moving.

The full extent of the damage will never be seen. The businesses that are not started, the factories not built, the machinery not purchased, the technologies commercialised offshore rather than in Australia are invisible losses.

They appear in no ministerial press release or ABS statistic. But the aggregate evidence can be seen. Australian productivity growth is among the weakest in the developed world. Business investment as a share of GDP has been trending down for the better part of two decades. The clues are there for anyone willing to read them.

The deeper point, and one lost amid the noise about intergenerational equity, is that capital should be preferentially taxed compared to labour.

This is not a favour to the rich but a recognition that capital is mobile and its supply elastic. Merely inflation indexing capital gains for taxation is not enough. Preferential treatment of capital is what encourages savings, business formation, and investment, and these are the only durable drivers of productivity and real wage growth.

The genuine drivers of intergenerational inequity, meanwhile, have attracted negligible political attention. The first is the regulatory thicket that has grown around nearly every form of productive activity in this country.

Starting a business and scaling it has become, above all else, an exercise in compliance management. The second is the income tax system itself, and bracket creep in particular, which lifts workers into higher marginal rates without any legislative decision being made or defended. It requires no political courage and attracts no scrutiny to transfer an ever-larger share of wage income to the state year after year.

The damage is not only to current consumption. It is to the very process by which young Australians might compound savings to accumulate wealth across a working life.

The unfortunate truth is that governments refuse to learn from prior mistakes. Successive increases in tobacco excise were forecast to deliver more revenue and less smoking. They have instead delivered falling revenue and a flourishing organised crime trade in illicit tobacco. The lesson is not obscure. When you raise the price of a mobile, substitutable thing, people and capital find another way.

An increase in capital gains tax, given the mobility of capital and the patience of those who deploy it, will produce a similar result: less investment, less activity, less business formation, less economic dynamism, and over time, less tax revenue than the modelling promised.

It has long been demonstrated that a country cannot tax itself to prosperity. Yet the Albanese Government appears determined to try to prove history wrong, whatever the cost to Australians.

And in the process, it may well deliver the intergenerational equity it claims to seek, not by lifting the floor to make the young wealthier, but by tearing down the ceiling and making everyone poorer together.

Dimitri Burshtein is a senior director at Eminence Advisory.