Money men say Budget plans may boost productivity

WARNINGS that looming tax reforms will worsen Australia’s productivity malaise are overblown, financial experts have said.

If anything, the reforms may boost productivity, senators heard as day one of a two-day snap inquiry into the tax changes began on Monday.

Under the changes, the 50 per cent discount for capital gains tax will be replaced with a rate tied to inflation and a 30 per cent minimum, while negative gearing will be limited to new houses only from July 2027.

That would remove distortions in the tax system and incentivise people to invest in assets that have higher rates of return, rather than a higher tax advantage, tax expert Peter Varela told the inquiry.

“Tax neutrality will always get you more productivity,” said Varela, from the Tax and Transfer Policy Institute at ANU.

By shifting the burden away from income earned from wages and towards assets, it would also encourage more people to work, increasing the supply of labour, he said.

Michael Brennan, chief executive of independent think tank the e61 Institute and a former Productivity Commission chair, agreed.

But he cautioned the impact would be relatively limited.

“It’s not economy-changing,” Brennan said.

While making tax settings more neutral would boost productivity, higher taxes on capital would probably offset that, he said.

However, the proposed legislation could be improved by allowing asset holders to average capital gains over a five-year period so they weren’t hit with an unnecessarily large tax bill depending on when they sell, Brennan said.

Despite the scare campaigns amplified by social and traditional media, young people would not notice they were paying more tax, said Matt Grudnoff, senior economist at progressive think tank The Australia Institute.

“What they will notice is house prices remaining flat,” he said.

“They will notice that as their incomes rise every year, housing becomes more and more affordable, and instead of thinking ‘I will never be able to get into housing’, they’ll start thinking ‘I can see the finish line, I can get there, I can own a home of my own’.”

The Australian Chamber of Commerce and Industry, AI Group, the Business Council of Australia and the Council of Small Business Organisations Australia warned the measures would lower productivity and make the nation less competitive.

“At a time of growing global competition, Australia cannot afford policies that make us a less attractive investment destination,” the groups said in a joint statement.

The business groups criticised the “slapdash” inquiry for being too short to adequately examine the changes.

Assistant treasurer Daniel Mulino said talks were still taking place with small businesses on potential concessions to the tax arrangements.

A slight reduction in supply was a worthwhile trade-off for reducing housing inequality, said National Housing Supply and Affordability Council chair Susan Lloyd-Hurwitz.