A higher capital gains tax won’t fix housing and could make it worse
Going after the CGT discount sounds easy, but it could backfire by choking construction, locking up stock and pushing more Australians into renting.
The federal budget is under pressure. The budget recently blew out by $57 billion and runaway spending is to blame for driving Australia’s stubbornly high inflation. That spending, and the government’s reluctance to rein it in, has pushed it to look for new ways to raise revenue.
The government is now considering whether to hike capital gains tax (CGT) by reducing or eliminating the long-term discount. It has been coy about this, seemingly flying a kite to see how people react. For now, the focus appears to be on how the CGT discount applies to housing.
Proponents argue higher CGT would help first home buyers by ‘forcing’ investors to sell or by driving them out of the market. They are wrong. Hiking CGT will backfire and will not help with the housing crisis. Here's why.
Start with construction. Higher CGT would deter it. Investors — especially developers — are rational value maximisers. They care about after-tax returns. If those returns fall below what listed markets offer, they will redirect their capital.
