Australia's tax and immigration debate: Labor and Coalition's contrasting approaches

Both the Albanese government and the opposition want to turn back the clock on the Australian tax system.

Labor plans to return capital gains tax to the pre-1999 system of adjusting for inflation instead of simply halving it, and the Coalition wants to return to the system of adjusting income tax scales for inflation that it introduced in 1976 and reversed six years later.

Labor's indexation would increase taxes and raise more revenue, while the Coalition's indexation would lower taxes and cut revenue, so there's the political contest over the next two years, along with immigration.

Halving the capital gains tax (CGT) in 1999 now looks like a mistake. Given that the National Housing Accord plan to build more houses and make them more affordable with more supply is not working as planned, reversing it should help.

Tax is a great motivator

The CGT discount wasn't the only thing that caused house prices to start rising at twice the rate of incomes after 2000, but it started the ball rolling.

It was then kicked along by a massive increase in immigration after 2005, with no increase in housing construction, and then in 2008 by the transformation of banks from business lenders to aggressive home mortgage marketers as a result of risk-weighting changes to capital rules after the Global Financial Crisis.

The idea for a 50 per cent CGT discount appeared in a 1999 Business Tax Review with these words: "… the recommendations for capital gains taxation are designed to enliven and invigorate the Australian equity markets, to stimulate greater participation by individuals and to achieve a better allocation of the nation's capital resources."

The terms of reference from then-treasurer Peter Costello asked the review to examine whether the CGT should be capped at 30 per cent, but the authors went for a 23.5 per cent cap instead, entirely replacing the CPI adjustment.

Those authors were three men: John Ralph, a director of Foster's Brewing and Pacific Dunlop, Commonwealth Bank, Telstra, BHP and Pioneer International; Rick Allert, a director of Southcorp, National Mutual, Coles Myer and FH Faulding: and Bob Joss, former CEO of Westpac.

They had an obvious conflict of interest: slashing capital taxes and invigorating the equity market would help their many businesses, not to mention themselves personally.

What they didn't know but might have guessed since there was an obvious internet bubble going on, was that nine months later the US stock market would begin a crash that would see the Nasdaq Composite index fall 78 per cent and the Australian market fall 22 per cent.

That meant "enlivening and invigorating" the equity markets was suddenly out of the question, and participation in them by individuals was not going to be "stimulated". Real estate investing was invigorated and stimulated instead.

Whether it would have happened without a stock market crash is moot — the CGT discount makes negative gearing work more powerfully for real estate than shares because of the greater borrowing.

Labor's revival of capital gains tax indexation won't apply to existing investments and won't start until 2028-29, when the budget papers estimate a relatively modest gain of $1.35 billion, followed by $2.28 billion in 2029-30.

But tax is a great motivator and should start changing behaviour immediately, encouraging more investment in new houses and apartments instead of existing ones because the changes don't apply to new builds.

Should the change exclude investing in businesses, both start-ups and ASX-listed shares, as some are suggesting?

Probably, although it's not always clear that a 50 per cent discount is a better deal than adjusting for inflation; it is better when inflation is low and the asset is held for a short time, but not when the opposite is true.

Taylor trying to save the furniture

Angus Taylor is also going with policy nostalgia, wanting to reinstate the income tax indexation promised by Malcolm Fraser in the 1975 election campaign and delivered in 1976.

In his campaign launch speech in 1975, Fraser said: "We will put an end to Labor's tax rip-off. … It will make government more honest with your money. They will no longer be able to rely on the secret tax increase of inflation."

Taylor echoed those words in his budget reply speech last week: "[Bracket creep] is a stealth raid on Australians working hard to get ahead. … Any government that wants to tax Australians more should have the courage to front up and to take that tax increase to an election."

But Fraser partially removed it two years later and then fully reversed it in 1982, saying later that "no one thanked me for it", which was obviously because the tax increases were secret and Fraser had made tax cuts secret instead, which is poor politics. Taylor apparently thinks it'll be different this time.

When the system of increasing marginal tax scales by the percentage rise in the CPI was fully operating in 1976 and 1977, the cost to the budget was about $1 billion a year, or $7.5 billion in today's money.

The cost of Taylor's new version of it is being estimated at either $22 billion or $35 billion over four years, depending on who you listen to, but somewhere in the middle sounds about right. Some have put it at $200 billion over 10 years, which sounds high.

Whatever it is, it will have to be funded or lead to a Reagan/Trump-style blowout in the deficit as a result of tax cuts.

Naturally, the Coalition wants the money to come from less spending, not raising other taxes, which seems to mainly mean dropping the effort to prevent global warming and getting rid of the "net zero bureaucracy", scrapping "Labor's housing bureaucracy", and making all welfare available only to Australian citizens.

It is, to say the least, a bold plan, especially for a party trying to get back into government by winning urban seats that were taken from it by independents focused on climate change and are often mostly populated by immigrants and their children.

But Taylor's Liberal Party seems to be trying to save the furniture first by hanging onto regional seats under threat from One Nation.

Two other housing policies in the budget and budget reply were Labor's $2.1 billion "Local Infrastructure Fund" and the Coalition's plan to tie immigration to housing, along with its previously announced $5 billion housing infrastructure fund.

Taylor said: "A Coalition government will cap immigration numbers based on the number of homes constructed each year. Never again will a government be able to bring in more people than our housing can support."

I suggested this in my book The Great Divide — Australia's Housing Mess and How To Fix It.

But that was two years ago, when net overseas migration (NOM) had been 518,000 in 2022-23, and housing completions were 174,393 — a shortfall of at least 50,000 dwellings using the current occupancy ratio of 2.4 people per house.

But in 2024-25, NOM had fallen to 306,000, and housing completions were still around 175,000, implying a surplus of about 50,009 dwellings.

So, something else made house prices rise in 2024-25 — namely, two interest rate cuts in February and May.

If the Treasury forecast for NOM in 2027-28 of 225,000 comes to pass, a Coalition government in that year would have to increase migration to match housing completions, not cut it. Not that it will come to pass, of course, but it might come close.

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As for Labor's Local Infrastructure Fund, it's also superficially worthwhile, but nowhere near enough.

It is budgeted to start at $262 million next year and build to $652.1 million in 2029-30. Minus administration costs and dividing it up among the states, it would barely fund the sewerage, water and roads for one new housing estate each.

Amusingly, Labor claims that its $2.1 billion infrastructure fund will produce an extra 65,000 dwellings, while the Coalition says its $5 billion for the same thing will produce 400,000.

That's $12,500 per dwelling versus $30,000: how come the Coalition's money goes more than twice as far as Labor's?

Or could it be that both of them are making it up — that is, using economic modelling?