Analysis of capital gains tax changes

April 2018 report

The Housing Industry Association (HIA) commissioned the CIE to investigate the economic implications of proposed changes to Capital Gains Tax Arrangements.

  • In the long-run, increasing the effective tax rate on capital gains is most likely to: increase housing costs across the board (this includes rents that tenants pay, as well as the prices first home owners pay to purchase property), reduce economic activity and reduce household consumption (our proxy for household welfare).
  • This is because investor-landlords form part of the mechanism that supplies dwellings. These individuals provide the capital that facilitates the creation of dwellings that tenants occupy. This is necessary, as tenants either cannot supply the capital for the dwelling they occupy, or prefer not to. Increasing the effective tax rate on this capital reduces the supply of dwellings available for occupation, which causes housing costs across the board to increase, and has negative flow-on effects for consumption and economic activity more broadly.
  • For example, if the government reduced the discount rate that is applied to capital gains by 50 per cent to 25 per cent, we estimate that in the long-run, the economy would be smaller each year by 0.2 per cent compared to the baseline (of no policy change). Household consumption would be smaller each year by 0.7 per cent, while dwelling costs would be higher by 0.7 per cent. Overall, total taxes collected in the economy (by both Federal and State Governments) are likely to be lower by around $500 million per year. Total revenues available to the State Governments are likely to be substantially lower, with significant falls in collections of property taxes and GST.

View report here.

For further information contact David Pearce.