With inequality rising and budget pressures mounting, a rare political window has opened for meaningful tax reform – if the government chooses to act.

It is time for another round of tax reform to improve both equity and efficiency.

The last significant tax reform was in the last century. Despite Prime Minister Anthony Albanese’s well-known caution, the prospects for significant tax reform look brighter than in a long time.

First, a recent Senate Committee, chaired by the Greens Senator, Nick McKim, produced a report recommending the capital gains discount be reduced from 50 per cent to 33 per cent or lower. Second, a leading independent member of Parliament, Allegra Spender, has proposed reducing the capital gains discount from 50 per cent to 30 per cent and ring-fencing negative gearing so investment losses can only be offset against investment income, not wages.

Third, the Treasurer, Jim Chalmers has given several hints that he supports reform of the capital gains tax, as well as potentially other wider tax reforms. Not surprisingly, Chalmers is careful to say that it all depends upon Cabinet. However, with a huge majority in Parliament, plus support from the Greens and independents, and with two years to the next election, this budget presents the best possible opportunity to embrace tax reform.

Capital gains and negative gearing

In principle, there is no good case for taxing real capital gains at a lower rate than other forms of income. Each dollar of real capital gains raises a person’s taxable capacity just as much as a dollar of wages.

Thus, when the Hawke Government first introduced capital gains taxation, real capital gains were fully taxed and there was no discount. However, arguably calculating the amount of the real gain was too complicated and instead the Howard Government changed the system so that the nominal capital gains were discounted by 50 per cent to approximate the real gain. Such a high discount rate may have been reasonable if inflation is high – more than eight per cent – but this has not been the case for years, and a lower discount rate is therefore appropriate.

Furthermore, a major concern driving these reforms is the increase in inequality,........

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