Labor’s tax policies will improve intergenerational equity and ensure more equal tax treatment of income from labour and capital.

Angus Taylor would like us to believe that Labor’s tax changes are anti-aspirational. These allegations merit an answer:

The changes to the capital gains tax will negatively damage start-ups and thus reduce innovation, resulting in lower productivity growth.

The ability of young people to save for their housing deposit will be reduced.

The changes to the taxation of trusts are equivalent to the introduction of a death tax.

The tax thresholds should be indexed so the average income tax rate doesn’t rise.

The capital gains tax and the incentive to innovate

At present 50 per cent of any capital gain is assessed for income tax, but Labor is proposing to return to the system originally introduced by the Hawke-Keating Government where all the real capital gain (after allowing for inflation) is subject to tax.  These real capital gains are income and raise people’s purchasing power just as much as any other form of income.  In fairness they should therefore be taxed at the same rate as any other income. Indeed, dividends from a company are taxed that way, and so should capital gains.

Nevertheless, it is argued by some that changing the capital gains tax will reduce innovation by new start-up businesses, in particular, for a start-up where the original value of the business was zero, meaning all the real gain will be subject to capital gains tax. The inference is that this will be a disincentive to start new enterprises.

There are, however, arrangements that allow small businesses with an aggregate turnover under $2m to significantly reduce, defer or disregard capital gains from the sale of active business assets. These arrangements are particularly directed at assisting people who are preparing for retirement, but even young entrepreneurs can defer all or part of their capital gains tax if they reinvest the proceeds into a replacement active business asset or use the funds to make capital improvements in an existing asset.

That still leaves the allegation that taxing real capital gains does not offer any offset for the effects of inflation on those new businesses whose assets start with a value of zero. It should, however, be possible to calculate the real gain by taking the present nominal value of the business assets and discounting that value by the rate of........

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