Very interesting to see the discussions around CGT over the last couple of weeks.
In my view, tax policy should be designed to minimise distortions to decision making without creating excessive compliance burdens.
The current flat discount is simple, but that’s where the good points end. We under tax gains on assets held for shorter periods and over tax gains on assets held for longer periods, and have differential treatment between individuals and companies. All of which created dead weight loss that hurts efficiency.
My view is the best trade-off is to index the CGT discount to inflation over the period an asset is held, so we are taxing real gains rather than nominal gains and extend the same discount approach to all entities. With modern systems it will be relatively simple to account for, and while not perfect, should materially reduce distortions.
This approach won’t deal with the lumpiness in GST, and the distorting impact that can have when couple with our aggressively scaling marginal tax rates. Averaging over a fixed period is the easiest way to partially deal with this distortion, and I’d recommend a period of five years.
Moving to an inflation indexed CGT discount would raise around $4b per year in additional revenue. This should be recycled into tax cuts and I would recommend reducing the top marginal rate from 45% to 42% to further reduce the impact on the lumpy nature of CGT.