Economist challenges rent spike and ‘death tax’ claims over Labor budget reforms

Economist Saul Eslake has published an opinion piece in The Guardian defending the tax reforms announced in Treasurer Jim Chalmers’ recent federal budget, refuting claims that changes to negative gearing and capital gains tax will trigger a rent spike or disproportionately harm younger Australians. Eslake argues that reducing incentives for investment in established properties will not increase rents but may increase housing supply by shifting investor demand toward new builds.

Eslake contends that investment in established dwellings, which accounts for over 80 per cent of money lent to property investors, does not increase housing supply but instead pushes up prices and adds to rental demand. He notes that existing investors in established properties have been grandfathered under the new rules, giving them no incentive to raise rents, and suggests that retaining tax breaks for new builds could prompt a shift in investor demand that increases overall housing supply.

Using 2022-23 tax data, Eslake highlights that younger demographics hold a minimal share of declared capital gains and negative gearing benefits compared to older groups. Only 4.4 per cent of taxpayers aged 18-34 reported capital gains, compared with 14.3 per cent of those aged 65 or over, while young people accounted for just 4.2 per cent of total declared capital gains value. Fewer than 13 per cent of taxpayers aged 18-34 were negatively geared property investors in 2022-23, compared with 42 per cent of those aged 45-65.

Eslake suggests the government should consider protections for startup founders and employees regarding the new capital gains tax rules to account for inflation effects on zero-value assets. He proposes an averaging mechanism, similar to those available to farmers and entertainers, to ensure these groups are not unduly penalised by the reversion to taxing capital gains at full marginal rates less an allowance for inflation.

He defends the new 30 per cent minimum tax rate on discretionary trusts as a necessary step toward taxing inheritances, noting that Australia is an outlier among OECD nations for lacking such a tax. Eslake concludes that while the reforms are not perfect, they represent material improvements to the tax system and are to be welcomed.