Got a tax problem in your neighbourhood? Who ya gonna call? Working class hero and antique clock collector Paul Keating. But he’s not here to bust myths, he’s here to make them.
It was only a matter of time before the national champion of political pugilism and, arguably, one of the world’s best name-calling commentators, Paul Keating, would roll up the sleeves to support his adoring student, Dr Jim Chalmers, his beloved party and his own capital gains tax discount creation.
History records that Keating introduced the capital gains tax (CGT) because he couldn’t force his Prime Minister Bob Hawke to run with a broad-based consumption tax of, wait for it, 12.5%! Nowadays, most economists think we could see some decent income tax cuts if any government — Labor or Coalition — had the guts to raise the GST.
So, when it comes to tax reform, most politicians are the ‘cowards of the county’ and see a higher GST as a recipe for political failure.
Enter the guy who history records has guts, which is only matched by his self-assured belief in his own personal greatness — former PM and Treasurer Paul Keating.
I’m a fan of his heroic work of financial deregulation, reduction of trade protection, convincing the union movement to link wage rises to productivity and, of course, the introduction of what’s regarded as one of the world’s best retirement systems in our superannuation arrangements. And that’s despite gutless governments in the past changing it to make it more punitive for those who’ve saved harder than the average Aussie and who become the biggest gainers from this super saving system.
But Paul Keating isn’t the Messiah. Many baby boomers who lived under his era (when home loan interest rates went sky high to 17% or higher) will never forget the last real recession of 1990-91 that happened under his watch. In fact, it led to his infamous remark that it “was the recession we had to have.”
No treasurer since Paul Keating was our number one bookkeeper has been responsible for a recession, except for Josh Frydenberg, who had the top money man job when Covid locked down the country! However, no one could blame any treasurer world-wide for the recession that followed the lockdowns associated with that pandemic.
To be fair, while I always argue that this world record run of 30 years without a recession was a consequence of the good reform work of Bob Hawke, Paul Keating, John Howard and Peter Costello, great track records don’t mean someone like Keating gets to lash others without him copping a lash or two.
So, let’s look at his defence of Albo and Dr Jim, from their hero, who’s a master of mind manipulation of those ‘without’ a memory for history. His MO can be summed up as: “Attack! Attack! Attack!”. Of course, this comes from the same playbook used by a certain US President who currently occupies the White House!
The Keating defence/attack was in a great piece by the AFR’s Economics Editor John Kehoe, of which I’ll take the main arguments of the former PM, as well as Jim Chalmers, and put these into a less subjective “I’m always right” context.
As Kehoe writes: “Keating excoriated “howls” from wealthy businesspeople who had “feasted” on lightly taxed capital gains for 25 years and now opposed the return to the inflation indexation of capital gains that he set up as Treasurer in 1985”.
However, the Budget CGT discount has been criticised, as Kehoe pointed out, by “entrepreneurs, small business owners, families who use trusts, and even the young people whom the government intended its tax changes to help.”
To this, the Treasurer Chalmers has a made-up figure that says “90 per cent of small businesses with annual revenue below $2 million or assets below $6 million” would not be impacted because they would remain eligible for reduced or zero CGT when they sell their businesses.
But you have to be in business for 15 years to get this Howard Government created concession. By the way, the statistics say 60% of small businesses don’t last beyond five years!
To win his argument, Keating points to the tech success story, Canva and other successful entrepreneurs who he says have made big gains along the way before they might sell and get capital gains tax discounts.
This comment ignores their contribution to job creation, tax paying and even helping other businesses that then contribute to the economy. Labor politicians like to think we’re all equal but some Australian achieve more, contribute more and deserve to be treated better, even when it comes to taxation. That’s why we give Research and Development grants to those who risk money and their lives to create stuff that not only benefits them but the people they employ, along with the income and taxes they help generate.
Keating says the CGT discount has fed house price increases. He referred to a graph that showed “house prices had grown from nine times household income per person to 16 times since the CGT discount was introduced in September 1999.”
But this also coincided with the escalation of immigration and a woeful level of government support for increasing the housing supply. Also, governments got out of building affordable homes, so private landlords were given CGT discount incentives to add to the housing supply.
Now these people are to be punished and berated as whinging wealthy types.
Keating ignores the fact that new CGT discount and negative gearing rules will send property investors to new builds, so young buyers will have to compete with them at auctions, which can’t be great for reducing house prices by much.
Even Don Russell, former Keating adviser and now chair of AustralianSuper reminded us that the old CGT discount system is good for high inflation times, but we all know that inflation was really low until Covid came along. I bet you inflation goes back to low levels, especially given what our RBA is doing now with rates.
Kehoe looks at various analyses of both CGT discounts. They all say the new one is a bigger taxer. And this one from Sandon Capital chief investment officer Gabriel Radzyminski, says it all: This calculation shows “that for an investor who puts $1000 into a start-up, and whose share value grows to $250,000 over 10 years, the tax rate would be 46.7 per cent.”
That compares to an average tax slug of 23.5% under the 50% discount system. This is a tax grab to make up for poor policy decision by this government and others, and Keating has been sent into bat to win over those who only remember his great work.
By the way, all this new proposed capital gains taxing of successful savers, investors and business builders is because the Albanese Government wants to address intergenerational inequity, which means young people can’t easily get into the property market.
Well, this could be a BS argument because it ignores Keating’s role in ‘punishing’ young home buyers of today with his super system that now takes 12% of their income, so they’ll retire as millionaires down the track!
Three to four years ago, the median super balances of Aussies aged between 55 and 69 years of age (i.e. the ‘despised’ wealthy baby boomers) ranged from $150,000 and $195,000.
Most baby boomers have low super balances because the system only started in 1992 and the super take from wages was a lot lower than now.
That’s why the property of a lot of Australians was their best bet for a comfortable retirement but no one then could see the super system would one day create millionaire retirees, who, in turn, would find it hard to buy a home because they were losing 12% of their pay to super.
Punishing those with properties but low super balances to help those with no property but with a great super future, really puts the irony of this intergenerational argument of the Albanese Government and their champion fact rearranger, Paul Keating, into context.
Let me repeat: I’m a fan of some of Paul Keating’s better work, including his super system. However, he has got things wrong. His defence of these CGT discount changes is masterful political rhetoric but like a true politician he’s given us a one-eyed analysis.
Who would’ve thought that possible?
