Just when it looked safe to like the Rudd Government after its brilliant rescue of the Aussie capitalist system with way out and whacky policies such as the stimulus package, the dead heads in the party masquerading as egalitarian tax experts have come up with the idea of hitting homes with a capital gains tax.
The target could be homes sold for $2 million or more and potentially raise $125 million a year in tax. But beware there are a lot of bleeding hearts in the party that want to slug homes with a tax.
I know all of the academic arguments for taxing homes and that it distorts savings so people over-invest in homes, but I still think encouraging people to invest in homes is a great idea because people need to be protected from themselves.
Question of trust
And by the way, the Government often makes decisions to interfere in people's lives because they don’t trust people to do the right thing.
When we register our car, we are forced to take our insurance at the same time because they don’t trust us. We are forced to put nine per cent of our pay into super because they don’t trust us. They make employers take out insurance to cover us at work because they don’t trust us to cover ourselves. They force employers to collect tax and send it to the tax office because they can’t trust us to send in our tax. They even make employers collect the super and send it in because, you guessed it, they can’t trust us to do it ourselves.
The Government has asked Treasury to do some modelling on the subject as a part of the Ken Henry review into the overall tax system.
Academic eggheads say the capital gains tax free status of homes is the single greatest distortion in savings. They say the tax status is the main reason why so much money goes into housing.
In the USA, there is a capital gains tax but it lets the first $296,000 of a home to be capital gains tax free. However, the Yanks can claim their interest as a tax deduction.
Changes to the capital gains tax rules would force people to go into the stock market. That would make financial institutions really happy but it would put lots of Australian's total wealth at risk.
Real estate love affair
I know academics think they can model the real world but Aussies like real estate. Its value does not fluctuate wildly and they like to leave it to their kids.
But more importantly, paying off a home is a disciplined thing and I reckon a lot of young people grow up by facing the responsibility of paying off their home loan. It often happens when a young couple get married and have their first child.
That’s bound to bring on maturity in a rush — a mortgage and a kid.
Having a home gives older people security and they don’t wake up one morning and find its value is chopped in half like their share portfolio. They can borrow against it to help out their family and they sell it and trade back to something smaller to top up their super nest egg in retirement.
And what is really nice about this trusted asset is that it doesn’t slug you with a tax bill if things are tight and you need downsize.
This Government is targeting homes of $2 million but other governments could reduce the threshold where the tax comes in.
Let me draw a picture of the people Labor could hurt by this silly tax idea. A couple of school teachers moved into Paddington or Bondi or St Kilda when they were blighted areas or the domain of battlers. They bought a cheap house and over the years tastefully renovated it and gave up going out a lot to create a nice home for their kids.
Then the world saw these areas as the place where trendies want to live and home prices are forced up. This once lucky couple who sacrificed and built a great house and did this knowing their home was capital gains tax free, now could be slugged unfairly.
Then there are hard working self-employed small business people, who didn’t have super but who might have put their money into their capital gains tax free home on the idea that they would sell it on retirement to use for their super in retirement.
If the Rudd Government tries a tax on homes it will be seen as the thin end of the wedge. Tax experts want a capital gains tax on all homes and so any move into this space by Labor will give Malcolm Turnbull the overdue chance to build on his popularity. Don’t do it Kev!
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