FTSE Mondo Visione Exchanges Index:
Australia short of CGT volunteers, says ASX
Date 19/07/1999
The Australian Stock Exchange ("ASX") has released a study on the economic gains from reform of Capital Gains Tax in Australia. The study was undertaken by Mr Alan Reynolds, Senior Fellow and Director of Economic Research at the highly respected US-based Hudson Institute.
The US experience suggests that there is little risk that reducing Australia's capital gains tax to 30 per cent could lose one dollar of revenue. CGT is largely a voluntary tax, and Australia is short of volunteers. High tax rates encourage people to hold rather than realise capital gains. Empirical work in the U.S. indicates that lower capital gains tax rates unlock capital gains and increase the volume of gains realised and taxed.
A reduction of the maximum rate is considered to be the best way of achieving reform, although equity objectives can be important to consideration of the means of reducing rates. A "tapered" rate (where the tax rate is gradually reduced for longer asset holding periods) would add to the already powerful incentive to defer CGT, thus aggravating the lock-in effect.
Mr Reynolds argues that there is no reason to give up such desirable features as indexation in exchange for capping the CGT, because there is no evidence that a 30 per cent tax on realised gains would yield less revenue than the current rates of 43-47 per cent on unrealised gains.
Lower capital gains taxes for individuals have powerful economic effects by encouraging entrepreneurship in Australia. This impact is another factor behind Australia's comparatively low CGT revenue from individuals. The study also assesses the ramifications of CGT for savings and economic growth.
Fears of increased tax avoidance from a rate differential between capital gains and other income for individuals are not borne out by the US evidence.
The study's findings augments the material ASX has already submitted to the Federal Government's Review of Business Taxation, with a view to expanding public and policy debate about the impact of capital gains tax (CGT).
