Dale Boccabella

A major anomaly in the capital gains taxation should be the target of a federal government seeking to increase tax revenue. Discount capital gains tax for individuals is very odd.

A wage earner on income above $37,000 will face a tax rate of 34% on income above that amount. When the income reaches $80,000, every extra dollar is taxed at 38.5%. Yet, the most that is payable on a discount capital gain is 23.25%.

Discount capital gains for an individual means that a person only gets taxed on half of the capital gain they make – only $5,000 of a $10,000 gain would be taxed. The effect is that a person on the top marginal rate of tax (earning income over $180,000) would only pay a rate of 23.25% on a capital gain (50% of the top marginal rate of tax of 46.5%). A person on the tax rate one down from the top marginal rate (income above $80,000 but below $180,000) would only pay a rate of 19.25% on a capital gain (50% of the 38.5% marginal rate band).

Why do we have such anomalies or differential treatment in the tax law? After all, isn’t a buck a buck, and therefore they should all be taxed in a similar way? Yes, a buck is a buck in terms of economic well being, and for accounting purposes, but for tax purposes, not every buck is quite the same.

This begs the question why?

Governments and the Henry Tax Review have come to accept that different taxes may have different effects on taxpayer behaviour, and that as far as possible, tax measures that have a damaging effect on investment and economic growth should be avoided.

Anomalies can therefore arise from this desire to avoid the damaging aspects of a tax measure. Badly designed taxes can have the effect of changing the behavior of taxpayers to the detriment of the economy.

But, fairness is at the top of many peoples’ wishlist when it comes to the design of a tax, and fairness is all about contributions to the public revenue. The ‘Warren Buffett’ type anomaly – whereby the billionaire Warren Buffett faced a lower tax rate on his income than the rate faced by his secretary – should be seen in the light of this tension between minimising damaging taxes and fairness.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business.