Economists Back Labor’s Tax Overhaul Despite Design Flaws, Calling It a Step Toward Fairer Investment Rule

Labor’s plan to reshape negative gearing and capital gains tax sparked fierce debate on the opening day of a parliamentary inquiry but several leading independent economists say the proposal, while imperfect, is still an improvement on Australia’s current system.

Progressive groups arrived buoyed by the belief that the reforms would boost generational fairness, while business groups warned the changes would chill investment and destabilise the housing market. Cutting through the noise, a panel of respected economists told the Senate economics committee that linking the capital gains tax discount to inflation is a more principled and equitable approach than the existing flat 50 per cent discount.

Former Productivity Commission chair Michael Brennan, now head of the e61 Institute, said the proposal has “scope for improvement,” particularly the decision to impose a 30 per cent minimum tax on discounted gains. Even so, he argued that inflation indexation is the right foundation for a modern capital gains system and should apply broadly, not just to property.
“If you ask me what an ideal capital gains tax system looks like, it has inflation indexation at its heart,” he said.

Independent economist Saul Eslake also criticised the minimum tax but backed the broader reform, saying it would bring the tax treatment of investment income closer to that of wages.
“Why should people earning a similar amount of income be asked to contribute different proportions simply because they earn it in different ways?” he asked.

From the ANU’s Tax and Transfer Policy Institute, Robert Varela described Australia’s current investment‑income tax settings as “a mess,” arguing the government’s plan is “a step in the right direction.”
“They remove some but not all distortions across investment types, some but not all margins for tax planning, and some but not all incentives for leveraged investment,” he said.

While the inquiry exposed deep divisions across political and industry lines, the message from independent experts was clear: the proposed model isn’t perfect but it is fairer, more coherent and more economically defensible than what Australia has now.

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