How Capital Gains Tax changes could deliver unexpected benefits for the labour market

The federal government has hinted at reducing the Capital Gains Tax (CGT) discount, as well as modifying or removing negative gearing, as it seeks to increase housing affordability and raise government revenue. Withpotential flow on effects for the labour market, unions and business groups alike are supportive of tax reform, saying it could increase housing affordability by reducing the incentive for investors to engage in the market at the expense of first-home buyers.

A likely scenario is for the government to reduce the CGT deduction from the current 50% to 33%; however, the details of implementation are a key sticking point. For example, there are questions as to whether the policy will be applied retrospectively, or if it will only apply to housing. The federal government is treading carefully as it walks a fine line between engaging in meaningful reform and reducing harm to its political goodwill. The good news for Labor is that it may not have to alter negative gearing policy, as tax experts and economists indicate CGT discount changes would already reduce the effectiveness of that strategy.

While not a primary motivation for such reform, labour market dynamics benefit greatly from improvements to housing affordability. The benefits flow primarily through higher labour mobility and reduced wage pressures, opening avenues for higher productivity. A 2022 publication by the Committee for Economic Development of Australia identifies Australia’s housing market as a major barrier in improving job matching efficiency and labour mobility, both of which are associated with improvements in productivity. When homes are cheaper, people can more affordably relocate to work jobs better suited to them, while also facing reduced financial pressures which then increase wage expectations. Time and political bravery will ultimately determine the extent to which these benefits manifest.

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