Four charts show Labor’s budget is not just about the generation gap, but the wealth gap

Nobody asks economists for political advice, for good reason.

But when Labor started hinting that it was going to revisit changes to negative gearing and capital gains, and sell it as a housing policy for young people, the boffins and wonks were scratching their heads.

Sure, there was a pretty obvious link between the tax rules and the housing market, which had become the dominant economic concern for young voters. But there was one problem: the lack of evidence that tweaking taxes would do anything much to fix it.

Rein in negative gearing and the capital gains tax discount, and you might depress house prices a little and create more home owners. But the shift would be pretty modest and, meanwhile, you would see fewer homes built and slightly higher rents.

Hardly much bang for your buck, given how much political risk you would be taking, especially if you grandfathered changes to keep the past in the past, as the economists assumed, correctly, that the government would choose to do.

So how do you sell negative gearing as a housing policy, rather than a policy about taxing “the top end of town”, as it was when Labor pursued the changes in 2019?

The answer: you do both. Maybe the biggest surprise of this budget wasn’t what the changes were, but how they were argued. In addition to an intergenerational housing pitch, Labor is also preparing to make a full-throated argument that “the 1 per cent” should pay more.

Or as Bill Shorten put it in a well-timed media appearance: “Why is it that a plumber, a nurse, a journalist, a lawyer, a teacher, a doctor pay higher rates of tax when they go to work every day than someone who just sits on a pile of assets?”

Treasury versus the ‘1 per cent’

If you think talk of “the 1 per cent” sounds like something too left of field for the typically dry, bureaucratic language of federal budgets, you’re in for a surprise.

Canvassing the changes not just to negative gearing and capital gains, but also discretionary trusts, the budget papers declare: “The cumulative tax benefits of these arrangements have overwhelmingly flowed to those with very high lifetime incomes.”

Reinforcing the point is a graph for the ages, showing just how overwhelmingly. That skyscraper at the end, next to a bunch of low-rise buildings? That’s the 1 per cent, embossed in the budget books.

There has, until now, been a lot of difficulty in identifying exactly to what extent these tax policies “favour the wealthy”, as it is so often said that they do. Most of the measures we have are based on yearly income, which, for many reasons, can give a misleading picture.

But this is a picture of lifetime income, built using the intricately detailed data on the tax people pay over successive years that only Treasury and the ATO can see. And it shows that the top 1 per cent alone account for 28 per cent of the benefit.

Making any case on the basis of wealth has been a tough sell for Labor in the recent past, and more than a few party hard-heads felt that the “top end of town” rhetoric from the 2019 election was rhetoric the party should veer away from.

You get out more than you put in

Another component of the government’s argument is that negative gearing and the capital gains tax have not only made property lightly taxed, but have actually allowed some people to pay less tax overall than if they had never bought a property.

This chart, which again uses data the public generally cannot see, looks at negatively geared properties that were sold in 2022-23 (the last full year of data). Only those who made an overall profit were included.

And one in three ended up paying negative tax, that is, zero tax over the life of their investment, plus less tax on other income, totally unrelated to the property.

Blessed are the wage earners

Those are Labor’s “haves”. Their “have-nots” are the wage earners.

One of the major themes of this budget was about taxes on so-called “passive” investments — assets like properties, which have grown and grown in value over the past 25 years — and those who make “active” income.

That group includes wage and salary earners and business owners, both of whom received some tax relief in parts of this budget. Businesses were given a reward for “risk-taking”, with a particular emphasis on startups.

And wage earners received the Working Australians Tax Offset (WATO), an idea without precedent in Australia’s tax system, which applies only to wage and salary income, not to investment income.