Jim Chalmers, the Chancellor of the Exchequer, and Tim Wilson, the new Shadow Chancellor of the Exchequer, have both said they are keen to do something about “generational inequality”.

This topic was also featured in both Chalmers’ first lectures in 2013 and Wilson three years later, and he still speaks on the topic frequently.

For the time being, Mr Chalmers is the only person who can do anything about this issue for now, especially since the Treasury’s Seventh Intergenerational Report is due soon and the Budget is due in May.

Will he? He says he will. And if he does, will Tim Wilson support him? Probably not.

But I have news for both. Inequality, especially intergenerational inequality, will only be solved by taxing those who have money, not by cutting taxes on those who don’t.

The latter is much better and is preferred by all politicians, but it doesn’t work.

Governments cannot afford to do much more than that, because even a small amount of it would worsen structural deficits and ultimately exacerbate inequality by cutting government services.

To reduce inequality, we need to expand government services, not cut them.

More broadly, capital and wealth are under-taxed and labor is over-taxed, especially as we enter a new era of AI replacing labor.

Widening disparity

Over the past 50 years, the share of labor in the economy has fallen from 62 percent to 54 percent, and the share of capital (profits) has reversed. The gap is likely to widen further as capital replaces (human) labor in the form of AI and robots, but the extent to which it will occur is unknown.

Apart from the intergenerational inequality it creates, the government is cash-strapped and already has a structural deficit of about $40 billion.

Reducing capital gains tax discounts and limiting negative gearing is a start, but only a start.

A kite bearing these ideas has been floating over Parliament House for weeks, and when asked what the kite was doing there, Chalmers said: “We’re not changing the tax system.”

“As we think about what tax reform comes next, we are guided by the idea of ​​intergenerational equity, especially for working people,” he added in an interview with Monthly.

Tim Wilson, on the other hand, strongly opposes changes to the CGT discount on the grounds that it would increase taxes.

On September 20, 1999, the 14th anniversary of the introduction of the capital gains tax, a 50 percent discount replaced the previous inflation adjustment.

Inflation for the year to September 1999 was 1.8%. The average holding period for investment properties is eight years, so the 50% adjustment was more than three times the previous inflation adjustment.

Even taking into account the average rate of inflation over the subsequent eight years (3.2%), which is also what the Reserve Bank is currently forecasting for the next three years, the new CGT discount in 1999 was, and remains, twice as generous as was needed to offset inflation.

This raises the question of whether capital income should be adjusted in line with consumer price inflation at all.

capital needs to be taxed more

Because personal income tax rates are not adjusted (indexed) for inflation, they sometimes experience bracket creep that is partially offset by “tax cuts.” However, capital income from investments is over-adjusted by about twice the inflation rate.

The result was a clear signal that capital income was prioritized over labor income, which is why house prices began to rise twice as fast as incomes from September 20, 1999, causing the house price crisis 25 years later.

Admittedly, the arithmetic difference between halved CGT discounts and house prices is now less than 2%, but the psychological impact was much stronger in 1999.

The effect was further amplified by the fact that the 50% discount was understood by everyone, even though most people don’t know the past years’ inflation rates and can’t even mentally average them out.

The world has changed, so it is impossible to say now what the psychological impact will be. But whatever it is, it is important in principle to rebalance taxation of capital and away from labor in order to improve intergenerational equity and raise more funds.

Younger generations tend to derive much (all?) of their income from labor, while older generations, especially retirees, derive their income from capital.

The basis for the generational inequality that both Jim Chalmers and Tim Wilson say they want to address is that capital is taxed much less than labor in terms of price increases and corporate profits.

This inequality is further exacerbated by the fact that wage earners have regressed over the past year, with wages rising by 3.4% and prices rising by 3.8%. Meanwhile, the 12-month total return for housing was 13.3%, and the total return for the Australian Stock Exchange 200 Share Index was 14.9%.

This means that owners of capital can earn profits four or five times above inflation, while employees not only get a reversal but also lower taxes.

This cannot be addressed by just giving tax breaks to employers. That is already happening, resulting in structural deficits. Capital should be taxed more.

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Two big holes in the government

Eliminating, or at least halving, the CGT discount is a start, but it is far from enough.

Apart from the emergence of neoliberalism in the 1980s, one reason for the existence of imbalances is that capital has become more mobile with the invention of the internet.

Capital taxation has become a matter of competition between countries seeking to attract it or make it a place for the wealthy to live.

That doesn’t change. This means that capital taxation must focus on immovable capital: minerals in the ground and housing above them, neither of which can be transferred to the Bahamas.

We all know that Australia taxes very little on its mineral resources.

Labor tried to do something about this with the Resource Super Profits Tax in 2010 and the Mineral Resources Lease Tax in 2012, but both were opposed (of course) by the Coalition and the mining industry and were ultimately scrapped.

Perhaps the Union will oppose it again, but like in the case of GST, it will oppose and oppose it and then introduce it once it comes to power.

This brings us to two big holes in Australia’s capital tax system: inheritance and principal residence.

In a way, they bring about the same thing. The perpetuation of inequality is addressed to some extent by mom and dad’s banks, but only for people with wealthy parents.

Australia had an inheritance tax from 1915 to 1975, but then it was abolished and ultimately zeroed out amid a frenzied state scramble to attract wealthy retirees.

It cannot be brought back, but if the goal is to improve “intergenerational inequality,” then it should be brought back.

Alan Kohler is a financial presenter and columnist for ABC News and a contributor to Intelligent Investor.