Submission to the Senate Select Committee 

The Evatt Foundation commends the Senate for setting up this inquiry and inviting public submissions. Intergenerational housing inequities are currently a major stress point in Australian society. The stress is likely to continue growing in the absence of remedial policies, making Australia a yet more deeply divided society and rendering the ideal of a ‘fair go for all’ ever more unachievable.

• During the last half century, the Evatt Foundation has consistently advocated policies to create a more equitable Australia. Its research and advocacy has been aligned with the interests of the labour movement, emphasizing that equity is not just a matter of getting ‘a fair days pay for a fair days work’ but also a broader matter of attaining social justice through economic and social policy. Now, more than ever, is the time to embrace major reform of economic and social policy to get Australia back on track to being a fairer society in which decent and affordable housing is available for all. Housing must be regarded as a human right – a principle that is embedded in the Homes Tasmania Act 2022 – not treated solely as a marketable commodity. Recognition of that right and the redress of the factors that inhibit or violate it is essential. Political economic analysis can help to serve that purpose.

This submission presents strong arguments for reforms that would get to the root of the current problems of housing inequity. It argues that housing reforms alone cannot provide an adequate solution. Rather, there must also be stronger policies to prevent the further growth of overall wealth inequalities and reduce their intergenerational transmission. This is because the intergenerational housing inequalities are partly a consequence of the increasing intra-generational inequalities over time.

Analytically, this submission argues that:

1. Intergenerational housing inequity is the consequence of the interaction between two factors: inequality in the overall distribution of wealth and specific features of housing markets that are distorted by current tax arrangements.
2. Because the intergenerational housing inequalities are directly linked to intra-generational inequality, they cannot be solved by policies of improved housing provision alone.
3. Deeper reforms should focus on fiscal policies, including removing the capital gains tax discount, the effects of negative gearing and, more generally, putting greater focus of taxation of wealth and its inter-generational transfer.

Intergenerational housing inequity as an aspect of social stress

The current cost of living stresses in Australia relate directly to economic inequalities. People living in relative poverty and struggling to make ends meet are hit hard by the rising prices of things they need to buy, including the most basic human need for shelter (‘a roof over your head’). Significant mental stress may be experienced by people on low incomes as they navigate housing insecurity. Concurrently, wealthy people benefit from inflation in the value of things they own, including real estate. Housing rents are the most striking example of this duality. Rapidly rising rents make it very hard for low-income people to cope, while the owners of the rented properties benefit from the higher rental incomes as well as the rising market value of their assets. Similarly, inflation in housing values benefits the already wealthy but at the expense of those who do not own property. It is not surprising that these inequities ‘snowball’ over time: most socio-economic phenomena show the effects of circular and cumulative causation, whereby people in advantaged positions gain cumulative advantage.

The social stresses intensify as economic inequality increases and these have pervasive effects society-wide. The cost-of-living stresses and the ongoing housing crisis are such manifestations, not soluble without tackling the causes of the growing inequality. In this sense, poverty and wealth are the flip sides of each other. Intergenerational housing inequalities are one aspect of this broader set of social stresses in an increasingly unequal society

The Federal Labor government recognized this sort of concern when it modified stage 3 of the program of income tax cuts that the Morrison government had initiated. That modification gave more tax relief to the low and middle-income earners, while trimming back the huge benefits previously promised to the top income recipients. This was a socially responsible and politically astute reform. It was a small step in the right direction, although minor in relation to what is needed need for deeper, progressive fiscal reform. Small tweaks to the income tax rates cannot suffice to redress the growing inequalities in Australian society, of which intergenerational housing inequities are one manifestation.

Housing and wealth inequalities

Seen from a political economic perspective, housing has two principal aspects. One relates directly to its use value – as a form of shelter, personal comfort, and a base for social provisioning and reproduction. The other relates to its exchange value – as a marketable item, a source of capital gains, and a store of personal wealth. The fundamental problem that has become increasingly evident in Australia during recent decades is that the latter has grown in importance relative to the former. Indeed, the increased use of housing for wealth accumulation and capital gains undermines, for many people, the possibility of acquiring a house for its basic use values.

This problem is most evidently pronounced for young people from families that do not own their own home. These people, lacking comparable access to a ‘bank of mum and dad’ for loans to buy housing, are at a notably disadvantage relative to people growing up in substantially wealthier homes. Their expectations of eventually acquiring decent and affordable housing are commonly thwarted. They are caught between a rock and a hard place; paying very high rent or trying to obtain and service a mortgage on a property they are seeking to buy. Sometimes both options are economically unviable and therefore out of reach.

Policies such as first homebuyers’ subsidy schemes do not provide a solution. They may help some people get a little ‘closer to the front of the queue’ for buying houses; but at the expense of others who face yet higher housing prices. Indeed, the subsidies usually exacerbate the inflationary problem because any subsidies paid in this way increase the effective demand for housing and, without any corresponding increase in supply, further fuels house price increases.

The provision of more public and social housing has more reliably beneficial effects. Public provison of subsidised housing in locations where the workforce is currently concentrated would enable access to stable, affordable housing, allowing people to build financial security over time and eventually transition out of subsidised housing when they are able to do so. Regrettably, the availability and eligibility for public housing has tended to become more restricted to people with complex needs, but there is no necessary reason why public provision should be based on that ‘residualised’ model. After the Second World War, a broader approach of public housing provision for working people was adopted by the states, supported by the Commonwealth-State Housing Agreement. That model has renewed relevance in this era when severe housing stress is experienced by a broad swathe of people who cannot afford to rent or buy homes at currently inflated market prices.

Reducing wealth Inequalities

Deeper and more enduring reforms will need to focus on factors making housing so expensive. These are the factors associated with the use of housing as an asset for capital gains and ever greater accumulations of private wealth. This emphasis on exchange value rather than use value in housing markets is exacerbated by current policies such as negative gearing and the discounted rate of capital gains tax that currently applies. The effect is to create cumulative advantages for a minority within the society, while making life more difficult for the majority, particularly those seeking to access affordable housing.

Wealth accumulation results from increasing asset ownership, within which housing assets are the single largest component. Wealth in this sense is quite different from income: it comprises a stock of assets, whereas income is a flow that people receive, primarily as wages or sometimes as government income support. Of course, assets commonly yield extra income flows for the owners, including from rents. A big flow of incomes like these can enable the fortunate recipient to purchase yet more assets. So, there is a two-way and cumulative connection between incomes and wealth.

Inequality of wealth is nearly always much greater than inequality of incomes.  This is evident in Australia from looking at the official Bureau of Statistics (ABS) data that adjusts raw household income figures to take account of the differences of household size and composition. This shows that, a couple of years ago, the 20% of households with the highest incomes had incomes averaging 5.3 times higher than the poorest 20% of households. For wealth, according to other ABS data for the same time, the top 20% of households had 154 times more than the bottom 20%. Clearly, while the distribution of incomes between households is markedly uneven, the distribution of wealth is very, very much more unequal.

Regrettably, most discussion of inequality in mainstream media and politics ignores capital gains and their interaction with wealth, even though capital gains have been the major factor driving huge increases in wealth for the rich. Redress of this situation is necessary if the tax system is to become fit for purpose in dealing with the current economic realities. The interaction between growing inequality and the housing crisis is particularly important because so much wealth in Australia is held in the form of land and residential properties.

Recognising this interconnection between wealth accumulation and housing provision, one important reform must focus on the negative gearing arrangements in the current tax system that encourage holding wealth in the form of real estate. The negative gearing arrangements need to be radically changed to reduce the bias caused by tax-favoured treatment enjoyed by ‘investors’ at the expense of people who do not already own housing.

Of even greater significance is capital gains tax reform The most obvious priority here is to eliminate the capital gains tax discount that was introduced by the Howard government. It has distorted the investment incentives by making housing assets sought after so vigorously by people seeking to hold their wealth in forms that are tax-favoured. Capital gains are currently running at almost half of other sources of household income; and they are on track to become even more influential than wages in shaping ‘who gets what’ in Australian society. Better public understanding of what these processes should contribute to getting capital gains and wealth tax reform a more central place in considering how our tax system can be made more equitable and sustainable.

Thrifty households increase the total wealth by saving part of their incomes but, in practice, the overall impact of this on total wealth in Australia is now tiny. This is documented by research undertaken by Frank Stilwell and David Richardson of The Australia Institute (published in an article titled ‘Tax Reform’, appearing in The Journal of Australian Political Economy, No. 92, Summer 2024). Using ABS data, it is shown that, during the 10 years to March 2023, there was no significant increase in household savings out of conventionally defined income. By contrast, capital gains added, on average, an additional 42.9 per cent to Australian household incomes. Because most households get very little or no income through this channel, it follows that the wealthiest households must be receiving prodigious amounts.

Again, the ABS data enables us to see the connection with inequality. Over the same time period, capital gains boosted the income of the bottom 20% of households by 4.4; but boosted the incomes of the top 20% by a massive 144 per cent. Looking over a longer period of the last 34 years (from September 1989 to March 2023), the same data source shows that wealth increased by a compound 7.3 per cent per annum, compared with household income which increased by 5.4 per cent per annum. Over that period, inflation as measured by CPI increased at an annual average rate of 2.7 per cent.

What would happen if these trends were to continue? Extrapolating over the next 40 years, as the government does in its periodic ‘intergenerational reports’, the ratio of total wealth to total income (as in GDP data used in the national accounts) would increase from 7.5 times to 15.6 by the 2060s. In other words, the increase in privately held wealth will be more than twice the increase in national income. This spectacular increase in the ratio of wealth to income would effectively eradicate any semblance of equality of opportunity from Australian society. The wealth and power of the very rich – ‘the 1%’ economic elite – would become ever larger and the inter-generational transfer of wealth even stronger in shaping economic and social inequalities. The possibility of becoming homeowners would become even more out of reach for people on low and middling incomes.

On these same extrapolated calculations, the total volume of capital gains will have grown to be 1.1 times household income, as conventionally measured. That is, on average, the huge capital gains would be more than doubling incomes, as conventionally measured. But most households would be getting little or none of these capital gains, because the bulk of the capital gains will be going to those with large property and financial asset holdings. Thus, the effect of the projected capital gains would be to make the distributions of both income and wealth cumulatively more unequal, even more so if the capital gains continue to incur little or no tax.

Some of the broader societal implications of these processes were explored by Thomas Piketty in his widely cited book, Capital in the Twenty-First Century. This showed that, if the increase in a society’s wealth exceeds the growth in its national income, the wealth becomes more concentrated; and family dynasties loom increasingly large relative to the size of the economy. That is already happening now in Australia, undermining any residual claims to egalitarianism and a ‘fair go’ for all. The current housing stresses are among the many manifestations of this process.

Intergenerational inequity

To reduce inequities, there must be reduction in both intra-generational inequality and its transmission across generations.

The former may be achieved through capital gains tax and wealth tax reform. The current CGT discount should be removed. Concurrently, an annual tax on wealth could be considered. Presently in Australia, there are wealth taxes but only on limited forms of assets: local government rates and the land taxes levied by State governments are cases in point. A more general wealth tax could be levied by the Commonwealth on households owning assets whose combined value exceeds a threshold of say, $3.5 million, indexed annually for inflation. Levied annually at a rate of no more than 2 per cent, it would generate considerable revenue but only affect about one in twenty Australian households. Arrangements would need to be made to cater for the small number of people who are ‘asset rich but income poor’; for example, by allowing deferral of the wealth tax liability until the ownership of the assets is eventually transferred. But, subject to that caveat being adequately addressed, the tax would be potent, efficient and equitable.

The revenue generated by those tax reforms could be used either wholly or in part for provision of more public and social housing. That could substantially increase the supply of housing beyond the currently modest targets and would enable lower income groups to more readily access decent and affordable accommodation.

Taxing intergenerational wealth transfers also warrants consideration, as a means of stopping housing and other social inequites increasing over time and across generations. This would mean the introduction of tax on inherited wealth, sometimes called estate taxes or death duties. As a necessary corollary, large gifts made earlier in life by wealthy people would also be taxed: otherwise, that would be an obvious means of tax avoidance. Any such forms of taxation been conspicuously absent in Australia for half a century (roughly, the period during which inequalities have been increasing). Many nations have wealth transfer taxes of this sort; and Australia had various State and Federal estate taxes before the Commonwealth Fraser government and the Queensland government under Premier Joh Bjelke-Petersen initiated their dismantling in the late 1970s.

Notwithstanding the predictable ‘shock, horror’ responses to any proposed reintroduction of taxing wealth transfers, there are strong socio-economic and ethical reasons for doing so. Having inheritance taxation would help to create a more level playing field inter-generationally. It would have no disincentive effects on work and productivity. It would take wealth from those who no longer need it. It would reduce the windfall gains of unearned income going to recipients (often too late in their lives to address any significant personal needs). It would also substantially reduce the inter-generational transmission of inequality, including the differential impact of the current housing crisis among young people according to whether they can access a ‘bank of mum and dad’. In other words, it is tax reform that ‘ticks all the boxes’ for those believing in the pursuit of a meritocratic society in which there is greater equality of opportunity, including opportunity for affordable home ownership.

Pursuing the necessary reform agenda

Of course, a massive campaign to depict any such reform initiatives as ‘unfair’, ‘economically damaging’, even ‘un-Australian’, could be expected.  Political courage is therefore necessary, whatever the soundness of the economic and ethical arguments. This is especially so for politicians who may be fearful of the disinformation and scare campaigns that enormously wealthy backers would certainly fund if reforms like these were proposed. But entering this politicised territory is necessary unless, as a society, we are to passively accept the ongoing slide into ever greater inequality, a deeper generational divide, and all its attendant adverse social, economic, and environmental consequences, including an ever-deepening housing crisis.

A large and growing volume of social science research shows the nature and extent of these adverse effects that would occur if no progressive reform is taken. Countries with the highest inequality tend to have worse macroeconomic performance than more egalitarian societies; they create bigger ecological footprints and disproportionately large climate change impacts; and they experience more intense social problems, ranging from poorer physical and mental health to more violence and prison incarceration. Moreover, the international evidence indicates a generally negative correlation between economic inequality and people’s self-reported well-being and happiness. This international evidence, coming from diverse agencies and social scientists’ research is cited in the book The Political Economy of Inequality by Frank Stilwell (published in 2019 by Polity Press, Cambridge, UK). Evidently, greater inequality produces less contented and less cohesive societies.

In summary:

1. Remedial action should aim to reduce within-generation inequalities as well as between-generation inequalities because the former fuels the latter.
2. Remedial action must include tax reforms relating to capital gains tax and negative gearing that currently distort housing markets in favour of high wealth individuals.
3. Remedial action also needs the current tax arrangements to be broadened to include taxation of accumulated wealth and taxation of inherited wealth.
4. While it takes political courage to make reforms like these that challenge vested interests, failure to do so will result in Australia becoming a yet more deeply inequitable and divided society.

Sent by Frank Stilwell, President of the Evatt Foundation and Professor Emeritus in Political Economy at the University of Sydney