Tax reform doesn’t need to be this difficult. Australia is overtaxed, and we desperately need another round of income tax cuts to lower the cost of living and boost productivity. That should include lower tax rates, higher tax-free threshold, tax bracket indexation, family income splitting, and tax-deductible savings.

The one thing it should not include is higher taxes on capital, yet unfortunately that is the centrepiece of the government’s so-called tax reform.

The federal budget included a range of tax proposals, including a mix of good, bad, and ugly. The workers’ tax offset, simplified deductions, and business loss offsets are good policies … the changes to trusts and negative gearing are bad policies … but the ugliest of their proposals relate to the capital gains tax (CGT).

The debate about the CGT reforms can get confusing because it involves two different factors. The government is both changing the way CGT is taxed and also changing the level of the tax. They were presumably hoping that the change in style would distract people from noticing that taxes were going up.

The structural change is that the government wants to switch from a CGT discount to a system of cost-base indexation. Both are ways to adjust the CGT system to ensure that people aren’t paying tax on asset price rises caused by inflation, with a discount approach being simpler but less accurate, while indexation is less simple but more accurate.

If done correctly, switching to indexation could be a perfectly acceptable change, but the government has not done it correctly. Hidden behind the changing system is a large tax increase. The consequence will be less investment, fewer businesses, stagnant productivity, and lower wages.

If the government is genuinely interested in changing the CGT structure without taking a sledgehammer to the economy, they need to radically rethink their approach, starting with these changes:

1. The miserly and regressive 30 per cent minimum (which only applies to low-income earners) should be removed, so that nobody is paying more than their marginal tax rate.
2. Investments should be indexed by more than just inflation. We have previously suggested indexation of inflation plus 2-3 per cent to compensate for the time value of money. Doing otherwise creates an extra tax on savings, which is the exact opposite of what Australia needs.
3. Apply the indexation approach to all long-term investments (such as savings accounts) to ensure consistency across the tax system.
4. Investors should have the option to reset their cost-base every year, so that the indexation system works properly. To do otherwise would create a situation where some investors will have to pay income tax even when they don’t make any real income.
5. As Paul Keating has repeatedly noted, the top marginal tax rate in Australia is far too high, and should be cut to 40 per cent or lower, for all types of income.
6. Eligibility for the small business and tech startup CGT discounts should be expanded, and the cutoffs should be indexed.

These changes would allow the government to change the style of the CGT system without introducing a large tax hike that strangles productivity. If they cannot bring themselves to make these changes, then they should abandon their CGT policy entirely and stick with the 50 per cent discount.

Tax reform should be about improving productivity. Albanese’s tax reform does the opposite and needs to be stopped.

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