This paper examines the economic case for the capital gains tax (CGT) discount and concludes that many of the arguments for reducing it are based on persistent myths rather than evidence. 

The CGT discount, introduced in 1999, allows individuals and trusts to pay tax on only half of a capital gain on assets held for more than 12 months. In recent years, the policy has increasingly been criticised as a driver of housing prices, inequality and lost government revenue. However, the research finds these claims are often exaggerated or misleading. It identifies and discusses 10 myths.

Key findings

• Housing should not dominate the CGT debate because residential property accounts for only part of capital gains activity, while many other assets are also affected by the tax.
• Empirical studies suggest that reducing the CGT discount would have only a small effect on housing prices while potentially increasing rents.
• Adjusting the CGT discount would be a blunt and indirect mechanism for influencing house prices, while imposing broader economy-wide costs.
• Some form of concessional treatment for capital gains is economically justified and widely used internationally.