The largest tax concession in Australia is the capital gains tax (CGT) exemption for the main residence. Last year it cost the budget $46 billion and is predicted to cost the budget $189 billion over the next four years. Each year the cost of the CGT exemption on for the main residence costs the federal budget more than Defence, Education or Medicare.

Modelling commissioned by The Australia Institute from NATSEM shows low income households (those in the bottom 30%) get almost no benefit from this tax break. Almost 90% of the benefit goes to the top half of income earners while the bottom half get only 11%. High income households (those in the top 20%) get more than half of the benefit (55%).

With the government looking for budget savings that do not disproportionately impact low income households, it is appropriate to look at this very large tax concession.

The government could raise revenue in an equitable way by limiting the CGT exemption to houses worth less than $2 million. This would mean that houses worth less than $2 million would still be exempt from CGT while houses worth $2 million or more would be subject to CGT.

Limiting the tax break to houses worth less than $2 million would raise almost $12 billion over 4 years. 56% of the additional tax revenue would come from the top 10% of income earners.

Reducing the concession is likely to have a positive economic impact by reducing distortions in the economy. At present the exemption encourages over capitalisation in main residences since any increase in their value is tax free. This has the effect of pushing up the value of housing and therefore making that housing less affordable. It also reduces investment in other areas.

Capital gain is less productive for the economy than other forms of income. Earning an income from a capital gain does not require the production of something but instead means holding an asset while its value increases. So from an economics perspective this is a less useful form of income.

Restricting the main residence exemption to houses worth less than $2 million would reduce this distortion, raise billions of dollars and do so from high income households.