Don’t eat the seed corn, Jim

If Jim Chalmers increases the tax burden on capital gains, it would mark the biggest backflip on a tax pledge since Paul Keating's infamous 'L.A.W. law' income tax cuts.

Keating, desperate to win the 1993 election, legislated tax cuts before polling day – only to repeal them almost immediately after victory. Voters didn't forget. At the 1996 election, they punished him with a landslide loss to John Howard.

Yet this is precisely the kind of betrayal being hinted at now. Journalists are reporting that Labor is considering hiking capital gains tax as part of its upcoming productivity summit. Would 'Gentleman Jim' really be such a bushranger? Perhaps.

For many politicians, breaking promises is as natural as breathing.

But if he and the Prime Minister are looking to history, they should look carefully.

Keating's U-turn did long-term damage to Labor's credibility on economic management. Going after capital gains now might do the same.

Even more concerning is that it's bad policy.

There's a reason capital gains are taxed more lightly than income – or not taxed at all in some countries.

Capital is the seed corn of future prosperity. It funds the investment that leads to higher productivity, which in turn leads to higher real wages and national income. Tax it too heavily, and you discourage people from planting at all.

Investors take risks. When they succeed, they create future income streams – for themselves and for the government, which taxes that income. Penalising success at the point of capital realisation is shortsighted: it delays investment, reduces mobility, and encourages wealth to flow elsewhere.

And there are plenty of 'elsewheres'. Countries like Singapore, Switzerland, and Hong Kong don't tax capital gains at all. Unsurprisingly, they attract capital – and they're wealthier per capita than Australia. That's no coincidence.

There's a deeper theoretical flaw. Taxing capital gains is a form of double taxation.