Capital gains tax does not just take a slice of success. It freezes capital in yesterday’s winners and starves the businesses that would become tomorrows – imposing a huge opportunity cost on the economy.
A country’s long-run prosperity depends on its ability to keep and attract entrepreneurs, and to make it rational for people who have already succeeded to back the next wave. That is how wealth compounds: founders build a company, create jobs and export earnings, then recycle capital into new ventures. Employees become millionaires and spend and invest locally. The cycle repeats. Capital gains tax interrupts that cycle at the exact moment it matters most.
Where the capital is—and where it isn’t
Australia’s APRA-registered superannuation funds manage $3.4 trillion of the total $4.8 trillion in superannuation funds. They invest through fund managers. They put next to nothing into Australian-focused venture capital. Those VC funds are already flooded with deals and reject most of them. Unless an opportunity fits a narrow mandate and is among the very best they see, they pass.
High-net-worth individuals are the other obvious source. Most of them made their money in a lane they understand—farming, property, retail—and stay there. They are rarely the natural buyers of early-stage technology or new business models. The people most likely to write those cheques are people who have already made money from new technologies and new models. They understand the risk, the timelines, and the payoffs.
Those investors, however, often sit on mature holdings whose growth has flattened. A new founder approaches offering a far higher expected return. In a world without CGT, the investor would sell the old position and fund the new one. Capital Gains Tax changes the arithmetic.
The lock-in tax
Consider a simplified version of a common situation. An investor bought shares at $100. They are now worth $700. The paper gain is $600. Selling crystallises a tax bill of $300. After tax, the investor has only $400 to redeploy. To make the investor whole—and then some—the new opportunity must offer a dramatically higher risk-adjusted return than the old one. In this case a 75% return is needed just to get the investor back to the before sale value.
Early-stage companies are already high-risk. The extra hurdle is often decisive. Many willing investors therefore stay put. Those who do move often only recycle dividends, not the bulk of their capital. So, significantly less money is available to investment in the new ventures.
The government collects no CGT from the sale that never happens. Entrepreneurs do not get the capital. Businesses that would have been formed are not formed. Jobs that would have been created are not created. Future income tax and company tax that would have been paid never appear.
That is the lock-in effect. It is not a theoretical curiosity. Capital gains taxes give investors a strong incentive to hold appreciated assets even when better uses exist. Capital stays in lower-productivity hands and lower-growth firms. Reallocation, entry, and innovation suffer, as does the economy.
Capital gains taxes discourage the reallocation of capital from less to more productive owners. Repealing them, improves outcomes by letting capital move to the highest-valued uses.
What success looks like
The world’s most valuable companies were founded by a small number of individuals who created enormous value for employees, shareholders, suppliers, and customers. NVIDIA, Apple, Microsoft, Alphabet, Amazon, Tesla, SpaceX and Meta have generated trillions in market value for others, employ millions, have created many thousands of multi-millionaires, generate trillions in export revenues, and provide products that the world values far higher than their sale price.
Australia has its own versions. Canva, started in Sydney, became one of the country’s most valuable technology companies and made its founders among the nation’s wealthiest people while employing thousands and serving a global customer base. Atlassian did the same from a different starting point. Those outcomes did not appear from nowhere. They required patient, risk-tolerant capital at the beginning and at each subsequent stage. When that capital is taxed heavily on the way out of a previous success, less of it is available for the next Canva.
Founder returns are extremely skewed. Most startup founders receive nothing at exit. A thin tail captures almost all the value. Policies that shrink the after-tax payoff of that tail—or that force successful owners to dilute simply to pay tax—change who is willing to start and who is willing to fund. Reducing the expected reward for taking the high risk associated with investing in start-ups and early-stage businesses, reduces the willingness to invest in the next unicorn, the next Canva.
The opportunity cost is the point
The usual defence of CGT is that it is a tax on “the rich” and that the revenue is needed for government to provide the services demanded by the citizens. That framing misses the relevant comparison.
When the tax prevents the sale, revenue is zero. The cost of the lost sale is anything but zero, it is significant. It is the businesses never started, the employees never hired, exports never earned, wealth never created, life-enhancing products never developed, and the income and company tax that never arrives.
Super funds will not fill the gap. Most traditional high-net-worth investors will not fill it either. The scarce resource is experienced, technology-literate capital that is free to move. CGT is a tax on that movement.
To ensure a prosperous future for all Australians, CGT should not apply to that recycling. There should be no CGT on the sale of an asset where the sale proceeds are applied to invest in a new issue.
CGT on the reallocation of capital into new equity issues is an especially expensive way to raise little or no revenue. The cost, which is potentially significant, is paid in businesses that never exist. Prosperity is created through the flow of new businesses. Capital gains tax severely impedes that flow. Prosperity suffers as a result.
Rather than taxing entrepreneurs’ capital gains and thereby discouraging them from putting that money back to work, we should encourage them to reinvest those gains in new businesses. That is how you get economic growth.
Consider a simple example. An entrepreneur starts a company with $100,000 and 10 employees and builds it to a peak value of $10 million with 100 employees. Would you rather that person keep holding the same company, or sell it and put the proceeds into a new venture that grows to $100 million with 1,000 employees? And if that succeeds, would you rather they stop there, or sell and reinvest until they create businesses worth $1 billion with 10,000 employees?
Economically, the answer is clear: you want the entrepreneur to keep going.
Classic Liberals Australia will abolish capital gains taxes and implement policies that will ensure Australia is the most attractive destination for entrepreneurs, the wealth creators.