While federal Labor deserves credit for putting negative gearing on the table as an election issue, by raising a relatively minor side matter (and proposing piecemeal changes that won’t be phased in until 2017), it has allowed the elephant to remain well and truly in the room. Negative gearing perversely encourages people to make bad investments, but in terms of extreme unfairness, it pales in comparison to the capital gains tax exemption for principal residences.

A report by the Australia Institute released earlier this year suggested that the CGT exemption cost $46 billion per year — that’s more than anything the government spends on anything other than Medicare, defence and education. (The cost to the budget of negative gearing is believed to be around $12 billion annually.)

Given the rabid response of the Property Council, banks and real estate agents to Labor’s timid proposed changes to negative gearing, one expects that the rent-seeking zombies would explode at the prospect of their precious principal residence CGT exemption being removed. Of course, instead of being some sort of critical protection of the great Australian dream, in reality, the principal residence CGT is far more simple — and nefarious. In short, it is the greatest inter-generational theft we have ever seen in this country.

While housing has some sort of romantic element that causes Australians to lose all sense of return on investment, in reality, housing is an asset in the same sense as cash, gold, shares or bonds. While we live in houses, there’s no requirement that we own the house we live in (home ownership in Germany is only 41%, in Switzerland, one of the richest countries in the world, it’s 38%, in Australia, it’s 70%). If folks want to own their houses, that is certainly their right, but the government shouldn’t facilitate a direct theft from those who don’t want, or more likely can’t afford to buy a house. Moreover, it makes little sense for a tax policy to favour a non-productive asset like established housing instead of giving tax breaks to small business, which creates jobs and satisfies consumer demand.

Like most taxation polices, the beneficiaries of the CGT exemption are largely the wealthiest Australians — 90% of the benefit flows to the top half of income earners. In short, rather than being a policy that helps battlers own when they sell their houses, the CGT exemption is a sop to the rich. Take BRW Rich Lister Brett Blundy, who is selling his Rose Bay mansion for $45 million. Blundy agreed to purchase the property for $32 million three years ago.

If Blundy achieves his asking price, it’s possible his $13 million profit may be tax free. By contrast, the cleaners and gardeners who work for Blundy are forced to pay the full marginal tax rate. It is perhaps unfair to single out Blundy (who has been one of Australia’s best wealth creators for two decades), but the example is indicative of a widespread problem: the older generation, through the CGT exemption and the favorable superannuation tax laws, are inadvertently stealing money from everyone aged under 40. The budget deficit means the government is required to borrow money, and the interest on those borrowings will need to be repaid by younger generations. A major reason for the budget deficit is the tax breaks given to the older generation through the CGT exemption, super tax breaks and negative gearing.

Removing the CGT exemption and negative gearing would most likely lead to a softening in property prices to something near their intrinsic value (which is likely to be around half of their current price, maybe less). Given the likely turmoil this will cause, it’s not something that can happen overnight, but that can be phased in over the next decade. A CGT rate of 10% for properties above $500,000, increasing a few per cent annually would allow a more gradual shift to normality, while acting to counterbalance the negative effects on the budget resulting from our aging population and allowing income taxes to be reduced.

Sadly, tax policy is not about ensuring fairness, but in trying to gain political mileage and garner donations from self-interested rent-seekers like the Property Council and banking lobby.