While the National Accounts that measure production and GDP get mass attention, the Finance and Wealth National Accounts released last week receive much less focus – but they provide important data on wealth and inequality.

This release includes data on household wealth and reveals that the total amount of capital gains earned by households in the 2023-24 financial year exceeded the amount of wages paid to households in that same period.

There is a quaint notion that household wealth derives from hard work and savings from the fruits of that labour. However, the national accounts reveal that household wealth increased by $1,399.7 billion but net household savings accounted for just $9.1 billion or just under 0.7% of the increase in wealth. This equates to $1,390.6bn in capital gains earned in 2023-24 compared with the $1,254.6bn in wages paid.

Importantly most of these capital gains are unrealised – they are paper increases in wealth due to increased value of asset holdings. These gains are untaxed, as Australia only taxes capital gains if they are realised—that is when the assets are sold—and the tax rate varies between zero and half the rate applicable to wage incomes. However, these unrealised gains while untaxed are used as equity in borrowings to generate more wealth – in effect untaxed wealth is being used to generate more wealth that will also be largely untaxed.

And who is earning these capital gains? The most recent taxation statistics give us some insight. People earning more than $1m a year made up just 0.2% of all taxpayers in 2021-22, but they earned 41% of the realised capital gains. All up the richest 9% earned just under 80% of all the capital gains realised in Australia in 2021-22. This accords with the latest Treasury estimate that 80% of the $19bn in taxation foregone in 2023-24 (some $15.5bn) due to the 50% capital gains tax discount went to the richest 10%.

Earlier this year the Australia Institute released a paper examining the worsening inequality of both income and wealth in Australia. It found that the share of Australia’s total wealth held by the richest 200 people nearly tripled during the last two decades – up from the equivalent of 8.4% of GDP to almost a quarter of GDP today. And yet, for the most part, wealth inequality and capital gains are barely discussed. Capital gains are not even included in ABS estimates of household income.

Wealth inequality is driven by capital gains. A failure to fully recognise the significance of those capital gains massively understates the true extent of income inequality.

But worse our current tax system is geared towards increasing this inequality. By offering a 50% tax discount on capital gains earned and not taxing unrealised capital gains it is little wonder that the very wealthy ensure that most of their income is generated through these passive investments rather than wages.

Both capital gains tax reform and wealth taxation will need to be priorities if Australia is to become more equitable and have a more sustainable tax system.