Paul Keating urges Labor to stick with capital gains tax overhaul and avoid exemptions that would hurt economy

Paul Keating has urged Labor to stick to its guns on controversial changes to capital gains tax, warning exempting commercial assets from the changes would further “distort” the economy.

Small business and the start-up sector are fighting the Albanese government over its plans to shift the 50% capital gains tax discount to an inflation-based model, part of a suite of tax reforms announced in this month’s federal budget.

Ahead of Labor introducing legislation for the changes to parliament on Thursday, Australia’s 24th prime minister said settings in place since 1999 had badly hurt the productive economy, as financial resources were diverted to housing, particularly established property.

“This had a major and deleterious impact on investment and with it productivity,” Keating told Guardian Australia on Wednesday.

“The government has done the right thing on housing but it is imperative that the CGT change doesn’t create a new and further distortion to the economy by exempting all other assets, particularly commercial ones.

“The shift in capital taxation under the new arrangements is so marginal that no entrepreneurial initiative is likely to be thwarted by it.”

The architect of major economic reforms in the 1980s and 1990s, Keating said correcting the balance in taxation between capital and labour should “be and remain the over-riding objective of policy, of the new policy.”

The treasurer, Jim Chalmers, has warned changes introduced by the Howard government overcompensated investment in established housing, and under-compensated other kinds of investment.

“We didn’t think it made a lot of sense to replace one big distortion with another kind of distortion,” he said.

But investors and entrepreneurs fiercely oppose the government’s plans, warning they will badly thwart investment and risk taking in the economy.

The legislation will include the CGT changes, changes to negative gearing rules, a $1,000 standard tax deduction and the new $250-per-year tax offset for workers.

Labor wants the legislation passed before parliament’s winter break in July, but the Coalition have pushed back on the timeline insisting the changes don’t start until July 2027 and do not need to be rushed.

A possible deal between the Greens and the Coalition could see Senate inquiries set up on the tax changes, and spending cuts to the National Disability Insurance Scheme.

The shadow treasurer, Tim Wilson, said the Coalition planned to use “maximum leverage” to scrutinise the plans.

“If the government wants to have a conversation around NDIS changes, then they have to actually allow the Australian people to have their say about their tax changes that they didn’t take to the Australian community, which are now punching down on the small businesses of this country.”

The CGT changes – replacing the 50% tax discount on profits with “cost-base indexation”, meaning tax on profits after inflation, and a minimum 30% tax rate – have sparked a social media campaign mocking Prime Minister Anthony Albanese in AI-generated memes.

Small businesses with revenue below $2m will be exempted from the plans and Albanese this week indicated further carve outs were possible.

Investors and business groups want further consultation, with Business Council chief executive Bran Black warning against a rushed process.

Guardian Australia has been told some Labor MPs are angry the budget message has drifted away from intergenerational fairness in the housing market amid the opposition.