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The Albanese government is widely expected to scale back tax breaks for investors in its May budget, under the banner of fighting intergenerational inequity.

Investors, including landlords, only pay tax on 50% of their capital gains on investments held for at least 12 months.

Experts say the concession, alongside rampant negative gearing, has helped fuel soaring home prices, locking many young Australians out of the property market.

Treasury has reportedly modelled cutting the discount to 33%, or returning to the pre-1999 regime where the capital gains were adjusted by inflation.

Just under two weeks out from the 12 May budget, bets have firmed that the Albanese government will opt for the second of these options.

With an eye to lifting housing supply – and to fend off opposition attacks about housing supply – the budget could include more generous tax breaks for investment in new builds.

There could also be changes to negative gearing – where landlords claim rental losses against their taxable income – which could involve limiting the number of negatively geared properties, or abolishing it all together.

What’s the problem with the current system?

The flat 50% capital gains tax (CGT) discount was introduced in 1999 as a way to simplify the system and create an incentive for more productive investment.

Saul Eslake, an independent economist, told a parliamentary committee in February that instead of turning us into a “nation of entrepreneurs and shareholders”, the 1999 change to the regime led to “Australia becoming even more of a nation of speculators than we already were”.

Over the past 25-plus years, the 50% CGT discount, combined with negative gearing rules, has been blamed for supercharging debt-fuelled property speculation and contributing to unaffordable homes.

Experts say the flat discount has proved too generous, and official data shows the vast majority of the tax breaks from the CGT discount are enjoyed by older and wealthier Australians.

The top 10% of income earners receive nearly 90% of the benefit of the CGT.

Chris Richardson, an independent economist, has said that cutting back these benefits would give us “a less biased tax system”.

Ken Henry, a former Treasury boss and an influential voice in the tax reform debate, told the parliamentary committee that wealthy investors have used property investment as a tax-minimisation strategy.

In doing so, they have done a “great injustice” to young Australians who find themselves unable to compete in the property market.

Would it make homes cheaper?

Peter Tulip, the chief economist at the Centre for Independent Studies, has pointed to modelling that suggests removing the capital gains tax altogether would have an “ambiguous” effect on housing affordability.

Experts say making investors pay more tax would make a difference to home prices, but likely not much. Various models estimate abolishing the discount would lower house prices by between 1% and 4%, but could bump up rents by a very small amount as the tax change drags on home building.

On the other hand, research suggests abolishing negative gearing and halving the CGT discount could lift home ownership by three percentage points. This is because investors in theory would be less inclined to put their money in property, meaning owner-occupiers face less competition from would-be landlords.

That by itself would go a long way to reversing years of falling home ownership rates by changing the composition of buyers.

So it’s unclear that a return to the pre-1999 inflation-adjusted CGT will move the dial much on housing affordability.

Chalmers has emphasised that boosting supply of new homes remains the “main game” when it comes to improving affordability, but that the new tax settings should rebalance ownership away from investors and back towards owner-occupiers.

Stephen Smith, a lead partner at Deloitte Access Economics, says “there are sound economic arguments for reducing the CGT discount”.

“While it may be politically easy to portray this as a housing fix, it is really a fairness fix.”

It’s a change that is unlikely to be too controversial. Building industry lobbyists, who have been the loudest critics, have effectively admitted they could live with a return to the pre-1999 CGT discount.

What about the budget impact?

The amount of money raised from a change to the CGT regime hugely depends on whether it applies to existing assets, or only to new investments.

For example, the Grattan Institute has estimated that halving the discount and applying it to all investments could immediately raise $6.5bn a year.

If the new rules are “grandfathered” so that only new investments are affected, the amount of additional tax revenue plunges to a fraction of that.

For example, a tax package that returns the CGT to its pre-1999 settings and gets rid of negative gearing – but where the rules are grandfathered – would raise just $2bn over four years, or about $500m annually on average, according to CBA estimates.

It collects more as the years go by, however, and over a decade the changes raise $25-30bn.

There’s another complication.

Because an inflation-adjusted CGT discount explicitly targets “real” profits from the sale of assets, whether this approach generates more or less revenue than the 50% flat discount depends on the difference between the rate of return and pace of inflation.

For example, if a property is increasing in value by 5% a year, and inflation is half that at a steady 2.5%, then under the pre-1999 CGT rules you get to reduce your capital gains by 50% – the same as under the current rules.

This implies no change to government revenue from a policy shift.

But if the asset value was growing by only 4% a year, you only have to pay tax on 1.5% of the annual capital gains (4% minus 2.5%). In this case, your CGT discount is more than 60% – a bigger benefit than today’s rules, and less tax dollars for the budget.

That said, if experts are right and the 50% discount has been historically too generous, then making the changes retrospective would be expected to generate billions in extra tax revenue.

This is where the fraught question of “grandfathering” comes back in.

Making the changes retrospective would raise more revenue but would be a break from established tradition where tax changes are grandfathered.

The government could decide to phase in the rules. Grattan, for example, recommends that investors get five years to sell their assets under the old rules, and Deloitte reckons they should get three years.

Guardian Australian has been told the most likely option is that the government opts for a hybrid and more complex model.

Under this approach, the capital gains on an existing investment bought after 1999 would be split into two periods for tax purposes: the gains recorded in the years before the change would get a 50% discount on the sale of the asset, while the gains after the rule change would be taxed under the new system.

Chalmers has said any new tax rules would “recognise the decisions that people have taken in the past”.