Wry & Dry

Labor shames government with tax initiative

Take a rattle from a baby and W&D (and you) will get wailing.  And just hint at taking a tax-benefit away from a tax-payer and the wailing will be intolerable.

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So, this week W&D was bemused by the first display of serious fiscal cajones (as it were) by either the government or opposition since Howard/ Costello introduced the GST.  And it was the Labor Party that showed the cojones.  And took the initiative.

It proposed to ban the tax benefit of what is called negative-gearing (i.e. claiming a personal tax deduction for investment income losses) on new purchases of investments except new housing and to halve the CGT discount from 50% to 25%. 

Within a nano-second the property interest groups were predicting the end of civilisation as we know it.  Apocalypse now.  Armageddon.  The Housing Industry Association were particularly aggrieved, as their somewhat misleading media releases showed.  And they shouldn't be aggrieved, as Labor's proposal retains the tax benefit for new houses.

And a few politicians (e.g. the one that owns 42 investment properties) with clearly vested interests also took up indignant arms.

Good grief.

Without entering into what can be a very acrimonious debate, W&D wishes to note three of the myths of negative gearing:

Myth #1: negative gearing promotes new housing supply

Nuh.  93% of property lending is for existing housing.  Negative gearing doesn't stimulate housing supply, instead it bids up prices of existing homes, making it more difficult for people to enter the property market.

Myth #2: abolishing negative gearing will hurt lower-income investors

Well, no.  As the proposed changes will be grandfathered, existing investors, regardless of income level, will not be affected.  And in any case, most of the existing tax benefit goes to high income earners.    Observe the statistical sleight-of-hand of the flat-earthers, who say that most people who negatively gear have taxable income of less than $100,000.  True, but that's because they negatively gear.  Furthermore, adjust the data for peoples' income before rental losses: the top 20% of income earners receive almost 50% of the tax benefit.  

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Myth #3: negative gearing keeps rents lower  

The flat-earthers state that rents rose when the Hawke government restricted negative gearing.  Leading economist Saul Eslake demolished this myth years ago: rents did rise rapidly in Perth and somewhat in Sydney, were stable in Melbourne and fell in Adelaide and Brisbane.  In Sydney and Perth population growth and insufficient residential construction, due to high borrowing rates – not the policy change, led to the rent rises.

More general, W&D notes that:

1.  UK, US, Canada, France, Germany, Japan, etc do not allow real estate/ investment losses to offset taxable income.

2.  Current law does not allow taxable income to be reduced for the purposes of calculating: HECS repayments; the Medicare surcharge; the Private Health Insurance Rebate; the Seniors and Pensioners Tax Offset and the Higher Income Superannuation Charge.

But, but, but.  The issue for the government is not the income side of the ledger.  It is the spending.  W&D has little doubt that Labor's tax proposals (i.e. reduced negative gearing, lower CGT concessions; tobacco tax increase and high tax from multinationals) will enhance the government's revenue.  Spending will be locked in on the basis that the income will be as predicted.  But the income will not be as predicted (it never is) and the spending will not be adjusted downward (it never is).  So the deficit will go up.  Government debt will go up.

W&D view?  In all honesty, and at the risk of upsetting a few First Samuel clients, provided existing negative gearing arrangements were grandfathered, W&D would be happy if Labor succeeded in raising these taxes, but used the funds to repay (part of) the government's ballooning debt.