Australia Institute demolishes negative gearing lies

By Leith van Onselen

Following on from my post this morning, The Australia Institute (TAI) has now released its full report examining the distribution of the $7.7 billion of negative gearing and capital gains tax (CGT) concessions amongst Australians, and found that the top 10% of income earners derive more than half of the tax benefits from these schemes:

Modelling from NATSEM featured in a new report from The Australia Institute, commissioned by GetUp, reveals that more than half (55%) of the benefit of capital gains discount and negative gearing goes to the top 10% of income earners.

Australia is one of only three OECD countries with this type of negative gearing regime. Working together with the capital gains tax discount, Australian taxpayers are being hit for $7.7 billion, which is going overwhelmingly to the wealthy, and is driving families out of the housing market.

Top Gears: How negative gearing and the capital gains tax discount benefit the top 10 per cent and drive up house prices, commissioned by GetUp, showed that one third (34%) of the benefits of negative gearing were captured by the top 10%, while a staggering three quarters (73%) of capital gains discount went to the top 10%.

ScreenHunter_7244 Apr. 28 13.45
ScreenHunter_7245 Apr. 28 13.45

“Negative gearing reduces tax revenue by $3.7 billion and the capital gains discount by $4 billion. That’s lost revenue which some politicians would rather collect when people buy fresh food at the supermarket. A far smarter move would be to phase out these taxes,” TAI Senior Economist, Matt Grudnoff said.

“Compounding this is the distortions it’s having on the housing market, pitting families looking to buy a house to live in against investors armed with generous tax breaks.”

“The majority of the lost revenue accrues to high income households, with 56 per cent going to the top 10 per cent of income households and 67 per cent going to the top 20 per cent.

“By comparison relatively little flows to low income households with just four per cent going to the bottom 20 per cent of households. The bottom half of Australian households only get 13 per cent.

“The claim that ‘Middle Australia’ is the principle beneficiary of negative gearing is simply not borne out by the evidence. This policy is driving greater inequality in the Australian housing market and, in turn, society…

“Negative gearing gives the wealthy an extra player on the property market pitch while middle income Australians have to play with a disadvantage. Changing negative gearing will level the game out for all Australians while giving our budget a revenue raiser rather than a wasteful handouts to support losing investments,” Connelly said.

The great big lies around negative gearing, perpetuated by both the property lobby and the Coalition, are finally being exposed for what they are: an egregious regime of entitlement aimed squarely at feathering the nest of Australia’s property rentiers.

[email protected]

Comments

  1. moderate mouse

    Well done to both TAI and GetUp! So clearly this is policy by the rich, for the rich. End this crap now.

  2. Go LvO!

    They are flat footed and ‘in the corner’ just trying to hold on ’till the next bell rings. Stay with the ‘game plan’- punishing ‘body blows’ where you ( and the judges and crowd) can hear their gasps. Eventually, the pain in the ribs becomes too much to bear and the arms drop to stop the agony; with resignation and a boxer’s understanding and acceptance that you’ll now go ‘upstairs’ to find the light switch.

  3. I will constantly point out that IF there was elastic housing supply, as in the cities in the USA that have maintained median multiple house prices at “3”, then negative gearing would indeed have all the benefits claimed for it and not the toxic effects.

    The problem is that a lot of policy assumptions have been carried over from the era where town planners did not create a land rent racket.

    Numerous policies have totally different effects under different elasticities of supply of sites for urban growth. In the stable-price, elastic cities of current USA and Australia past: low interest rates would merely stimulate house building and home ownership; subsidies would stimulate house building and home ownership; immigration and population growth period, would lead to economies of scale in increased housing supply; upzoning and building “up” would merely allow smaller, cheaper units of housing to be provided (instead of site rents rising to reflect the racket gouge of more households per site); and negative gearing would in the long term ensure a healthy supply of affordable rental housing.

    Heck, in Germany they don’t just have NG, they have outright subsidies to landlords, but this does not push house prices up. It is all a question of the right mix. I respect MB but I dislike their habitual lack of discrimination regarding NG’s potential benefits in a “beneficial total package” housing policy.

    • [email protected]!! GetUp! suppressed the negative gearing debate a few years ago.. even though it was among the top ten suggestions by votes on their website.

      http://www.debtdeflation.com/blogs/2011/03/29/getup-proposed-campaign-against-negative-gearing/

      http://www.abc.net.au/news/2011-03-31/the-homebuyer-strikes-back/2635986

      GetUp’s deputy national director Sam McLean says the organisation does not currently have any plans to campaign for the buyers’ strike or against negative gearing.

      “We’re looking into the suggestions – but they are some fairly complex economic issues so we’ll need to spend some time doing research,” he said.

      “We don’t have any intention to run a campaign on the issue in the immediate future.”

      When asked whether GetUp may steer clear of a campaign on negative gearing to avoid upsetting any investment property owners who donate, Mr McLean replied that particular issue had not crossed his mind.

      Now they are jumping in front of the mob and calling it their parade !!

    • The report doesn’t seem to say (well not that I can find) how the CGT discount was distributed in fig 2.

  4. CIS also released a paper today covering negative gearing and other tax concessions, conclusion

    “The conclusion for policy is that unless the design of the tax system is changed so rental income becomes concessionally taxed, so-called ‘negative gearing’ should be left as it is. If rent income were to be discounted or subject to a low rate of tax — presumably as part of a broader reform of taxes on saving and investment —there would be a case for curtailing deductibility of relevant expenses.”

    When you’ve finished the TAI light read, move on to this more meaty report

    http://www.cis.org.au/images/stories/research-reports/rr2.pdf

    • NATSEMS data (unqualified and not available on their web site) is difficult to reconcile with this ATO fact “Tax Office statistics show that around 70 per cent of individuals who negatively gear have a taxable income of $80,000 or less”. People on the top marginal rate logically get a larger deduction, which would explain the $ value of the tax deduction being higher, but that’s because they pay more tax in the first place (they also get a larger deduction for donations…). The inclusion of the property price graph in the TAI report is revealing; NG applied right through the graph period yet the inference is that the recent lift in prices is because of NG. I’d grade the report a 5 out of 10 as a first year business degree assignment. Surely there is better information around than this to mount an argument.

      • Typical TAI grade I’d suggest.

        “It is a capital mistake to theorise before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts”. Sherlock Holmes!

        There’s a lot of that about these days…

      • The inclusion of the property price graph in the TAI report is revealing; NG applied right through the graph period yet the inference is that the recent lift in prices is because of NG.

        Where is the implication?

      • @flyingfox “where is the implication?”

        On page 1: “Compounding this is the distortions it’s having on the housing market, pitting families
        looking to buy a house to live in against investors armed with generous tax breaks.” (see
        figure 3 below)

      • @flyingfox “is having does not imply never had before”. I can’t agree. If people were happy with house prices in the 90s and negative gearing was in place then, how could NG now be held out as the cause of high house prices – what has changed?

      • I can’t agree. If people were happy with house prices in the 90s and negative gearing was in place then, how could NG now be held out as the cause of high house prices – what has changed?

        Because it is the interplay between NG and the CGT discount that is the problem. This is clearly evidenced by both sets of reports. Basically it allows people to reduce their tax on income now for “hopefully” capital gains in the future which is taxed much more preferentially.

        If you are on the 45% bracket and you can convert all loses to CG, you stand to benefit by 24.5%! NG for the middle and low income earners is pointless anyway…just those people are too dumb to realise.

      • @flyingfox “it is the interplay between NG and the CGT discount that is the problem”

        The capital gains tax discount was there in the 1990s as well, but in a different form. We have never had an “undiscounted” CGT!

        “If you are on the 45% bracket and you can convert all loses to CG, you stand to benefit by 24.5”
        That’s not really correct in real terms. Losses are incurred from day one and generally are removed through rent increases over time. Anyone that thinks that an investor would rather have a negatively geared property as opposed to a break-even or positively geared one doesn’t understand the process. A loss is a loss, whether there is a tax refund or not, the refund just reduces the loss. So if a property is held for 10 years, the after tax losses incurred in say the first three or four years could have been invested in shares for example. The CGT 50% discount is a proxy for the adjustment of nominal capital gains to real capital gains. On a related point, in the USA, owner occupier mortgages are tax deductible and are CGT free, so why are their house prices lower than ours?

        .

  5. and yet the unrepentant swill that constitute the slop of political refuse in parliament will continue to obfuscate and lie and divert and stall because they all feed at the trough of excess and greed.

    • mine-otour in a china shop

      Commies or right wingers – who knows – but like most things in the glorious Australian policy research centres / lobbying arena, the pork crackling does smell good….

  6. The politicians are part of that 10% who negatively geared… and the same lot who wants NO changes to it.
    Corrupt is corrupt.

    Sadly, you need a new party that has no vested interest in order to get the wheels turning… that or protest after protest.

    • Sadly, I have resigned myself to accepting that the only way political change can happen will be after a catastrophic downturn, and Australia has plenty of ways to keep pushing this housing turd up the hill.

  7. The figure for CGT is that residential housing only CGT or all CGT? Obviously, the wealthier you are the more you are likely to have money in the share market, or commercial property, not in crappy residential housing. Thus your profits would be higher and the CGT discounts greater. Most truly wealthy people i know have their money in the share market, or in businesses; residential property investing is really for those who still have to work for a living, and therefore arent that rich at all. CGT discounts derived from the share market or commercial property obviously has nothing to do with the price of family homes.

  8. @Stictches

    The capital gains tax discount was there in the 1990s as well, but in a different form.

    yes. Related to CPI and not tax bracket.

    . Anyone that thinks that an investor would rather have a negatively geared property as opposed to a break-even or positively geared one doesn’t understand the process.

    I would consider myself and the extended family investors, but mainly in commercial RE. None of us will touch oz real estate with a 10 foot pole. Try explaining this to your average “investor” and you get blank stares. The understanding is severely lacking.

    So if a property is held for 10 years, the after tax losses incurred in say the first three or four years could have been invested in shares for example.

    yeap….

    The CGT 50% discount is a proxy for the adjustment of nominal capital gains to real capital gains.

    A very bad one it serves to reduce the progressive nature of the tax system. Adjustments should be made to CPI.

    On a related point, in the USA, owner occupier mortgages are tax deductible and are CGT free, so why are their house prices lower than ours?

    Well for starters, the playing field is level…investors are not getting tax breaks that OO are not. Ofccourse their supply side policies are better in many cases. Not sure about lending.

    • the USA has a wonderful thing called the Alternative Minimum Tax (AMT). If you take too many deductions they don’t count and you pay the AMT (that is, your ‘deductions’ aren’t really always deductions). I lived in NYC and owned a co-op over there. My mortgage interest pushed me into the AMT 4 years out of 5.

    • I think by definition negatively geared residential property investors are “battlers” – otherwise known as people with no money. If you had money, you would not be buying residential property when you could buy a commercial property on an 8% yield, 5 year rolling leases, tenant pays all outgoings, CPI rent increases, and regular market rent reviews. Or you could buy bank shares with a 6% yield, no outgoings, and huge bull market capital gains.

      And I think people need to consider the actual $ impact of abolishing negative gearing. Not getting $3k back a year on your $10k loss has far greater impact on someone who earns $50k than it will on someone who earns $150k. Perhaps the Govt doesnt want to remove $7b a year from consumer spending, considering thats all thats really keeping Australia afloat at the moment.

      • @kiwikaryn

        But these require you to have a lot of cash to invest. Where else can you get 100% leverage but RE?

  9. I don’t know what all the fuss is about other than envy politics. I can recall the days when I purchased property with negative gearing and no capital gains tax. There was no talk then of abolishing negative gearing or introducing a capital gains tax. High real estate prices must be a function of something other than the tax system.

  10. All good stuff and really no news to us who bother to take an interest. To MSM feeding the millions, it’s a whole other story and not this one. Keep plugging away…