Loony right’s negative gearing defence fails

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By Leith van Onselen

The Australian’s Judith Sloan has written a typically abusive comment aimed at “doomsayers” that have questioned the merits of Australia’s world-beating and poorly targeted tax expenditures.

Of particular note, is Sloan’s defence of negative gearing, where she argues the following:

…the tax codes of all advanced countries contain provisions for negative gearing, although the arrangement goes by different names. It is a fundamental principle that taxpayers should be able to deduct the associated costs incurred in earning income from investments, including the cost of borrowing. And the flip side is capital gains tax, which is also a feature of the tax codes of most advanced countries, New Zealand being an ­exception.

The discussion of negative gearing also ignores that fact that the interest paid by borrowers is income in the hand of lenders who, in turn, pay tax.

To eliminate or scale back negative gearing would amount to double taxation, again something that only those from the loony Left would advocate. And here’s another point: when it comes to negative gearing of property, it is not just the highest income earners who invest in residential property. In fact, many Australians of relatively modest means have investment properties.

Moreover, the net effect of negative gearing is to make market rents for these properties lower than they would be otherwise, something which assists those on low incomes.

To call bullshit on Sloan’s arguments around negative gearing is an understatement.

While it is true that most countries allow taxpayers to deduct the costs incurred in generating income from an asset against the same asset’s income, very few allow such costs to be deducted against non-related income – e.g. wages and salary.

Australia and New Zealand are outliers in this regard. And it is the quarantining of negative gearing – so that interest and other costs related to an asset can only be offset against the same asset’s income – that most opponents of negative gearing (including me) are seeking. It is also what happened when the Hawke Government temporarily ‘abolished’ negative gearing between 1985 and 1987.

The argument that “interest paid by borrowers is income in the hand of lenders who, in turn, pay tax” and that “to eliminate or scale back negative gearing would amount to double taxation” is utterly ridiculous.

Using this logic, the private health insurance rebate is not really a cost to the Budget, since it is income in the hands of health funds that in turn pay tax to the government. Similarly, if childcare was to be made tax deductible (as advocated by some), then it would not pose a cost to the Budget, since childcare centres would earn higher profits, part of which would also be remitted back to the government via company tax (not to mention the extra income taxes paid by childcare workers).

On this point, Sloan also fails to acknowledge that the extra house price inflation caused by negative gearing also means home buyers have to take-out bigger loans and pay more loan interest which, while beneficial to the banks, limits their expenditure elsewhere in the economy, in turn crimping the profits (and tax paid) by other sectors.

As for Sloan’s next statement: “when it comes to negative gearing of property, it is not just the highest income earners who invest in residential property. In fact, many Australians of relatively modest means have investment properties”, she is only half right.

While the majority (70%) of negatively geared investors do indeed earn less than $80,000 per year, the proportion of people holding negatively geared property does also rise with income:

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As do the losses claimed:

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Proving that negative gearing does overwhelmingly benefit higher income earners.

Finally, Sloan’s argument that negative gearing makes the “market rents for these properties lower than they would be otherwise, something which assists those on low incomes” is clearly false and has been debunked many times before.

Reserve Bank of Australia (RBA) data clearly shows that the overwhelming majority of investors – over 90% – buy existing dwellings, not new dwellings, and that the proportion of investors buying new dwellings has fallen spectacularly since negative gearing was re-introduced in September 1987 (see next chart).

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Moreover, the amount of investor funds going into new housing has barely shifted in 25 years:

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Because investors primarily purchase pre-existing dwellings, negative gearing in its current form simply substitutes homes for sale into homes for let. As such, negative gearing has done little to boost the overall supply of housing or improve rental supply or rental affordability.

In the event that negative gearing was once again quarantined and a proportion of investment properties were sold, who does Sloan think they would sell to? That’s right, renters (or other investors). In turn, those renters would be turned into owner-occupiers, thereby reducing the demand for rental properties, leaving the rental supply-demand balance unchanged.

Indeed, when negative gearing losses were last quarantined between June 1985 and September 1987 (shown in red below), there was not material impact on rents, with much higher rental growth recorded in earlier periods and subsequent periods when negative gearing was in place:

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Sloan does slightly better on superannuation when she argues:

By international standards, the marginal tax on savings via superannuation in Australia is in fact very high. In any case, the screws have been significantly tightened on superannuation, with an annual concessional contribution now set at $35,000 per year (for older workers) and a contributions tax set at double the normal rate for high income earners.

It is not clear what these advocates of further reductions in the “outrageously generous tax concessions” have in mind.

If they were to advocate an end to the system of compulsory superannuation, I might find myself agreeing.

While I agree with her that the notion of compulsory super should be re-examined, her other arguments are questionable.

Most Australians believe that a progressive income taxation system is worthwhile on equity grounds. Yet for some crazy reason, our settings around superannuation concessions throws the idea of progressiveness on its head, with the standard 15% flat tax on super concessions penalising those on low incomes and conferring large tax breaks to most people on higher incomes (see next chart).

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Accordingly, those at the lower end of the tax scale – and most likely to be reliant on the Aged Pension – are unnecessarily restricted in their ability to build-up a retirement nest egg, whereas those that are unlikely to ever need the Aged Pension receive giant tax breaks.

Added to the fact that income earned via superannuation is tax free to those aged over 60, and you have a system of superannuation concessions that makes absolutely no sense on either equity or Budget sustainability grounds.

I am surprised that Sloan can defend such glaring anomalies.

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