Negative gearing propaganda exposed?

By Leith van Onselen

I wrote earlier today how the Property Council and the Real Estate Institute of Australia (REIA) had enlisted ACIL Allen Consulting to write a report arguing the case for retaining negative gearing and the 50% capital gains tax discount.

Now, it has come to my attention that in 2006, Allen Consulting Group called for negative gearing and the CGT discount to be removed in order to “reduce effective marginal tax rates across the income spectrum, but especially at very low income levels”:

In 2005, the Allen Consulting Group was commissioned by the Victorian Government to examine how the income tax system could be remade. That report – Reforming Income Tax: Broader Base, Lower Rates, Simpler System – was co-authored by Jerome Fahrer, our speaker at the Forum. Lower taxes and a flatter structure were at the core of the proposal.

It is one thing, of course to recommend lower taxes. It is potentially quite another to work out where the compensating revenue will be found.

ACG suggests that the tax cuts should be funded by reductions in tax breaks, such as deductions for work-related expenses, capital gains concessions, negative gearing, fringe benefit concessions for vehicles, and others. They estimate that there are around $12 billion in tax breaks that could be removed, so finding $6 billion to fund the proposed reforms should in its view “not be difficult.” According to ACG, these reforms would reduce effective marginal tax rates across the income spectrum, but especially at very low income levels where the interaction of the income tax system and the social security system has particularly bad effects on incentives to participate in the workforce. ACG estimates that these reforms would lead to around 92 000 additional people entering the labour force.

Why was it sensible to remove negative gearing and other tax concessions in 2006, but not now?

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  1. ….because interest rates were a lot higher then, and NGers were claiming more back that the Govt could retain….

  2. The Patrician

    The hired gun shoots itself.
    Well spotted whoever picked that up.
    I wonder if the AFR will publish that little anomaly.

  3. Why was it sensible to remove negative gearing and other tax concessions in 2006, but not now?

    Because as a consulting agency it is eminently sensible to provide feedback that you know the client wants to hear.

    What’s more interesting here (imo) is why the REIA didn’t do their homework before hiring these bozos. You’d think they would avoid going for someone who had previously argued the opposite course. Clearly they’re grasping at straws here.

  4. Client: “Should I centralise or decentralise my organisation?”
    Consultant: “That depends – tell me what you are now.”

  5. outsidetrader

    “Why was it sensible to remove negative gearing and other tax concessions in 2006, but not now?”

    Because in 2006 the Victorian Govt were the clients and now its REIA. While its pretty sad, its also very common. The more shameless example was back during the MRRT debate, when someone (I think it was Access Economics) wrote papers supporting and opposing the MRRT at the same time…

  6. Too much emphasis is put on NG as the cause of our house price boom. The problem is low interest rates and it’s a global phenomenon, which is not about to go away any time soon. I suspect that a large number of investors who use NG are actually losing money if they realised the sale of the IP. So in effect they are subsidising the rental market, instead of the government. People don’t realise that NG is a very risky investment and it only makes sense if the price increases substantially (which is unlikely) or if rents increase and becomes positive geared. A LOT of NG investors are actually losing money in the hope that one day, the investment will provide a return, but we all know that this is not the case. People say that Australia is missing out on the additional tax that NG investors would be paying, but aren’t the banks also paying more tax because of higher profits, so I wouldn’t be surprised if it all balances out… I agree Sydney and Melbourne prices seem very high, but it’s probably not caused by NG. This bubble talk is becoming a hysteria and a lot of young people who could easily afford to buy the first homes are turning against it because they think property prices everywhere will drop through the floor, but the reality is they will probably wait forever and continue to pay rent. The economy is cyclical and what matters is now. So if you can afford now, then it’s affordable. What sensible home buyers should do is buy something that they can easily afford (with a mortgage similar to rent price) and then build up a buffer as quickly as possible to help with any changing conditions in the future. Interest rates will go up and down over the long term, but what are the chances of us seeing 17% rates again in our life time?? More likely mortgage rates remain very low for at least 5 years and then gradually go move up to around 7%-8% instead of current 4%-5%, but this could still be a number of years away and you would have plenty of time to increase your buffer. The worse mistake you can do when buying a home is to over extend yourself financially, so this means buying sensibly with the long term view and forget about profit (if it happens, it’s a bonus). What a lot of people don’t understand either is that if you buy a home within your means, it doesn’t even matter if prices go down and if you eventually sell at a loss in say 5 years and $20K loss, you would still be better off than if you had rented for the whole 5 years. And keep in mind that it’s unusual to sell at a loss after 5 years…

    • The Patrician

      Ok so in 400 words you could establish no good reason to keep NG.
      Moodys found NG adds $44,000 the price of the average dwelling
      Grattan found NG costs us $3-$5bn in revenue forgone per year
      There’s two good reasons to drop it.

      • You can’t really believe everything you hear. Ohh such and such said NG adds 40K to the price of property. The only way to find that out is to remove NG and compare over a long term. Ohhhh such and such said it’s a bubble, so I’ll never buy property (even if I can afford it). There’s far too much noise these days and everything is contradictory… One day it’s good to buy, but the next day is GET OUT NOW… Also, any data can be twisted to prove the RIGHT point, it’s all BS…

    • “The economy is cyclical” and it’s also Structural. The Structure of the property market has and will change over any timeframe. Arguably, it’s doing that now, and not in favour of higher prices. “what are the chances of us seeing 17% rates again” as good a chance as 0% rates were in the USA etc just a handful of years ago! So 17%…possibly and maybe higher. “if you eventually sell at a loss in say 5 years and $20K loss, you would still be better off than if you had rented for the whole 5 years” Maybe. But how about if you’ve lost $350k on a $700k adventure? Renting would look cheap under any scenario I could imagine in that case.

      • that’s why I said borrow within your means. I wouldn’t proclaim a FHB to borrow 700K. Someone who borrows 700K, I would expect to be very wealthy in terms of assets they have or very high income.

      • Janet, that is SOOO right. This is a STRUCTURAL issue.

        Urban land markets are morphing from a condition that lasted for decades, where there was consumer surplus in housing. Like in everything under free markets. You got more and more for lower and lower real cost.

        Now they have reverted to a condition of “extractive economic rent”. You pay the maximum you can possibly stand, for the piss-poorest that regulations will allow the market to supply you. Low density mandates, height restrictions etc are not responsible for problems with housing affordability at all. Ironically the evidence, eg from Boston and Hong Kong, is that the denser you are allowed to build, the bigger the gouge per housing unit, not the smaller. Boston has around 700 people per square km and HK has 66,000; Boston’s median multiple is around 6 and HK’s is around 15.

        If you can convert rural land to urban without choke points, the median multiple will. be. three. Density will depend on what is allowed, but the median multiple will. be. three. Atlanta is also 700 people per square km but this does not make its median multiple go above 3. The densest a free-to-grow city with a median multiple of 3 ever is, I believe to be not much more than 2000 people per square km. Los Angeles was like this for decades, so was Auckland and Toronto. This is probably indicative of the density that comes about when people get to freely choose in a market in which there is consumer surplus. (Los Angeles has NEVER been a typical US LOW density sprawling city, it has been about the same density as German or French or NZ suburbia since WW2).

    • Dude, your post if full of false statements I wouldn’t know where to start..You really should invest a bit more time understanding this..There’s a lot of information both here and on Google, of course unless you’re pushing a certain agenda.. 🙂

    • I know MB encourages informed debate but wtf is this? If this isn’t a piss-take I’ll go he!

  7. arescarti42MEMBER

    The way these industry reports work is you tell the consultant the findings you want, and they do the analysis to support it.

    • What analysis? The thing is full of pretty graphs and conjectures. Should be a big stamp on it.

      “No analysis was conducted in the preparation of this report”