Negative gearing propaganda exposed?

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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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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.