The AFR’s Alan Mitchell has entered the fold today calling on Malcolm Turnbull to implement the Henry Tax Review’s negative gearing reform, which he argues would remove property’s tax-privileged investment status, reduce speculative demand into property, and improve overall tax efficiency:
The benchmark should be the reform proposed by the Henry tax review which, with its 40 per cent tax discount for all assets, would deflate the artificial demand for rental housing while increasing the attractiveness of alternative investments.
The aim, to quote the Henry tax report, is to “encourage households to seek the best pre-tax return on their savings and to invest their savings in assets that best suit their circumstances and risk-preferences”…
This “would provide a more consistent tax outcome for income from bank deposits and bonds, shares, and rental properties, and provide a means of adjusting for the effect of inflation”.
Can you image that? Australian savers would be encouraged by the taxation system to invest where it would do themselves and the economy the most good, instead of being channelled lemming-like into the property market!
There is a lot to like about Mitchell’s proposal.
Offering the same treatment for different classes of investments would ensure that savings are channeled towards their best pre-tax return. In turn, there would be less mis-allocation of resources based on tax-effectiveness, namely into real estate.
Take bank deposits, for example. Under current taxation arrangements, individuals with money in the bank are taxed at their full marginal tax rate. In this low interest rate environment, this has meant that returns are very often negative after both inflation and tax.
Accordingly, we have Australian households lining-up to invest into real estate, where tax benefits are large (thanks to negative gearing and the CGT discount), and banks that must instead tap funding offshore because domestic deposits are scarce.
The end result is too much leveraged investment into housing, which has reduced the nation’s productivity at the same time as it has raised financial stability risks.
With Labor proposing bold reforms to both negative gearing and the CGT discount, now is an opportune time for Prime Minister Malcolm Turnbull to take the high rode and announce that the government will enact the Henry Review’s recommendations. Such a policy would be difficult to argue against, it would stymie Labor’s political momentum, and would vastly improve the workings of the tax system, improving the nation’s productivity in the process.
However, it would require Turnbull to break apart from Tony Abbott’s “Dr No” mantle, and overcome his Treasurer’s ties with the Property Council of Australia.
It would also require Malcolm Turnbull to become the man that he was expected to be when he replaced Abbott, not just another Abbott-lite intellectual pygmy that thrives on negative campaigning for short-term political gain.
Basically, it would require Malcolm Turnbull to act like a Prime Minister.
