Daley responds:
As our report documents, we could find no developed country save for New Zealand that allows taxpayers to deduct the interest costs of investment from their wage and salary income.
Turnbull argued that:
The paper argues that negative gearing and the CGT discount create significant distortions in the housing market, but then directly contradicts this when it says that changing them will have little impact. Really? How can changing the policies that Mr Daley says are supposed to create such huge distortions have no impact?
Daley responds:
The explanation is simple: a new tax regime will significantly affect on the mix of investment, but have less impact on the total.
Tax changes would lead to more home ownership, more investment in assets other than property, less investor leverage, and increased tax collections of about $5 billion a year.
Turnbull argued that:
The paper argues that negative gearing benefits wealthier taxpayers. However, in countries which have adopted the ‘quarantining’ approach, the result has been to drive middle and low income earners out of the investment market, as they cannot afford to carry the loss-making periods when costs are high relative to rentals. In contrast, under both Daley’s proposal and Labor’s, wealthy Australians would continue to be able to deduct net rental losses from their other investment and property income. How can a change which would actually make the tax system more advantageous to those on higher incomes be fair? How will it improve wealth inequality when it will make it more difficult for those on lower incomes to build up wealth?
Daley responds:
Although investors with only one asset will not be able to offset their losses against gains on other assets, overall the reforms will affect high incomes earners far more.
Turnbull argued that:
The paper ignores the fact that reducing the CGT discount to 25 per cent would give Australia the second highest CGT rate among comparable countries. While the paper claims this too would have no harmful impacts, that assertion is directly contrary to the evidence, which it systematically ignores.
Daley responds:
We don’t know what evidence he has in mind. But a substantial body of literature, including an OECD report, finds that tax rates have little impact on how much people on high incomes invest.
Even the government’s own Re:think paper on tax reform says that while “low-income individuals may respond to tax incentives with new saving, high-income individuals are more likely to divert savings to more tax-preferred savings”. It concludes that, “although taxes may affect the allocation of savings, they are unlikely to affect significantly the overall level of investment in the economy”.
Turnbull argued that:
The paper also ignores the fact that under reasonable assumptions, if the CGT discount was reduced to 25 per cent, the effective tax rate on real capital gains would under reasonable assumptions be close to 70 per cent. As a result, the paper dismisses, with little analysis, the important point that high rates of capital gains discourage entrepreneurial investment, whose returns generally come in the form of capital gains.
Daley responds:
This is an issue that our report works through in detail, and it all depends on what assumptions you make, bearing in mind that tax is not paid on capital gains until the asset is sold. Under a capital gains discount of 25 per cent, as we propose, and with inflation at 2.5 per cent, an asset held for fifteen years with a 3 per cent nominal income return and 4 per cent capital return would pay a real effective tax rate of about 55 per cent if the taxpayer is one of the 3 per cent of Australians on the top marginal rate.
Turnbull argued that:
Removing negative gearing would mean a tax increase for wage and salary earners and would affect incentives to work. The paper ignores these efficiency costs.
Daley responds:
…using negative gearing seems a strange way to solve this problem. Why would we try to reduce marginal income tax rates, but only for the minority of workers who happen to invest? What’s more, income tax rates need to be higher across the board to pay for the tax break we provide to one in 10 taxpayers.
Another complete demolition. What a tragedy for the nation that such rhetorical flair turned to selling outright lies.
