Turnbull blog-flames Grattan, self

Nothing stirs the passions of our Prime Minister like criticism of negative gearing. So much so he’s blogged a reply to the Grattan Institute today:

John Daley’s paper recommends major changes to Australia’s negative gearing provisions.

Firstly, it proposes to only allow deductibility of net rental losses against other investment income.

This is despite the findings of Labor’s 2010 Australia’s Future Tax System (AFTS) Review, which, after a comprehensive analysis, supported the principle of being able to deduct net rental losses from wage and salary income.

Secondly, Daley’s paper recommends reducing the capital gains tax discount to 25 per cent; again this is despite the more modest AFTS recommendation to reduce the discount to 40 per cent.

Daley proposes phasing both tax changes in over 10 years, but will not grandfather existing investments.

Neither of those latter two features are part of Labor’s negative gearing and capital gains tax policies.  And Daley argues against the Labor proposal to limit negative gearing to new residential property.

So while there are a number of similarities between Daley’s proposals and Labor’s, it would be incorrect to say that his paper advocates adopting Labor’s position on negative gearing and the capital gains tax discount. It also does not advocate using the proceeds to finance more spending.

I have a great deal of respect for John Daley and the Grattan Institute, but on this occasion they have it wrong.

Unfortunately, the paper is littered with factually incorrect statements, claims that are unsupported by evidence and direct contradictions.  And its economic analysis in many places leaves a lot to be desired.

For example:

  • The paper claims that negative gearing “goes beyond generally accepted principles for offsetting losses against gains”.  But this is factually incorrect.  The ability to deduct interest and other costs from personal exertion income has been a generally accepted principle in Australia’s tax system for more than a hundred years. While there are some exceptions to this principle, they have been strictly limited to instances of flagrant abuse (as was claimed to occur with ‘hobby farms’) or to situations where taxpayers might use losses to gain welfare benefits.
  • 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?
  • 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?
  • 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.
  • 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.
  • 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.

However, despite these and other shortcomings Daley’s paper confirms what the Coalition has been saying for several months now – but which the Labor party seems determined to deny: that removing negative gearing will reduce investor demand and result in lower residential property prices.

Daley estimates that his proposed negative gearing changes would raise an additional $2 billion in tax revenue each year from negatively geared investors.

Just think about that number for a moment.

Tax revenue always has to come from somewhere.  In 2013-14, negatively geared investors earned gross rental income of $20.5 billion. So using Daley’s revenue estimate, we see that the effect of his proposed change would be similar in magnitude to a permanent 10 per cent fall in gross rental income for each and every one of Australia’s 1.26 million negatively geared property investors.

Mr Shorten and Labor argue that a shock of this size would have little or no adverse impact on confidence, investor willingness to pay, or the housing market more generally.

In contrast, the Coalition is of the firm view that it would significantly reduce investor demand and house values and lead to a range of other undesirable impacts.

To offset such a significant change, investors will seek to increase their pre-tax cash flows – and this will place upward pressure on rents.

Negatively geared investors would also seek to cut back on maintenance and repairs and would reduce other costs in an effort to reduce their net rental losses.  Over the longer term, as the market adjusts to the fall in investor demand, there would be fewer rental properties, as existing dwellings fall into disrepair and are withdrawn from the market. In the UK and the US, which have removed negative gearing, the resulting crisis in rental markets has caused serious hardship and forced governments to spend billions of dollars in subsidies.

Nobody wants to see that happen – except, apparently, Mr Shorten and the Labor Party.

As argued many times, MB sees the removal of negative gearing as price negative for capital values and rents:

  • landlords exist in a market and can’t just jack up rents any time they like;
  • renters will shift to buying as prices fall taking pressure off rents;
  • although investment into housing will also fall, given 90% of negatively geared investment goes into existing stock already that’s hardly a bad thing, especially if it shifts more towards the productive use in constructing new dwellings, adding more to growth, creating jobs (and also weighing on rents);
  • any fall in house prices will be cushioned by falling interest rates which will in turn lower the currency, boosting tradable sector growth. This is structural reform par excellence that helps restore Australian competitiveness via the internal and external deflations that are precisely what the nation needs in its post-mining boom adjustment.

But don’t just take my word for it. Let’s ask that other Malcolm Turnbull, the one we used to see before he was engulfed by the Australian vampire squid, from his 2005 tax paper:

“Australia’s rules on negative gearing are very generous compared to many other countries…the normal deductibility principles do not apply to negatively geared real estate such that the taxpayer is not obliged to demonstrate that the negatively geared property will generate positive cash flow at some point in the distant future”.

Oh dear.

Comments

      • Hey Malcolm,
        Can you explain how allowing NG on existing dwellings increases the housing stock?

    • They have! “Look, you’re taking those words out of context. Next question please?” was the retort.

      • Yes, saw that Janet. What an answer, serious nerve.

        The man simply thinks all Strayans are fuckwits.

      • The question wasn’t specific enough, they needed to quote Malcolm. However, the reporter would probably never get such a chance as there is “limited” time for questions. If only there was an announcement from Malcolm like Julia did with the “there will be no carbon tax under the government I lead”, it seems like video evidence is the only way we can hold a politician to their word now days.

      • Haha really? Well i guess the context has changed – now he has lobbyists paying him not to say it…

      • That is how he plays the game in regard to the NBN as well.
        When confronted with a question of merit he just refuses to answer it.
        That the press don’t follow through on anything makes them just as guilty as the politicians they pander to.

    • It would be a great opportunity to show even more just what a hollow man PM Turnbull is, as opposed to the Real Malcolm.

      • proofreadersMEMBER

        The Real Malcolm is the same as the current Malcolm – they’re both the “It’s All about Me” Malcolm.

  1. It’s good that MT has super fast broadband in order to get his points across. Abbott would never have been able to do this. Credlin would have to explain what a blog is.

    • Absolutely. The guy is an out and out crook.

      Then again, should you be surprised, given he was once boss of Goldman Sachs Australia….

  2. After the Ute-gate mess Turnbull was extremely fortunate to be given a second chance by the public, and he has now comprehensively destroyed any shred of doubt that he is just another mediocre Party Duopoly politician.

    More simplistic debate, more lies when it suits, more policy for lobbyists – go and stand in line with others Mal.

      • Malcolm was suckered in by some emails forged by a weirdo public servant named Godwin Grech. Based on the emails Malcolm thought he had evidence of government money being improperly rerouted to a car dealership (hence utegate) owned by a relative of some Labor polly and publicly called for heads to roll. The fraud was quickly uncovered and Malcolm’s judgement called into question over believing such flimsy, uncorroborated evidence. Godwin ended up in a psych ward I think. May have some details wrong, but that’s the gist of it.

        Edit: the dealership was owned by a Labour donor, not MP’s relative. And he donated the use of a ute. There’s the utegate.

  3. Chris Richardson also repeated the Turnbull line this morning on radio that neg gearing should absolutely stay because:
    “the ability to deduct costs against your income is absolutely basic to any income tax system” – see the link at 7:30 minutes:
    https://radio.abc.net.au/programitem/pgQk7AAPo7?play=true
    This is an amazing statement by him because our tax system only allows the deductability of business expenses against business income not against other personal income. That neg gearing does this is an anomaly. To then equate this anomaly with the normal business deductability of expenses against business income is BS our media really should have put a stop to by now.

    • Huh? Negative gearing is possible because the ability to set off deductible losses against all income is a fundamental part of our tax system. The exceptions to this (non-commercial losses for instance) have to be specifically legislated.

      • Yes it is a fundamentally FLAWED part of the Australian tax system. That doesn’t mean it shouldn’t be brought into line with other Tax systems which quarantine investment losses from wage and salary income.

      • How is it flawed? All income is taxed at marginal rates therefore is it fair that all deductions are deductible at marginal rates as well.

        The rest of the world has GST/VAT rates around 20%; and most of it doesn’t have dividend imputation either. There doesn’t seem to be a call to match the rest of the world on these features of the tax system.

      • “have to be specifically legislated”

        There is no shortage of “specific” legislation relating to the various tax acts. So “specific legislation” is a straw man. Stating that it is a fundamental part of the tax system that costs are tax deductible, implying that quarantining NG losses violates this, is disingenuous because the costs will be deductible at some point in time.

    • Today's Empire Tomorrow's Ashes

      What if: we allowed ANYONE to deduct ANY interest costs (even for PPOR) against wage tax, just like Merica.

  4. bolstroodMEMBER

    Lies , obsquefication , no policy’s,
    Dog is in his heaven ,all is well with the LNP world.

  5. Today's Empire Tomorrow's Ashes

    Can you pull apart Turnbull’s rebuttals. Then we can facebook it and Tweet it to Turnbull and Labor politicians who can them pummel him

  6. http://www.watoday.com.au/business/federal-budget/scott-morrison-says-claims-negative-gearing-benefits-the-rich-are-a-complete-and-utter-myth-20160425-goetex.html

    with Treasurer Scott Morrison dismissing as “a complete and utter myth” the notion that negative gearing chiefly benefits high income earners.

    http://www.watoday.com.au/comment/government-spin-cant-hide-the-harm-of-negative-gearing-20160425-goe2m4.html

    In an extraordinary and sad development, Turnbull has gone further than the spivvy end of the real estate market. The spruikers merely promise to make the naïve rich. The Prime Minister claims negatively geared property portfolios are an absolute duty.

  7. No matter how much glitter you drop on it, no matter how much perfume you spray on it, now matter how much make up you shovel on it…

    it’s still a turd

    • It’s still a turd, however, their goal is to to turn the turd into something else. Their goal is to convince over 50%+ of the voters to believe it’s not a turd… A much simpler task.

    • lol. It provides 2800 jobs… and since we know all politicians lie it’s going to be closer to 1500 FTE jobs (if that). I’m calculating about 33,000,000 per job… and would we even use a sub in a any material conflict…

      I’d rather we just paid Pyne 50 million to go away.

    • I support the idea that Australia needs a new sub fleet.
      However i have issues with this winner.
      The winner is a conventional version of the French Nuclear powered Barracuda class that will not even be deployed till 2017.
      So untested, never built design. Conversion of a nuke hull to run conventional. Use of pump jet propulsion instead of propeller. Again proposed or similar hull not yet running using this new propulsion technology. It has however the advantage of being much quieter than propeller driven subs,
      On paper this is a lethal boat design.
      But i would be significantly concerned that so much new an untested design will be implemented on an almost experimental design.
      Other the other hand it is good that the project will be designed and run by an experienced world class submarine building consortium.

    • nexus789MEMBER

      Pyne is terrible Industry Minister that is absolutely clueless about industry and anything else.

      • He is however a first class ass wipe and therefore eminently qualified to be a politician and a member of the liberal party.

      • Of course. The dude went straight from Uni into politics. He’s never had a proper job, or built anything that someone would want to buy, or contributed a single damn thing to the country in his adult life. He, like many of his colleagues, is a bloated worthless drone.

        His self-proclaimed area of expertise is the minutiae of Parliamentary procedure. Points of order, and other such useless shit. So he’s an expert on the rules of conducting meetings and debates, and he uses that expertise to manipulate Parliamentary proceedings. The only people who have ever received any benefit from his life’s work are the members of his political party, while the rest of us foot the bill for his very comfortable lifestyle.

  8. Is this Australia’s Freedom and Democracy that the diggers sacrificed their lives for 101 years ago?
    Australians became slaves to corporates and real estate agents
    The Australian dream is now impossible to reach
    Thanks MT

  9. Actually, PM Malcolm Turnbull has got it correct! I have read the key parts of the just-released Grattan Institute paper “Hot Property”, and indeed there are methodological and factual errors littered throughout! It’s obvious that Grattan is flag-waving for the ALP.

    The PM’s second dot-point criticism of the Grattan paper is indeed correct. If the “evil tax twins” (“ETTs”) of NG and the CGT 50% discount are so guilty of massively inflating prices, then why would their cancellation have little downward impact? Illogical!

    The PM’s comments about the disastrous effect of an across-the-board reduction in the CGT discount is spot on. Capital investment will quickly flow away to lower tax regimes, and so will jobs.

    I suspect, from my private modelling that NG has had a significant inflationary impact, but the main factor is ultra-low interest rates.

    My proposal for the ETTs would be to limit NG to the company tax rate which is currently 30%. This would trim the tax leveraging power for high income earners to nearly neutral, i.e. 30% taxable income offset vs. a CGT rate of 23.5% (47 cents in dollar top tax rate X 50% discount).

    The CGT discount is dopey and needs replacement with a more accurately-tuned set of adjustment coefficients (multiplier numbers) tuned to the time period of asset holding, cumulative inflation, and the tax-payer’s average taxable income over the years coinciding with the period the taxpayer held the taxable asset. Keating’s formula was better than the 50% discount, but did not adequately adjust for long periods of asset ownership.

    If anything, CGT should be lower than it is now, and certainly not higher.

    • Peter Fraser?? Why drop the second name?
      ……. oh sorry to blow your cover, you must have thought you’d be incognito!

      • Nope, I’m not of the Fraser clan, although a great Scottish clan!
        If you need a patronym to identify me, then I’ll give a you a patronymic substitute: “Peter the Great”
        Hahahaha!

    • Regrettably I agree on your first point.
      But not on CGT. The nominal gain should be taxed.
      If not you introduce inconsistency between capital income (in particular profits) and CG. Businesses can also only deduct the nominal cost of plant (depreciation at cost) and inventory (COGS). Why should the cost base be indexed for CGT when replacement costs (real costs) are not deductible against capital income? It’s not consistent. Arguing that capital income and capital gains shouldn’t be taxed at all (the Friedman argument) is consistent, but wrong. Arguing that real capital gains should be taxable while nominal capital income is taxable isn’t consistent.

      • Sweeper, I confess to being confused by your use of conceptual terminology – (nominal) capital income, capital gain, real capital gain, capital income, etc. Could you please clarify? Could you also please explain the relevance of the comparisons between these concepts you have suggested we consider?

    • “Keating’s formula was better than the 50% discount”

      But obviously we live under a political system where making tax policy worse is regarded as an improvement. What incompetent idiots we have had since Keating.

  10. This Government is showing it’s true colours and has no real interest in getting house prices under control. However Labor and the Greens only plan to slow the growth in house prices. As far as I can tell only my Affordable Housing Party has the intention of actually lowering house prices back down to where they should be in real terms. We’re now only 125 members short of registering the party the Senate at the election. Would be great if you could join and recruit your friends who have concerns about housing affordability in Australia as well. We want this issue clearly on the ballot paper http://affordable-housing-party.org/join.html
    You can find us on Facebook as well at https://www.facebook.com/The-Affordable-Housing-Party-of-Australia-314184302114346/

  11. Good to see MT prioritising the defence of our world class tax policy on a blog instead of running the country.

    • @Andy

      I very much doubt the reply would be his “own” work -more like one of his bright young helpers.

  12. “Capital investment will quickly flow away to lower tax regimes”. Can you provide an example of this, that doesn’t include foreign capital speculating on asset values (i.e. private equity buyout or land speculation)? Why wouldn’t a high CGT actually reduce asset speculation and encourage investment in operations, the lower cost of assets would increase the yield and business costs?

    @ Peter above.

  13. This is instructive in as much as it clarifies that the Liberal Party is now clinging desperately and hopelessly to a failed neoliberal paradigm of fiscal incentives, surging population growth, and ever higher asset prices to wash clean the sins of an unproductive, unbalanced economy, all the while their pompous figurehead prattles on emptily about productivity and innovation and agility and fairness.

    Not seeing for a moment the irony in backing in a philosophy of government spending, corporate primacy and an investment model that will ensure this country remains anything but.

    Destroying any prospect of a more productive telecommunications infrastructure, walking away from federal funding of public education, undermining confidence in the public health system, installing barriers to the growth of alternative energy sector, and perpetuating unsustainable growth in property prices.

    With friends like Turnbull, our country’s future prosperity doesn’t need any enemies.

  14. Why would Malcolm risk a lay-down misere 2nd term, protecting an expensive and unproductive tax shelter that is used by 5% of the population?

    Surely his backbenchers in marginal seats are getting nervous.
    I am in a marginal seat <1%
    I was going to vote for Malcolm
    Now I am voting Labor primarily on the back of NG reform
    75% of 30,000+ voters on the 24hr Faifax poll have voted for Labor NG reform

    • Hopefully there are only 500 voters in your electorate, and you can convince four friends who haven’t been taken out by the Property Council’s propaganda putsch !

  15. Don’t just take H&H’s word for it.

    Don’t just take MT’s word for it.

    Ask MT’s wife Lucy – she is on the board of the Grattan Institute – a point I will be bringing up every time I hear the trope that Grattan is a “left wing think tank”.

  16. Just goes to show EVERY politician to ever have lived in history lies. At least Malcom has loyalty to his buddies at the banks, being ex Goldman Sach and all.

  17. all of this (what MT says, what Labor wants and what MB is pushing) is just bullshit.
    To become a prosperous nation we need to stop completely speculations on housing like they do in Germany for example.
    We are arguing how much discount to give on CG while we should instead introduce speculative tax: anyone who sells within 10 years of purchase should pay 90% tax on CG.
    Why on earth would someone get a discount on CG on land? maybe we should give it to people who buy gold or old cars as well ? At least they spend some money keeping them safe