Since Labor first announced its policy to restrict negative gearing and the capital gains tax (CGT) discount, the Turnbull Government has opted to run a scare campaign claiming that it would “crush” productive business investment.
Here’s an example of this argument from Prime Minister Turnbull:
“So at a time we need more investment, they’re increasing the tax on investments. Is that well thought out? I don’t think so. At a time when we want Australians to have a go and be enterprising, start new businesses, start small businesses, they are – they are – with their negative gearing policy they are going to prohibit anyone from offsetting an investment loss against their personal income unless it is a new residential property”…
And another:
“What Labor proposes is that there can be no investment in any asset other than new residential housing…”
Today, Morgan Stanley has effectively called “bullshit” on Malcolm Turnbull’s claim that Labor’s policy would stifle investment, arguing that it is precisely the Australian tax system’s bias towards non-productive housing speculation that is hindering productivity and the economy. From The AFR:
Morgan Stanley’s economists argue there needs to be a structural shift in how government tax policies favour certain forms of investment over others.
“We’ve got a lot of tax incentives for leveraged investment in housing and a lot of disincentives to save in cash or invest in fixed income,” he said.
The preference for leveraged housing is also being spurred because people holding bonds or cash are effectively going backwards once tax and inflation are taken into account.
“We have a lot of tax incentives to encourage this debt fuelled investment which doesn’t have a lot of productivity associated with it, in our opinion.”
Instead, the tax system should encourage more investment in entrepreneurship, start-ups and innovation, he said. “We’d rather see some of the tax incentives used to boost productivity.”
In a similar vein, Fitch Ratings on Friday also argued that negative gearing is partly behind Australia’s record household debt, which has left the economy vulnerable. From The ABC:
The agency also drew attention to Australia’s key economic weakness – world-beating levels of household debt.
On some measures, Australia now has the world’s most indebted households, with the debt-to-income ratio measured by the Reserve Bank at a record 186 per cent…
“We argue some of the tax policies might have contributed to it, such as negative gearing,” Ms Jaehne said.
Of course, we shouldn’t forget that Malcolm Turnbull, too, once believed that negative gearing and the CGT discount were stoking unproductive mal-investment. In his 2005 tax policy paper, Turnbull described both tax lurks as a “sheltering tax haven” that is “skewing national investment away from wealth-creating pursuits, towards housing”.
The data is also damning. Since negative gearing was reinstated in 1987, lending to property investors has risen almost exponentially while business lending has flatlined (see next chart).
Thus, the Turnbull Government’s support of negative gearing and the CGT discount has nothing to do with boosting “productivity” or “innovation”, but rather maintaining Australia’s grotesque bubbles in private debt and housing.
Thankfully, people are beginning to see through the Coalition’s “smoke and mirrors”.
