En Passant

Shadow Treasurer, Chris Bowen, says that Labor’s proposals to limit negative gearing to new housing from 1 July 2017 and grandfather existing investment before then are the biggest tax reforms in a decade. This isn’t the case.

In tax terms, negative gearing just means that the deductible costs are greater than the rental income. This is not on its own a rort. It is normal tax outcome. There might be an argument that the costs are not really deductible because there is no relation to earning a positive net income over time, or alternatively that the sole or dominant purpose of the investment is tax avoidance, i.e. to reduce salary and wages or other net taxable income.

Why would anyone invest in such loss making venture? Apart from the reduced tax, the other aspect is capital gains. If an investor holds the property for more than 12 months, when they sell it only half the net gain is included in assessable income.

That is why it is odd to hear Labor talking about negative gearing being a policy to encourage new house building. It has never been that. It is the logic of the tax system. What ahs changed over the last few decades is that more and more working class people are taking it up. Thus about 800,000 people who negatively gear are on taxable incomes less than $80,000 (the average wage.) Of course, negative gearing helps reduce a person’s taxable income, but even so the average loss claimed and offset against other income such as wages is around $10,000.

However it is true that those on better incomes get a bigger benefit from negative gearing. Here is a graph from a year or so ago showing which electorates get the biggest negative gearing deductions.

Chris Bowen points out that 50% of the benefits of negative gearing go to the top 20% of income earners.  However Labor’s proposed reforms will do nothing to address that. For a start the grandfathering of current investment may well lock it in. Certainly it takes nothing away from that top 20%. Second, allowing negative gearing to continue after 1 July 2017 for new housing investment merely shifts the focus of the extra negative gearing benefits going to the well off.

In tax terms there is nothing major about Labor’s proposals.  There is not  a hint of taxing the rich, just shifting the goal posts as to where the rich can invest.

Labor claims this will see an increase in housing supply, putting downward pressure on housing prices and rents. Well, maybe, but that will if it happens be a very long term result. Second it addresses a tax advantage to the rich by giving them another one. Third, there is no guarantee that it will actually work. And fourth, it is based on the idea that the market needs just a little tweaking to make the world better for new home buyers and renters.

Why is there a housing shortage? One of the reasons is State governments’ withdrawal from or lesser involvement  in building public housing.  If Labor were serious about addressing the high price of housing and the impact this is having on both first home buyers and renters it would begin a program of state housing that addressed the needs of working class Australians. Such a program could be funded by taxing the rich capitalist class who benefit from having a well housed, rested working class. Labor won’t do that because it is wedded to the market and market ‘solutions’. That marriage explains its mickey mouse negative gearing proposals.