IT’S rare to see an opposition unveiling such significant policy issues in advance of an election atmosphere. Oppositions usually seek to avoid scrutiny and the opportunity for a well-resourced government to attack them until late in a campaign."This guy had just purchased his 200th property so I am gratified that at a time like this he can only think of the poor people."
However Labor has been putting it out there, first the release of their tax on multi-national companies, their arguments for superannuation reform and now the changes to the negative gearing tax provisions. Labor’s policy is about changing the availability of negative gearing so that it is only available for new properties, that is to stimulate new housing stock.
So far the debate has been totally one sided with the Government unable to land a glove on the opposition, rather fighting a rear-guard action with its own backbenchers, terrified at the prospect of going to an election with the policy of increasing the GST to 15 per cent. Labor has led the debate and effectively scuttled the GST increase by making it an election issue.
Even former Liberal premier Jeff Kennett applauded Labor’s plan to restrict negative gearing, or rather applauded Labor’s courage in making a stand on tax reform. He argues that Australia is getting into increasing economic trouble because it has not had the courage to address the taxation problems – the Government is missing in action.
But there is a reason Governments have not acted on tax benefits such as negative gearing and superannuation. Watch the forces muster against the negative gearing changes with all sorts of spurious rhetoric. One “expert” predicted it would burst the housing bubble; another that it would reignite the property boom.
The CEO of the Real Estate Institute of Australia, Amanda Lynch, is quoted on her own website as saying, “The evidence is clear that both negative gearing and the capital gains tax discount (CGT) feed the supply-side pipeline at a time of a chronic under-supply of houses in Australia.” How does it do this when it encourages investors to soak up the existing stock of houses?
We will hear a lot of misinformation about this policy over coming months with all the vested interests trotting out their arguments. They may even sponsor research that supports their position.
The Australian Financial Review quoted an investor who said: “The biggest losers will be the poor families trying to get into rental properties”. This guy had just purchased his 200th property so I am gratified that at a time like this he can only think of the poor people.
Another in the same article warned “another side effect of the Labor proposal would be to open the flood gates for more spruikers to sell over-priced property”. She argued "A better strategy is to bring back attractive first homeowner grants to encourage people to buy rather than rent."
Self-serving nonsense! It is well known that first homeowner grants just flow into the purchase price of properties, benefitting the vendor rather than the purchaser. It is yet another simple way to transfer more money to people who already have plenty.
So what about negative gearing? It encourages the purchase of properties that make a loss, that is where the costs outweigh the returns, and the loss can be claimed against one’s personal tax. The purchaser hopes that it will shift over time with capital gains and rent increases to be positively geared or generate a capital gain when sold. It is an aid to speculation.
Is this bad? It costs the taxation system a lot of money that could otherwise be available for schools, hospitals and other government spending areas. Just as importantly, any intervention with tax incentives or tax increases skews the market, causing more funds to be invested in areas benefitting from the incentive or away from areas with increasing costs. The law of unintended consequences inevitably kicks in with any intervention.
According to Wikipedia, only three countries – Australia, Japan and New Zealand – allow unrestricted use of negative gearing losses to offset income from other sources. With the benefit of hindsight, the Government would not introduce negative gearing today; however, policy inertia makes it very difficult to remove a policy that has become entrenched and that benefits a powerful well-off minority.
There is no doubt we need reform and those listed – superannuation reform, multinational tax avoidance and negative gearing – are the first that should be considered. With our ageing population the budget will get out of control; simply older people make a larger call on health and pensions while there are relatively fewer people in work and paying taxes to pay for it all.
Paul Keating foresaw this and to his great credit introduced compulsory superannuation. The contribution rate should have been increasing over time, progressively lessening the burden of the aged pension on the national budget, but that policy has been thwarted. It was Malcolm Turnbull’s party, during Tony Abbott’s leadership, that scuttled the last increase.
These other reforms are needed but superannuation reform, including an increase in the contribution rate, is crucial to getting the budget into control in the longer term.