IT’S a uniquely Aussie slang term up there with thongs and budgie smugglers, but it’s also the behind one of the most pervasive myths in public debate.
Economists have hit out at fresh calls to wind back negative gearing concessions in a bid to raise more tax revenue and increase housing affordability.
In a report released yesterday, peak welfare body the Australian Council of Social Services urged the government to restrict tax deductions for negatively-geared property investments.
ACOSS claimed the move could save more than $1 billion a year, arguing the current system primarily benefited the rich.
According to its report, ‘Fuel on the fire: Negative gearing, Capital Gains Tax and housing affordability’, more than half of geared housing investors were in the top 10 per cent of personal taxpayers.
It argued negative gearing encouraged over-investment in existing properties and expensive inner-city apartments, lifting housing prices and doing little to promote construction of affordable housing.
Sinclair Davidson, Professor of Institutional Economics at RMIT University, described the public debate around negative gearing as ‘a complete load of rubbish’.
The term itself is an Australianism, so the whole notion of having to explain negative gearing to foreigners falls into the same category as having to explain slang terms to foreigners, he argues.
‘ACOSS and other people who don’t actually pay tax themselves don’t understand much about the tax system and so they think it’s being rorted,’ Professor Davidson said.
‘People like ACOSS, UnitingCare and Anglicare, they have an incentive for the government to take in more tax revenue because they want to spend more money. They are going for a tax grab.
‘I suspect a lot of journalists don’t understand business and taxation, which is probably slightly unfair and a sad thing to say, but unfortunately too many journalists are a little sucked in by salacious arguments about tax rorts.’
According to Professor Davidson’s analysis, the main beneficiaries of the system were lower-income earners, with people earning between $45,000 and $180,000 per annum actually the most likely to be declaring a loss on rental property.
He claimed myths around negative gearing permeated public discussion, partly because Australia was the only country to have a specific term for what was considered a standard tax deduction in most other countries.
‘It is standard procedure that if you earn a loss you deduct it against your income. The thing that causes excitement in Australia is we are the only country that calls it negative gearing,’ he said. ‘You ask people in other countries, ‘Do you have negative gearing?’ and they say, ‘Gee, what’s that?’.
‘But if you ask, ‘Do you have mortgage reduction or deduct loss against income?’, and they say, ‘Of course we do.’ This is not some strange or unusual quirk of our tax system.’
While some countries only allowed deductions against the same asset class, Australia has a better system, he argued.
‘A loss is a loss, you should carry a loss against all income. New Zealand has it, Japan has it. In the US, individuals can’t deduct their losses against all other income, so people incorporate as companies. It’s a workaround, but effectively the same thing is happening.’
Robert Carling, senior fellow at the Centre for Independent Studies and former official with the NSW Treasury, Commonwealth Treasury, World Bank and IMF, argued groups like ACOSS only looked at the demand side of the housing equation.
‘More investment in housing, other things being equal, should lead to more supply eventually,’ he said. ‘They argue people are buying up existing housing, but they don’t have to buy new houses themselves to stimulate supply. If prices are bid up across the board then that will encourage more supply by developers, and we see that happening.’
In a report released last week, Mr Carling argued much of the ‘mythology’ around potential revenue to be gained from abolishing tax concessions such as negative gearing came from a misinterpretation of the Tax Expenditure Statement published by Treasury.
In addition to the revenue cost of some concessions being greatly exaggerated, he pointed to the inability of the estimates to account for taxpayer behaviour in response to changes in tax concessions, and an incorrect assumption that estimates for revenue forgone were equivalent to potential revenue gain.
‘If it’s the tax system that’s driving up house prices, why aren’t we seeing it happening across all cities? The tax laws are the same across the country yet we’re not seeing large price increases in other cities. Many countries have had house price booms, and all of them have had different tax arrangements,’ he said.
‘The main factor, according to the Reserve Bank, is the secular decline in real interest rates over the last 20-odd years, which has vastly increased people’s borrowing capacity. That’s been the common factor around the world.’
He said winding back negative gearing might raise significant revenue initially, but after investor behaviour responds net revenue gains would likely be very small.
If reductions in tax concessions were to be justified, they should form part of a broad, revenue-neutral tax reform with offsetting reductions in income tax rates, he argued.
In response, an ACOSS spokesman said countries like the US and UK do not allow people to claim unlimited deductions for investment property losses against their other income.
‘We didn’t rely on Tax Expenditure Statements alone but they are a reasonable starting point,’ he said. ‘We advocate the closure of tax shelters on a number fronts to deal with behavioural responses.
‘There are considerable lags between higher property prices and more construction, due to well-known problems on the supply side.
‘In any event the main problem is that prices are too high by Australian and international standards. This means, for example, that institutional investors are reluctant to invest because their rates of return from rents alone are too low.’