Government's negative gearing claims dismissed by Grattan Institute report
25 April 2016
Re not supported by the facts, a Grattan Institute report has found.
And the government’s claim that “mum and dad investors” were the biggest beneficiaries of current policy settings was also wrong, the paper said.
In fact negative gearing largely benefited the wealthy, with the top 10% of income earners before rental deductions getting almost 50% of the tax benefits, contrary to claims by the government and Property Council, the paper found.
The government could raise $5.3bn a year – with little effect on house prices or housing supply – if it reduced the excesses in the system, the paper argued.
“Our proposed changes will improve housing affordability – a little,” it said. “The changes will not cause housing markets to collapse: their effects on prices are small compared to factors such as interest rates and supply of land.”
Malcolm Turnbull has promised not to touch negative gearing or the capital gains tax discount in his budget on 3 May, setting up both as key policy battlegrounds in the federal election.
Labor has promised to slash the capital gains tax discount from 50% to 25% if elected, while restricting negative gearing to new properties.
Turnbull claims Labor’s housing plan will deliver a “reckless trifecta” of lower home values, higher rents and less investment, and work against the interests of middle income earners.
But the Grattan Institute report, “Hot property: negative gearing and capital gains tax reform,” said the Coalition’s claims were not supported by the facts.
The report’s authors, John Daley and Danielle Wood, said it was time the excesses in negative gearing and capital gains tax regime were fixed, and they recommended changing both.
The report said the commonwealth could raise $3.7bn a year by cutting the capital gains tax (CGT) discount from 50% to 25%, phasing in the reform over 10 years, and another $1.6bn a year by limiting negative gearing – preventing losses on passive investments from being written off against wage and salary income.
Together the changes would raise $5.3bn a year, while making houses more affordable and the tax perks less skewed towards the wealthy, the report said.
“The Reserve Bank, the Productivity Commission, the Henry tax review, and the Murray system inquiry have all argued that negative gearing exacerbates volatility in housing markets,” the report said.
“Reduction in the CGT discount and changes to negative gearing will affect investor demand, rents and property prices. Yet the impacts will be much smaller than some commentators suggest.
“Our best estimate is that the changes we recommend might lead to property prices up to 2% lower than [they] otherwise [would be]. There will be little impact on rents, or on the rate of new development, even in the long term.”
The paper recommended a different approach to negative gearing from Labor’s policy.
Labor wants to restrict negative gearing to new houses while grandfathering arrangements for investors using the current policy settings.