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Negative gearing

The old chestnut of negative gearing is being raised yet again. There is nothing at all wrong with allowing asset owners to claim interest payments as a tax deduction if capital gains are fully taxed. Similarly there is nothing wrong with exempting the family home from capital gains taxes if, as is the case, interest payments are not tax deductible.

High house prices are not a consequence of either policy. They are in the main a consequence of our highly urbanised society, which puts pressure on land prices around major cities, and our relatively high population growth rate reflecting high fertility and a high immigration intake. Eliminating negative gearing but retaining capital gains tax on non-owner occupied housing would reduce housing supplies and act to increase housing prices. Imposing capital gains tax on the family home implies that householders would make mortgage repayments out of after-tax income and then be subject to a futher tax on any capital gains the asset might enjoy.

Such double taxation is not imposed on the acquisition of any other asset in the economy by consumers or firms.

The key policy causing problems here is the immigration policy. Although it realizes some efficiency gains to society as a whole (only “some” because there are significant unpriced external costs) the effect of immigration is to shift the distribution of income against labour. The chances of changing this policy are however slim – the business lobby stupidly see fostering a strong housing industry as an end in itself while the “left” (with equal stupidity) see any attempt to restrict immigration as lacking compassion and of even being “racist”.

My environmental concerns mean, I guess, that I lack compassion.

14 comments to Negative gearing

  • rog

    There is a 50% CGT concession if you hold the asset for +1 year.

  • hc

    Rog, The article I link to points that out. Hence I was careful with my words “if capital gains are fully taxed”. Of course the implication here is that the Howard reform to CGT should be overturned.

  • rog

    Howard was always against any CGT and the theory was that by halving it transactions would increase which would flow onto revenue. In other words, tax cuts increase tax revenue. Magic pudding economics.

  • Rob Wiblin

    The right way to make housing more affordable isn’t to soak foreigners because they were unlucky enough to be born overseas – it’s to remove regulatory impediments to just building more houses and increasing density.

  • conrad

    We don’t have high fertility rates (they’ve been low for ages — http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/1301.0~2012~Main%20Features~Births~51) — we have a population that is dying later and fewer people living in each residence.

  • I used to be not trampis

    as The RBA pointed out in their submission to the Productivity commission negative gearing isn’t the problem it is the very generous depreciation that is.

  • Roger Wilkins

    You don’t need to think negative gearing increases house prices to be opposed to it. It is an unnecessary and inequitable tax expenditure. Please also note that the issue is not the tax deductibility of interest expenses; rather, the issue is that losses can be used to reduce tax payable on labour (or other) income – something which does not in general apply to other businesses or investments.
    Greater public investment in transport and other infrastructure would probably help moderate house prices. All very well to say population growth is a driver, but we don’t exactly have a shortage of land suitable for urban development.

  • hc

    Roger, I can borrow to buy shares or any other capital asset and deduct the interest expense from my taxable (labour) income. Nothing specific about housing at all.
    I think that borrowing costs to purchase a capital asset are a cost of earning income and should be tax deductible. I think it is both necessary and equitable. It is the same as having the right to deduct any cost in earning income. We have a shortage of land in the major metropolitan centres (Sydney, Melbourne) where people want to live. These are becoming huge cities in terms of geography.

    Conrad, Among developed countries Australia has quite high fertility. Yes, the US is higher.

    Rob, I am not trying to soak foreigners. I am trying to reduce the number of migrants who come here. I’d prefer to stabilise the Australian population at something well short of the proposed 50 million. Why do we need an ever expanding housing stock if natural fertility is close to replacement?

  • Roger Wilkins

    Okay, it is a bit more nuanced than I made out (and I am not a tax expert), but the point remains that business losses cannot in general be offset against other income (there are some exceptions) and interest on borrowings to fund share purchases can only be used to offset (realised) capital gains on those shares (unless share trading is the primary business of the tax payer). Interest paid on these borrowings cannot be used to offset dividend income. So property is indeed quite different.

  • rog

    There is no difference between how CGT is applied to shares and property, both are assets. Losses incurred with one group of shares cannot be set against gains made on another. Same with property, losses on one property cannot be set against gains on another.

  • hc

    Roger, Interest costs on borrowings to buy shares can be offset against other income. They do not need to only be offset against capital gains.

    Rog, Realised capital gains on one share can be offset by realised capital losses on another.

  • conrad

    “Why do we need an ever expanding housing stock if natural fertility is close to replacement?”

    As noted above (actually, it is less than replacement, and I’ll bet we will go far less thanks in part to high house prices), because there is a huge over-hang of people that will live longer and will want to live either by themselves or with one other person. Based on the first of these, I seem to remember than if we changed immigration tomorrow so that the number who came in were equal to the number that left, we would still get to 30 million. I haven’t seen estimates of the second, but presumably even a 20% drop in the number of people per residence means a 20% increase in number of residences needed. This seems pretty likely with an aging population that don’t want to live with their children for all eternity or don’t want to live with someone else when their partner dies.

    Also, one argument against using houses as “assets” is they are different to other types since people actually need somewhere to live, and thus some might argue the less speculation the better. So they are not equivalent to, say, a share portfolio.

  • rog

    My mistake Harry, capital gains and losses can be balanced out but a capital loss cannot be claimed as a tax deduction. I think (bows gracefully while exiting).

  • Jim Rose

    Most variations in housing prices are driven by land supply restrictions rather than negative gearing