As Labor prepares for a possible election later this year, its negative gearing policy looks likely to be either abandoned or at least altered. While this could be spun as a politically good move, negative gearing and the current capital gains tax discount remain bad policies that need to be changed.
In the 1986-87 cabinet papers when the Hawke government decided to reinstate negative gearing after pressure from industry lobby-groups, the poor Treasury officials rather lacked a reason to do so. The best they could come up with was that “it was anticipated that other tax shelters would be closed” but had not, and thus it should be reinstated.
It was the first of many bad negative gearing policies all of which vainly try to pretend they are not a tax shelter. But it was in 1987, and so it remains – and looks likely to do so into the future if reports of Labor reconsidering its policy are accurate.
It’s no real shock that the ALP might dump the policy it took to the past two elections, as it seeks to blame those losses on policy rather than the selling (and seller) of the policy.
But let us be clear, any political party seeking to do something about housing affordability needs first to change negative gearing and the ability for people to get a 50% discount on capital gains tax rate.
And such a policy is greatly more vital than, for example, another idea currently pushed by government backbencher Tim Wilson to allow people access to their superannuation to buy a home.
It is important to note that negative gearing and capital gains discount are inexorably linked, for it was the introduction of the latter by John Howard and Peter Costello, which set fire to the former:
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Prior to the change, as many landlords recorded a rental profit and they did a loss; but afterwards, suddenly a lot more people began recording losses.
And with the increase in the number of people claiming a rental loss, so too was there an increase in the average amount of loss people were claiming and an increase in the amount of capital gain people were recording:
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Rarely has there been a policy combination so perfectly attuned towards encouraging people to become housing investors purely for the purpose of tax minimisation.
And rarely as well has there been a combination of taxation minimisation policies so perfectly attuned towards causing house prices to soar:
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If you want to improve housing affordability, capital gains tax and negative gearing must be the first place to start.
Unfortunately, the 20 years of damage caused by the Howard government cannot be undone, but there is no reason to continue that damage.
And we should also note that while many people negative gear, overwhelmingly the benefits go to the wealthiest.
Those earning under $87,000 account for nearly 80% of all individuals in the tax system, but just under 70% of those who negative gear and they record just 60% of all rental losses.
By comparison, those who earn over $150,000 account for 6% of all individuals, but accrue 20% of all rental losses:
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Similarly capital gains are recorded overwhelmingly by the richest:
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Negative gearing and the capital gains discount are little more than tax rorts designed to assist the wealthiest.
But it is perhaps understandable that it is politically difficult to remove negative gearing. While those who work in the highest paying occupations are more likely to negative gear, it is no small thing for any political party that, for example, 10% of librarians or 11% of primary school teachers also negative gear:
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But there is more than one way to improve the system.
Since the changes to capital gains the percentage of people claiming a rental loss who own just one investment property has declined from 79% to 71%:
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While there may become resentment towards those who use this tax loophole, this ire is less directed towards those who own just one property, rather than, say, towards government backbenchers who with their partner own four investment properties.
Thus one move could be to limit the ability to claim losses on just one property.
Were this administratively difficult, the losses able to be claimed could also be capped.
A cap on the claimable rental loss of $10,000 would cover a vast majority of people earning under $150,000 and would at the same time take away the incentive to have a multiple number of investment properties:
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We know that whatever the ALP does the Liberal party will lie and call it a property tax or a retiree tax or a tax on ambition. But the dumping of any changes to negative gearing or capital gains tax out of fear of the political consequences would be a bad move.
If the ALP really wants to do something about housing affordability, it must act.
