Gearing up

The tax conversation turns to negative gearing

So a GST increase is officially dead (for now, at least). Malcolm Turnbull today gave a clear statement that “the government will not be taking a proposal to increase the GST to the election”. All other tax reform options are apparently still possible.

Labor will take it as a small victory, after Bill Shorten this morning called for Turnbull to do exactly this. The problem for Labor now is that an electoral campaign built around opposition to a GST increase is no longer feasible.

The conversation has turned instead to negative gearing, the scheme which allows property investors to claim tax deductions when their rental income fails to cover their mortgage payments. In principle the scheme encourages investment in new housing stock, which in turn makes the cost of housing lower. Critics say it encourages property speculation, drives up prices, concentrates ownership and facilitates a transfer of wealth to property owners (who tend to be older and wealthier than average already).

Negative gearing has been untouchable since Hawke and Keating removed it from 1985 to 1987 and rents increased, supposedly as a consequence. More recent analysis suggests that the rent increase was not as big as had been claimed and may have been caused by other factors anyway.

At the weekend, Labor introduced a proposal to restrict negative gearing to investments in new building. This seems on its face like a good idea, and it is also recommended by the panicky reaction it seems to have induced in the property industry and the broader owning-things community.

Rather than reducing house prices, it would reignite the housing boom, according to Domain. The Financial Review says the Aussie negative gearing dream is under attack and has dug up an Aussie battler with no less than 15 negatively geared properties to demonstrate how. (The Fin also lists the top 10 suburbs set to suffer under the plan.)

Scott Morrison, who used to work for the Property Council of Australia, is also against the changes. Malcolm Turnbull says the proposal would work against people on average earnings.

No doubt property investors do feel like they are ordinary mums and dads, doing it hard. Almost everyone in Australia feels that way, even those in the top 10% of incomes. It doesn’t mean it’s the case, though.

The basic divide here is pretty simple: if you own a house (or are in the business of selling houses), you want prices to go up; if you don’t, you want them to come down. In practice, this is becoming a generational divide. Younger people have always been less likely to own homes, but house prices have been rising sharply since about 2001 and slipping ever further from the grasp of the young. This situation is only exacerbated by current tax arrangements which give heavily to those that already have, as a new study has shown.

One fundamental problem for young Australians is demographic: there are maybe 6 million aged between 18 and 34, while the 35 and over crowd are 13 million strong. While voters aged 18–34 have a preference for Labor over Liberal (57–43, in one recent poll), younger voters don’t seem to identify themselves strongly as a group with well-defined shared interests.

Tomorrow Scott Morrison will give a speech to the National Press Club, which we can expect will include some more detail on the Coalition’s tax plans. Real detail probably won’t emerge until the budget in May.

Don’t expect too many challenges to vested interests, though. There aren’t a lot of votes in it, and it’s easier to stop the up-and-comers getting vested in the first place.

Today’s links

The government may be planning to remove the existing 72-hour notice period for asylum seekers facing deportation.
Bob Carr says the real reason for unaffordable housing is immigration.
Michaelia Cash this morning said that GST changes were still a possibility, and Turnbull was quick to say that was not the case. A little untidy.
What happened to Turnbull’s ideas boom?
Georgina Downer, daughter of Alexander Downer, has received the crucial Jeff Kennett endorsement in the preselection battle for Goldstein.
Victoria’s Independent Broad-based Anti-corruption Commission has heard evidence about bizarre goings-on in the state’s education department.