, , , , , , , , , , , , , , , , , , , , , , , , , , ,

Tax concessions on investment properties have long been a subject of fierce debate here in Australia. Policies on negative gearing and capital gains concessions have arguably long been too generous, hurting the economy and the budget. The opposition Labor Party has come up with a policy to remove most of the concessions from existing housing. I’ve just posted the following comment to an article at two news sites: The Conversation and Business Spectator …

Well, I guess someone had to tackle the overly generous tax concessions on property investment and it’s finally happening. The current set of policies hurts both the budget and the economy.

The money investors pay in interest and to real estate agents, legal firms, insurance companies, and in repairs and maintenance is a tax deduction for investors, but if this money is spent by owner occupiers, it isn’t a deduction. Agents, insurers, repairers, etc. would still be paying tax just the same. Further, investors are probably on a higher marginal tax rate than the average agent, insurer, repairer, with a good sprinkling of investors probably at each of 32.5, 37 and 45 cents in the dollar. Repairers would be concentrated in the 32.5 cent bracket, others at 32.5 and 37. Companies (including banks) of course pay 30 cents in the dollar. Thus there is a significant adverse effect on the budget.

First home buyers have been priced out the market due to overly generous tax concessions for property investors and we now have among the highest housing prices in the world. Housing prices don’t really matter that much to investors when they know they can get all sorts of concessions, so they swamp the market, which pushes prices up, especially in the likes of Sydney. They are competing with potential owner occupiers who are priced out of the market and have to pay high rents indefinitely, meaning that they never get to the stage where they have paid off a mortgage and have a large increase in their disposable income for renovations, extensions, a new car, household goods, a holiday, etc. Thus the policies are no good for the economy.

But it’s a long term policy and might take 20 years to sort out. Property prices have risen eightfold and investment housing finance eightyfold in the last 30 years. Rent increases are 25% ahead of overall CPI increases over that time, which is a huge amount for struggling families to find. Meanwhile, middle income earners should be getting more money into superannuation rather than existing housing.

I was okay with a hike in the GST [goods and services tax] to 15%. In many countries, it’s around 20% or more. But it’s probably now off the table. An advantage of a consumption tax is that the amount collected fluctuates less than with an income tax (because consumption fluctuates less than income). Thus revenue is more stable during the ups and downs of the economic cycle. But with a GST increase, there’d have to be compensating decreases in income tax.

With revenue at 23% of GDP and expenditure at 26%, the government will need to do something on both sides of the ledger (other than bracket creep) that won’t unduly hit the poor, the sick, the old and the young.

It will be interesting to see what ‘facts’ those with vested interests in the current policies come up with.