Coward’s route to raising tax

In The Australian today
“It’s hardly about negative gearing. Rather, what the Left really wants is to increase income tax on the middle class. As it lacks the courage to do that directly, fiddling the definition of income is the coward’s way of achieving the same goal.”

About Henry Ergas

Henry Ergas AO is a columnist for The Australian. From 2009 to 2015 he was Senior Economic Adviser to Deloitte Australia and from 2009 to 2017 was Professor of Infrastructure Economics at the University of Wollongong’s SMART Infrastructure Facility. He joined SMART and Deloitte after working as a consultant economist at NECG, CRA International and Concept Economics. Prior to that, he was an economist at the OECD in Paris from the late 1970s until the early 1990s. At the OECD, he headed the Secretary-General’s Task Force on Structural Adjustment (1984-1987), which concentrated on improving the efficiency of government policies in a wide range of areas, and was subsequently Counsellor for Structural Policy in the Economics Department. He has taught at a range of universities, undertaken a number of government inquiries and served as a Lay Member of the New Zealand High Court. In 2016, he was made an Officer in the Order of Australia.
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14 Responses to Coward’s route to raising tax

  1. john constantine

    Any family that can be forced from ‘Howard Battler’ or aspirational tradie [potentially tory voting] into a social worker controlled welfare herd becomes a resource for the left.

    The swampies do not care how they gain control of a client herd, they are happy to tax people down, bribe them with welfare, brain wash them in childcare, import them from overstocked overseas peasant puppyfarms or crush their spirit through regulatory compliance burdens.

    Free living people are the enemy of the left, compliant client herds are like goldmines for the swampfilth.


  2. Fred Lenin

    Since when has courage and honesty been a part of our political shambles? Lies ,deceit. Conniving,obfuscating,manipulating, greed self interest ,thise are the. Benchmarks of politicians under or system the hole system is geared to their benefit,a d ensuring they are never punished for tgeir cupidiy and stupidity .It has now become so serious that the sysem must be scrapped ,along with the law trade another antiquated self seeking industry .The unionmovement hi jacked by criminals. Tge Education sytem that doesnt educte but indocrinates a public service monolith that is not public and serves only its self . A monstrous welfare system. That even imports illiterate islamic and african peasants who will nver assimlate ( look at tge USA and UK ) the system is destroying our future
    And must its self be destroyed and a completely new way of Governance brought in ,one that gives Real Power to the Real People ,get rid of politics and polticians they have done too much harm.

  3. Big_Nambas

    Bit hard to comment after those two perfect posts.
    What is clear is the electorate have figured out that Government WILL pay for their votes with your money.
    What they haven’t figured out is what happens when you run out of other peoples money.
    Democracy appears doomed to failure.

  4. duncanm

    I’m afraid you let the cat out of the bag, Henry.

    The left will begin to understand the word ‘imputed’ and start bleating about the huge ‘government subsidies’ afforded to all those rich home-owners.

  5. Rabz

    So what’s the position of the Government? Have they come out and categorically stated they won’t stuff around with negative gearing?

    Stupid expedient cowards, the lot of them.

  6. Zippy The Younger

    Bowen would sooner cut off his own appendages than cut taxes

  7. Token

    Any family that can be forced from ‘Howard Battler’ or aspirational tradie [potentially tory voting]

    The FBT changes in Bowens budget blowout in ’13 & Shorten trench warfare when he was IR minister against contractors prove the ALP want to bring these guys to heel.

    Stopping them being able to leverage their skills via negative gearing is the final piece in that puzzle.

  8. Andrew

    Generally the people who argue against negative gearing don’t actually know what it is, I have found.

  9. Big_Nambas

    All this shit goes away with a flat tax. Problem is 1000’s of accountants and tax administrators would be sacked. Their vested interest guarantees no solution to our failed tax system.

  10. fiddling the definition

    Three words that tell you how they win all the bloody time.

  11. So, the mechanics behind the phrase “Negative gearing” refer to the practice of deducting the cost of making your living from your gross income, before calculating tax.
    If you (as a person) lose the ability to deduct the cost of financing your investment property from your taxable income, what happens to other (currently deductible) costs of earning my living ?
    Do I lose the ability to deduct the cost of borrowing to invest in my own business ?
    Do I lose the ability to deduct the cost of training courses ?
    Do I lose the ability to deduct the cost of personal protection gear ?

    I don’ t see anyone from GetUp or the ALP or ACOSS or any of the other usual suspects telling me how the plans to remove negative gearing from property investment are any different from any of the examples I refer to above.

    Of course, you will be able to retain the ability to deduct the cost of doing business if you operate as a sole-trader or company (which I have done in past). Of course the ’employer’ has no obligation to pay benefits like holiday pay. And they will want you to pay for things like workers compensation insurance. And you will need to face the paper work of things like quarterly GST, ASIC forms, etc.


  12. duncanm

    Generally the people who argue against negative gearing don’t actually know what it is, I have found.

    Yup – and as martin_english has listed, they often don’t understand that it applies to any investment.

  13. Token

    Problem is 1000?s of accountants and tax administrators would be sacked. Their vested interest guarantees no solution to our failed tax system.

    There would be a lot more finance, accounting & admin jobs as the number of businesses booms, and the people involved would be paid more than they are today. Unfortunately the people you are talking about are the lucky few with jobs built around engineering around existing rules.

  14. Gavin R Putland

    Nothing to do with raising or minimizing taxes

    Until a few weeks ago, the defenders of negative gearing (NG) preferred not to mention the possibility of limiting it to new homes, lest they give the idea any free publicity. Then, on 22 April — six days after the PM ruled out any changes to NG — shadow treasurer Chris Bowen pointedly left open the possibility of limiting NG to new homes for future investors while grandfathering existing arrangements. Although grandfathering was the only NG-related policy to which Bowen actually committed his party, commentators quickly noted that the policy of limiting NG to new homes for future investors would be consistent with his stated aims. Since then, the Establishment’s response to that policy has shifted from silence to frontal attack.

    So today we have Henry Ergas in the Australian claiming that any modification to NG is a coward’s route to raising tax on the middle class.

    As any changes to NG will be limited to future investors, Ergas is accusing the reformers of wanting to increase taxes on a group of taxpayers that does not yet exist. Presumably what he really means is that this group, when it eventually comes into existence, will pay more tax than it would have paid under the old rules. But will it? If NG is limited to new homes for future investors, those future investors who are positively geared will be unaffected by the change, while those who are negatively geared will be more likely to choose new homes in order to escape the change. The only people who pay more tax than under the old rules will be future investors who choose to defy the new incentives by negatively gearing established homes. Their choice: their responsibility!

    Ergas asks:

    [I]f you are going to prevent interest expense from being fully deductible against property investors’ taxable income,… why not limit investors’ ability to deduct maintenance costs as well? …

    And if the interest deduction is “unfair”,… why would the maintenance deduction be any fairer…?

    [I]f double taxation of maintenance is unacceptable, why would it be acceptable for interest payments…?

    Well, for one thing, there is a public interest in keeping the existing housing stock in habitable condition, but no public interest in helping would-be landlords to outborrow and hence outbid would-be owner-occupants who are competing for the same existing stock. In answer to the first question, Ergas writes:

    True, rental homes need to be maintained; but it is every bit as true that they need to be financed.

    But if a home already exists, it has already been financed at least once! If it is to be financed again, why should it be financed for the benefit of an investor instead of an owner-occupant?

    Attempting to deny that investors have a tax advantage, Ergas writes:

    [I]t should be obvious that owner-occupied housing enjoys any number of tax advantages that rental housing does not, including the complete exemption from tax of imputed rent (that is, the rent an owner would pay for using the dwelling) and of capital gains. And owner-occupied houses are also fully exempted from the means tests for the age pension and for aged care benefits.

    Careful, Henry! If owner-occupants are getting a favour by not being assessed on imputed rents, although they also can’t claim deductions for interest or maintenance, then investors are getting a favour by not being assessed on their unrealized capital gains while they do claim deductions for interest and maintenance. Ergas doesn’t mention the crucial fact that owner-occupants can’t claim deductions for interest and therefore can’t exploit negative gearing, even if their outgoings exceed their imputed rent. And the exemption of owner-occupied homes from future capital-gains tax and means tests, unlike NG for investment homes, does not help first-time buyers to win the bidding war for entry to the market.

    Having apparently given up on the old furphy that Keating’s quarantining of negative gearing caused a blowout in rents (actually rents rose faster before and after the quarantining period than during it), Ergas looks across the Pacific for another anecdote:

    The US experience is telling: the 1986 tax reform, which imposed “quarantining” provisions that limit the scope to offset losses from real estate investment against other personal income, helped decimate investment in smaller rental properties, leaving a gap ever-growing public subsidies have been unable to close.

    Did those quarantining provisions make an exception for new homes, Henry? If not, that story is inapplicable to the present proposal. (And the story about Keating’s quarantining, if it were true, would be inapplicable for the same reason.)

    Defending current arrangements, Ergas notes that

    …while prices for capital city houses have doubled since 2000, rents have risen only marginally more rapidly than median household incomes.

    If workers on minimum wages are to be able to afford housing without pricing themselves out of jobs, the upward trend in rents will need to be slower than that of median household incomes. If that is to happen, tax concessions for housing will need to do something about supply — e.g. by requiring investors to build or buy new homes in order to qualify for NG.

    But this is clearly the policy that Ergas has in his sights:

    [E]ven the options that have been mooted as intermediate solutions are more likely to compound the difficulties than to solve them.

    The proposal to limit negative gearing to new homes is a case in point. Given the restrictions on land availability, its immediate effect would be to raise the price of new, compared to existing, rental properties…

    Note the implicit admission that NG drives up prices! But if prices of new homes are not driven up by NG, they will be driven up by big developers withholding land from sale until the market is ready to pay whatever ransom they demand. If limiting NG to new homes drives up prices of new house-land packages, it will enable builders to pay more for developed lots and thereby induce developers to sell their stock earlier. Meanwhile, the diversion of investors’ demand from established homes will make established homes more affordable for owner-occupants, while the increase in the overall supply of housing will make rents more affordable. But, of course, improved affordability is precisely what the defenders of the status quo are afraid of.

    There’s another way to induce developers to sell, namely to slap a whopping great holding tax on vacant land. But I’m pretty sure Ergas wouldn’t approve of that, regardless of how much payroll tax and stamp duty were cut at the same time.

    On limiting negative gearing to new homes, Ergas continues:

    …over time, however, it would accelerate, possibly materially, the rate at which existing properties were scrapped so as to make room for new, tax-advantaged, dwellings.

    That is easily prevented or neutralized by requiring new negatively-geared dwellings to be additional dwellings, over and above those that merely replace old ones. But if, like Ergas, you don’t want to require negative gearers to build new homes, neither will you want to require them to build more homes than they demolish.

    In short, just as the proposal to limit NG to new homes (for future investors) has nothing to do with raising taxes and everything to do with improving housing affordability, so the opposition to this proposal has nothing to do with minimizing taxes, and everything to do with maximizing prices and rents of established properties for the benefit of incumbent owners.

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