The strange politics of negative gearing
Twenty-six years ago, on the day the then treasurer Paul Keating declared Australia was in “the recession we had to have”, a Canberra journalist for The Age compiled a list of Keating’s previous quotes that denied a recession was coming.
For a bit of fun, she put a suggested heading on it: “I knew we had to have one but I didn’t want to tell you.”
Unfortunately, a subeditor assumed it was an actual quote – not just a made-up gag – and added it to the list beneath. Another newspaper then used it as the basis for an editorial. The opposition hurled the quote at the treasurer in question time and he didn’t correct them. Other than the mortified journalist herself, nobody realised it wasn’t real, including Paul Keating.
It sounded like something he might have said, so it became true.
The same thing is happening to Malcolm Turnbull in 2016 on the issue of negative gearing.
In some corners of the internet, bloggers have been flaying Turnbull for doing an about-face on negative gearing compared with the view expressed in a 2005 tax paper he prepared with Jeromey Temple, of the Australian National University.
The bloggers’ criticisms are making their way into the traditional media and were repeated in a letter published in The Sydney Morning Herald on Tuesday.
“In 2005, Malcolm Turnbull described negative gearing as a ‘sheltering tax haven’ that is ‘skewing national investment away from wealth-creating pursuits, towards housing’ and has caused a ‘property bubble’,” the letter writer said.
When the prime minister unveiled his party’s no-change policy on negative gearing on Sunday, with Treasurer Scott Morrison, Turnbull was asked about it.
“Mr Turnbull, you were on the record a few years back supporting changes to negative gearing,” a journalist asked him. “Was that a mistake?”
He responded without correcting the assumption.
“Well, look, I think you are taking some comments out of context,” Turnbull said, before going on to attack Labor’s plan to restrict negative gearing tax concessions to investments in new housing stock.
Turnbull faces allegations of flip-flopping on a range of issues, but, in this particular instance, the bloggers were misquoting him.
The sentence in the 2005 paper actually reads: “The Australian recently editorialised ‘our top tax threshold … is far too low as a multiple of earnings. This in turn, distorts economic behaviour, sending honest taxpayers scurrying towards sheltering havens – such as negative gearing, a capital gains tax regime that was halved in 2000, or the 30 per cent company rate – and skewing national investment away from wealth-creating pursuits, towards housing. The result – a property bubble’.”
They weren’t Turnbull’s words. But what he did say could signpost his future inclinations on tax policy generally and negative gearing and capital gains tax in particular.
The 2005 paper described Australia’s negative-gearing provisions as “very generous” because the taxpayer “is not obliged to demonstrate that the negatively geared property will generate positive cash flow at some point in the distant future”.
It goes on to say: “On the other hand, given the dependence of our economy on the building sector, the consequences of a change to negative gearing could be very severe.”
Turnbull and Temple also favoured lowering the top marginal tax rate to match the company tax rate of 30 per cent – or no more than 5 per cent above it – and taxing capital gains at the same rate as income.
Their paper observed that, “the lower the MTR [marginal tax rate] the less attractive are any and all tax effective schemes”.
But if Turnbull’s negative-gearing position has been consistent, some of his colleagues have made dramatic about-turns on whether negative gearing needs to be protected or not.
As recently as February, Scott Morrison said there were “excesses” in the system. The same week, the now trade minister Steve Ciobo said there was “possibly scope to make some reform”.
Assistant minister to the treasurer Alex Hawke said that if people had “too many properties negatively geared, that isn’t something that we ought to continue”.
Two months on, Hawke has changed his position. “We’ve looked at it carefully,” he told Sky News this week, “and now is exactly the wrong time to make any of these changes.”
He said that it would threaten economic growth and limit people’s ability to “get ahead”.
“It’s a very dangerous time to be making changes in such a major way to the tax code,” he said.
This week’s unexpectedly low quarterly inflation rate has reinforced that view within the government. The fall of 0.2 per cent – deflation – has spooked some in the financial markets and made some MPs nervous, too.
Inflation that low – well below the Reserve Bank’s target range of 2 to 3 per cent – means prices are actually falling. Some in business fear that could make consumers delay spending, waiting for things to get cheaper. And that could slow down an already sluggish economy.
Coalition sources say concerns about the impact on consumer confidence of big changes to the tax system – along with the assessment that the boost to growth was too small to justify the upheaval – were behind the decision to abandon an increase in the goods and services tax.
Similar concerns also fed into the decision not to fiddle with negative gearing.
The Saturday Paper has been told cabinet took its decision to retain negative gearing some weeks ago and that it was a political – and not an economic – move.
The policy decision was made to form part of the government’s armoury in the lead-up to the election and to fit an overall future-focused message about investment, growth and jobs.
The Labor opposition’s focus is essentially the same. Both sides’ negative-gearing policies are aimed squarely at affordability and aspiration – the Coalition’s at those wanting to buy investment properties to get ahead, Labor’s at those wanting to buy their first home.
“Labor’s reckless changes will reduce property values; they’ll devalue every home, every property, in Australia,” Turnbull said, unveiling his position on Sunday. “…They are going to drive down home values, drive up rents and discourage investment.”
Shadow treasurer Chris Bowen argued Turnbull was looking after the rich. “He thinks it’s more important for an Australian buying their 10th or 11th property to get a tax break than it is for first-home buyers to get into the housing market,” said Bowen.
Labor has pitched its suite of pre-election announcements as “positive policies”. If it wins government, it proposes from July 1, 2017, to limit negative-gearing tax breaks on investments made after that date to new housing stock. New investments in existing stock would no longer qualify for the concessions available by offsetting losses, or expenditure, against wage and salary income.
It would also reduce the discount on capital gains tax for properties sold after being owned for at least a year, from 50 per cent to just 25.
It points to the government’s financial services inquiry, led by former Commonwealth Bank chief David Murray, which found the combination of negative gearing and capital gains tax arrangements was distorting the housing market.
But Labor would still allow losses from new investments in shares or existing properties to be offset against investment income. And it would allow those losses to be carried forward to offset the final capital gain.
It argues this is deliberate, designed to keep the treatment of wage and salary income and the treatment of investment income separate. The Coalition believes it’s a policy-drafting mistake that will favour the rich.
Some in the Coalition’s ranks who have advocated restricting negative gearing now say they believe it shouldn’t happen until the economy is more robust. They warn that removing the incentive to invest in existing housing stock by scrapping negative-gearing concessions naturally means fewer will invest.
Those who do invest won’t be able to claim a tax break on either the rental income or maintenance and upgrade costs, potentially pushing rents higher and leaving rental premises to fall into disrepair.
“Will this create slums?” one asks. He is unwilling to pose the question publicly. But the same person acknowledges that with low interest rates and rental returns, negative gearing is not currently the investment incentive it used to be.
As economic commentator Alan Kohler wrote in The Australian this week, “politicians vying to scare and tempt may have missed the boat: the real estate investment boom is now all but over”.
Both sides are focusing on the idea of negative gearing as much as the reality.
Coalition strategists say that while most Australians don’t have an investment property to negatively gear, many would like the opportunity – the current low benefit notwithstanding.
The Coalition’s selection of young Sydney parents Julian and Kim Mignacca as spruikers for its negative-gearing policy was designed to highlight aspiration.
At his news conference with Morrison outside the couple’s home in the Sydney suburb of Penshurst on Sunday, Turnbull said Julian had bought investment properties “in order to buy a place for his little daughter, Addison”, who was almost a year old.
In a Coalition-produced video, which Turnbull then uploaded to Instagram, Julian Mignacca explains how he bought his first investment property, a two-bedroom, red-brick unit at Cronulla, 10 years ago.
He says he bought it on his accountant’s advice because the negative-gearing benefits would help his business. He went on to buy more.
“With our investment properties, we have spent quite a bit of money on renovations to keep it modern, not only for a higher rental return but also for the resale,” Julian says. “…If you couldn’t negative gear a property, I don’t think I would buy another investment property. It would just purely cost me too much … I see our family in 10 years’ time with hopefully a few more kids, a couple more investment properties and just, yeah, the more I can get to leave my kids for the future. That’s our goal, ultimately, to have a nice family home.”
The video hit all the buttons in the Coalition’s message: that negative gearing was about investing in the future, that it was normal for a young blue-collar family to have property investments, and that Labor’s policy would undermine the building industry, which relies not just on construction of new homes but also renovations on existing ones.
It was also designed to reinforce the Coalition’s overall election pitch – that it is focused on the future, on investment, on growth, on jobs.
Next week’s budget will be framed around the same things. So will the Coalition’s campaigning in seats where the election will be won or lost, using direct-marketing techniques including targeted video messages appearing in voters’ social media feeds and phone calls to their homes containing recorded political messages.
It is what strategists call “ground warfare”, and it has already begun.
Labor has also begun rolling out its marginal-seat strategy, evidenced by its pledge last week to support night-time no-fly zones over the Western Sydney suburbs around the planned second Sydney airport at Badgerys Creek.
Infrastructure spending is being linked directly to the housing affordability issue.
The government’s new cities policy includes incentives for both the states and territories and the private sector to unlock more land in return for the Commonwealth supporting transport-corridor infrastructure projects that will generate cheap housing.
Turnbull is offering this as an alternative to what he is convinced is a defeatable Labor housing policy.
But the opposition believes voters are on their side.
This week, an Essential Media survey of 1020 respondents found majority support for tightening the tax concessions on capital gains, 52 per cent in favour and 19 per cent opposed, with 29 per cent undecided.
It also found more than twice as many people favoured limits on negative gearing, with 48 per cent in favour and 24 per cent against.
Each of the major parties is reaching for published reports and third-party endorsements to back it as offering the best home-ownership opportunities for the next generation of Australians.
For the next 63 days, the nation’s babies should beware of politicians promising not only a kiss but the keys to their first house.
This article was first published in the print edition of The Saturday Paper on Apr 30, 2016 as "Strange politics of negative gearing". Subscribe here.