Malcolm Turnbull blog disputing Grattan Institute negative gearing report

Prime Minister Malcolm Turnbull has written a blog disputing the Grattan Institute's report recommending significant changes to negative gearing that could save more than $5 billion a year.

"I have a great deal of respect for John Daley and the Grattan Institute, but on this occasion they have it wrong," Mr Turnbull wrote in a blog post on his website.

"Unfortunately, the paper is littered with factually incorrect statements, claims that are unsupported by evidence and direct contradictions.

"And its economic analysis in many places leaves a lot to be desired."

"And its economic analysis in many places leaves a lot to be desired.

Malcolm Turnbull's then lists the following examples:

• The paper claims that negative gearing “goes beyond generally accepted principles for offsetting losses against gains”.  But this is factually incorrect.  The ability to deduct interest and other costs from personal exertion income has been a generally accepted principle in Australia’s tax system for more than a hundred years. While there are some exceptions to this principle, they have been strictly limited to instances of flagrant abuse (as was claimed to occur with ‘hobby farms’) or to situations where taxpayers might use losses to gain welfare benefits.

• The paper argues that negative gearing and the CGT discount create significant distortions in the housing market, but then directly contradicts this when it says that changing them will have little impact.  Really?  How can changing the policies that Mr Daley says are supposed to create such huge distortions have no impact?

• The paper argues that negative gearing benefits wealthier taxpayers. However, in countries which have adopted the ‘quarantining’ approach, the result has been to drive middle and low income earners out of the investment market, as they cannot afford to carry the loss-making periods when costs are high relative to rentals. In contrast, under both Daley’s proposal and Labor’s, wealthy Australians would continue to be able to deduct net rental losses from their other investment and property income. How can a change which would actually make the tax system more advantageous to those on higher incomes be fair? How will it improve wealth inequality when it will make it more difficult for those on lower incomes to build up wealth?

• The paper ignores the fact that reducing the CGT discount to 25 per cent would give Australia the second highest CGT rate among comparable countries. While the paper claims this too would have no harmful impacts, that assertion is directly contrary to the evidence, which it systematically ignores.  

• The paper also ignores the fact that under reasonable assumptions, if the CGT discount was reduced to 25 per cent, the effective tax rate on real capital gains would under reasonable assumptions be close to 70 per cent.  As a result, the paper dismisses, with little analysis, the important point that high rates of capital gains discourage entrepreneurial investment, whose returns generally come in the form of capital gains.    

• Removing negative gearing would mean a tax increase for wage and salary earners and would affect incentives to work. The paper ignores these efficiency costs.

Tax reform to target Australia’s distorting capital gains tax and negative gearing regimes could net the government A$5.3 billion in tax revenue per year, according to a new report from the Grattan Institute.

The report can be found here.