July 15, 2004 | Graham

Negative gearing is not the problem

In today’s AFR John Quiggin argues that one source of savings from which Mark Latham could pay for policy initiatives would be the abolition of negative gearing. In passing John also blames negative gearing in part for the housing boom. contrasting it with the US where property losses are quarantined against the eventual profits made from a property.
I also notice from John’s blog today that he is following one of John Maynard Keynes’ most significant policies. When accosted by a journalist who accused him of inconsistency because he has changed his opinion, Keynes said “When I find that I am wrong, I change my mind. What do you do?” Commendably, John lists a number of issues where he has changed as a result of what the facts have shown.
This post is hoping to add to the list.
The argument against negative gearing proceeds from the perception that negative gearing is a tax dodge which unjustly diminishes the tax taken by the government. Evidence generally produced in favour of this proposition is that more expenses are deducted from property than the total of income derived from it. John puts the deficit at $700 million.
But the deficit does not support the argument because it only deals with the equity side of the investment. When viewed in its totality a housing investment returns money to both the owner and the financier. In the typical negatively geared investment the owner agrees to forego a positive income in the hope of earning a positive capital profit at some later date. To do this he has to pass the income to someone else who is not interested in capital profit. So, while the owner might indeed make a loss and receive a tax deduction that does not mean that the revenue escapes the tax net. In fact it is captured as it goes through first the hands of the primary financier – the bank or other intermediary – and then into the hands of the depositor.
Australia’s housing stock is returning gross income of around 3.5%, and all of that, one way or another, pays dues to Michael Carmody.
The other argument that tends to be refuted by the facts is that negative gearing has led to the housing boom. This paper from Barry Zigas at the National Summit on Housing Affordability tends to suggest that the US situation where losses are quarantined makes little difference because it shows a chart of renter affordability in the US over the last 14 years with very similar fluctations to ours. If anything it may show a worse result. (Should be noted I’m making an assumption that rents and housing repayments tend to track each other which is not necessarily a good assumption).
The bottom line (a hackneyed phrase but I think justified in this analysis) is that housing booms and busts and consequent fluctuations in housing affordability are responses to changes in supply and demand rather than enduring taxation arrangements. That’s something that I would think modified Keynesians and economic liberals could both agree on.

Posted by Graham at 10:21 am | Comments (2) |
Filed under: Uncategorized


  1. I’ll just note that it’s the combination of negative gearing and concessional capital gains tax that’s problematic. I don’t have a problem with negative gearing per se. The first-best option, as I mention, would be to restore full taxation of capital gains.

    Comment by John Quiggin — July 15, 2004 @ 11:10 am

  2. The only real argument that there should be in this area is what capital gains tax regime should apply to a profit made on sale of an investment property – this has been loosened up quite a lot and as a consequence people are looking at the other end of the setup – negative gearing – in what would have to be something like a fifteenth-best solution.
    People who borrow for a property and make a revenue loss in a particular year make a real loss – it actually comes out of their pocket and they should be entitled to the tax deduction. (Declaration of interest – I don’t have any negatively geared real estate but I do have some negativel geared shares which I don’t hear the same outrage being expressed about).
    It strikes me that the real issue behind the negatively geared property outrage is an unease that those with property or an income which allows them to borrow have better access to investing in appreciating assets than do other people, and hence are able to even further improve their poition over time. If that is seen to be socially undesirable it probably hould be targetd more directly but of course everyone hopes they will some day be a property investor so it wouldn’t be politically popular.

    Comment by Alex McConnell — July 15, 2004 @ 11:24 am

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.