Wednesday, October 27, 2021

Now it’s Liberals telling us we are going to have to cut the capital gains tax concession if we want to get Australians into homes

NSW is doing what Labor’s Bill Shorten could not – explaining why Australia’s capital gains tax concession is knocking first home buyers out of homes.

Shorten went to the 2016 and 2019 elections with a plan – Labor would halve the capital gains tax concession used by landlords who buy and sell properties.

In much the same way as he was unable to sell his (now modest by international standards) plan to make half of all new car sales electric by 2030, he was pilloried by Morrision and before him Malcolm Turnbull for a policy they said would smash house prices.

All Shorten was proposing was to wind back the capital gains tax exemption (which exempts from tax half of each profit made from buying and sell real estate and other assets) for future transactions only. The exemption would stay in place for everything already bought.

In the face of an overblown debate about whether or not it would smash house prices (Morrison’s department had quietly warned such claims were “not consistent with our advice”) the Labor leader found himself defending modelling about prices rather than outlining what his policy would actually do.

And he lost, twice.

Now, as we prepare for yet another election, the NSW Coalition government has done what Australia’s Labor opposition could not – make a cogent argument for winding back the capital gains tax concession, saying it “pushes first home buyers out of the market”.

Elbowing first home buyers aside

In a submission placed quietly on the federal government’s housing inquiry website late last week the NSW government argued that if the concession was cut, housing would be used “more for accommodation needs than investment needs”.

Here’s the line of thinking it set out, the line Shorten was never able to get across.

The income made from capital gains – from buying something, holding it, then selling it at a profit – is taxed differently from the income made from work or running a business. Only half of it is taxed.

Prime Minister John Howard and his treasurer Peter Costello were responsible for the change, introduced in 1999 in the leadup to the introduction of the goods and services tax in 2000, but with less fanfare.

Before then capital gains were taxed in the same way as other income (what they are subject to is income tax, there is no such thing as a separate capital gains tax).

But before then only the portion of each gain over and above the rate of inflation was taxed, so that people weren’t taxed on a profit that would have no real value.

The change, introduced after an inquiry that found it would “encourage a greater level of investment, particularly in innovative, high-growth companies” was to instead tax only half of each capital gain.

It was sold as a small change. A few years earlier, inflation had been big, around 8% per year, meaning that after five or so years only half of each profit would have been taxed in any event.

But inflation had since dived to a barely-noticeable 2%, where it has stayed for most of the past 20 years, making a guaranteed exemption from tax of half of each capital gain made trading property way over the odds.

It was, as economist Rory Robertson told his clients at the time, “almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages”.

Instead of pouring into high-growth companies, as Howard’s inquiry said it expected, the money flooded into housing, which was easier to borrow for.

Rushing into real estate rather than shares

As Reserve Bank assistant governor Luci Ellis told a parliamentary inquiry, it was “more profitable to negatively gear property, because you can gear it more”.

To buy properties quickly, real estate investors needed to buy properties that would have otherwise been bought to live in.

It pushed up prices, but that wasn’t all it did.

As the NSW submission to the current housing inquiry says, the most significant impact was “the displacement of owner occupiers (including first home buyers) from home ownership by tax-advantaged investors, predominantly those already on higher incomes”.

In its words

by encouraging investors to buy and hold property, the 50% capital gains discount increases investor demand for housing and pushes first home buyers out of the market

Before capital gains tax was halved and Australians dived into becoming landlords, more than 70% of Australian households owned the home in which they lived and one quarter rented.

At the latest count (itself four years old) only two thirds owned the place in which they lived and one third rented.

Labor has new friends

And properties are less well used. Because income from rent is no longer the chief motivation for holding property (these days most rental properties make a rental loss whereas before the capital gains tax change most made a profit) the NSW government believes more are remaining empty.

Now, when the capital gains from holding properties can be measured in hundreds of dollars per day, it would be an ideal time to wind back the capital gains tax discount. Its absence wouldn’t much hurt.

And it’s easy to forget that wasn’t what Labor was proposing. Shorten (twice) put forward something far more modest – leaving the tax discount for existing investments untouched and halving the discount for future investments.

It’s no longer Labor policy, but it was backed by the head of the Coalition’s Commission of Audit and the head of its financial system inquiry.

And it was of interest to the Business Council of Australia which pointed out that the discount “can distort investor behaviour, particularly at a time of rapid capital gains, such as in a housing or equity boom”.

Morrison’s opposition to it was hard to justify at the time. It’s harder now.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, October 20, 2021

The easy way to rein in Facebook: stop it eating competitors

Few of us who have survived the last year aren’t grateful for technology.

Zoom, email, connected workplaces and solid internet connections at home have made it possible to work, shop, study and carry on our lives in a way that wouldn’t have been possible had the pandemic hit, say, 20 years earlier.

But parts of big tech — the parts that track us and drive us to think dangerous and antisocial things just so we keep clicking — are doing us enormous damage.

Although it might seem like we can’t have the best of both worlds — the connectivity without the damage — I reckon we can. But we are going to have to change the way we think about big tech.

The first thing is to recognise that big tech is intrinsically weak. Yes, weak. The second is that it has only become strong each time we have let it.

By “big tech” I mean Facebook and Google and related companies such as Instagram and YouTube (owned by Facebook and Google respectively).

The firms that came before them were indeed weak in the sense that they didn’t have a guaranteed future. Think back to Netscape, Myspace, MSN and all those other montholiths we were told at the time would become natural monopolies.

Terrified of losing its edge

Much of the behaviour revealed by Facebook whistle-blower Frances Haugen this past month is that of a market leader terrified it is losing its edge.

It switched what it showed away from news towards posts that inflamed and enraged people in 2018, with “unhealthy side effects on important slices of public content” in part because users had begun to interact less with it.

Extract from internal Facebook report. Wall Street Journal, US Senate Commerce Committee

Facebook knew that “we make body image issues worse,” in the words of one of its memos, but did little to change the way Instagram worked. In part this was because teens spent 50% more time on Instagram than Facebook. Instagram looked like the future.

When engagement on Instagram started flagging, Facebook developed plans for Instagram Kids, seeing pre-teens as “a valuable but untapped audience”.

These don’t sound like the actions of a company confident of staying on top.

And nor does its initial purchase of Instagram in 2012 when it could have started its own photo-sharing service on mobiles, leveraging all that it had.

Facebook also bought WhatsApp in 2014 because its own messaging platform, Messenger, was losing ground.

It couldn’t grow anything like as big by itself, because when firms grow beyond a certain size they turn sluggish, bureaucratic.

Google got bigger by buying DoubleClick (the platform it uses to sell the advertisements that drive its income) and all manner of emerging platforms including Android, YouTube, Waze and Quickoffice.

They are the actions of a hungry company, but not one supremely confident of staying at the top.

Australian academic Stephen King, a former member of Australia’s Competition and Consumer Commission and a current commissioner with its Productivity Commission, says we need to apply special tougher rules to takeovers by companies such as Google and Facebook.

Big tech grows bigger by takeovers

Usually we only block takeovers where the target is big. Instagram and WhatsApp were small. Instagram reportedly had 13 full-time employees at the time of its takeover, WhatsApp reportedly had 55. Yet Facebook paid billions for them.

In the US and the UK both takeovers were waived through.

Big tech companies can do things with tiny takeover targets others can’t. Takeovers can give them access to vast networks of existing users and their data.

As King puts it, Instagram is big because it was acquired by Facebook, not because Instagram was necessarily the best target.

In Europe the authorities were on to this possibility and approved the takeover of WhatsApp only after Facebook informed them it would be “unable to establish reliable automated matching between Facebook users’ accounts and WhatsApp users’ accounts”.

This statement was incorrect, Facebook has done it, and paid the European Commission €110 million for providing incorrect or misleading information.

Had Australia been tougher, had the US, the UK and the European Commission been tougher, Facebook and Google would be nothing like the behemoths they have become today. They might have peaked and be losing market share.

We are able to say no

Their future is largely in our hands. For big tech companies able to use the weight of their networks (and only for those companies) we could “just say no” to takeovers. It’s hard to think of a reason for one to proceed.

If needed, we could change the law to make “no” the default.

This wouldn’t shrink the companies in a hurry. Most of the users of Facebook, YouTube, Twitter and the like are locked in, because that’s where their friends are.

But where the friends are changes every generation.

Facebook and Google know this, which is why they are so keen to take over upstart competitors and emerging platforms in fields they haven’t thought of.

If we stopped them, we wouldn’t stop them growing straight away, but we would make it hard for them to fight the natural order in which the new and fashionable displace the old and predictable. It’s their deepest fear.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Monday, October 18, 2021

Economists back carbon price, say net-zero benefits outweigh costs

Eight in ten of Australia’s leading economists back action to cut Australia’s carbon emissions to net-zero.

Almost nine in ten want it done by a carbon tax or a carbon price – mechanisms that were explicitly rejected at the 2013 election.

The panel of 58 top Australian economists selected by the Economic Society of Australia wants the carbon price restored to the public agenda even though it was rejected seven years ago, some saying Australia’s goods and services tax was rebuffed in 1993 and then restored to the public agenda seven years later.

Among those surveyed are former heads of government departments and agencies, former International Monetary Fund and OECD officials and a former and current member of the Reserve Bank board.

Asked ahead of November’s Glasgow climate talks whether Australia would likely benefit overall from the national economy transitioning to net-zero emissions by 2050, 46 of the 58 said yes.

The Conversation, CC BY-ND

The response is at odds with the previous positions of groups such as the Business Council of Australia which in the leadup to the 2019 election labelled Labor’s proposed steps towards net-zero “economy wrecking”.

This month the Business Council backed net-zero by 2050, and produced modelling suggesting it would make Australians A$5,000 better off per year.

Only one net-zero doubter

Only five of the 58 economists surveyed disagreed with the proposition that cutting Australia’s emissions to net-zero would leave Australians better off.

Of those five, only one doubted that cutting global move emissions to net-zero would leave Australia better off. The others believed that even if a global move to net-zero did leave Australians better off, it was likely to happen anyway, meaning Australia wouldn’t need to act, a stance derided by others as “free-riding”.

“The argument that we are only a small percentage of global emissions holds no water either ethically or in terms of establishing and implementing a global agreement,” said Grattan Institute’s Danielle Wood. “If rich countries like Australia won’t do their fair share, this undermines the likelihood that others will.”

Others including Reserve Bank board member Ian Harper pointed out that Australian exporters faced punitive tariffs and lending and insurance embargoes unless Australia pulled its weight in reducing emissions.

His comments echo those of Reserve Bank Deputy Governor Guy Debelle and Treasurer Josh Frydenberg who have said that unless Australia takes action it will face reduced access to capital markets “impacting everything from interest rates on home loans and small business loans to the financial viability of large‑scale infrastructure projects”.

University of Melbourne economist Leslie Martin made the broader point that Australia had a lot to lose from rising temperatures if free-riding didn’t pay off.

“Although Australia could possibly free-ride on the efforts of other larger economies, it would suffer disproportionately if other countries chose to do the same” he said.

Only one overwhelmingly preferred option

Offered a choice of four options for rapidly reducing emissions, and asked to endorse only one, the economists surveyed overwhelmingly backed an economy-wide carbon price in the form of a carbon tax or market for emissions permits.

Of the 58 surveyed, 49 backed a carbon price, seven backed government support to develop and roll out emissions-reducing technologies, and one backed support for technologies that drew down carbon from the atmosphere.

None backed so-called “direct action” – the program of competitive grants for firms that cut emissions the government took to the last two elections.

“The less federal governments choose to involve themselves with the technical aspects of the alternatives at a micro scale the better,” said Lin Crase, a specialist in environmental management at the University of South Australia.

Crase said governments had shown themselves to be very bad at picking winners, but very good at putting in place broad settings that allowed the people and businesses closest to the action to pick winners.

Several of the economists surveyed said the government’s slogan of “technology, not taxes” set up a false distinction. Taxes could drive the switch to better technologies – ones chosen by the market rather than by government edict.

Australia’s carbon price was introduced in 2012 and abolished in 2014. Had it still been in place Australia would have at hand the tools it needed to get to net-zero.

Some of those surveyed said it was “too late” for a carbon price, partly because of politics and partly because of lost time.

Time for everything plus the kitchen sink?

Saul Eslake said Australia was no more likely to adopt an economy-wide carbon price than he was “to step in thylacine droppings on my front lawn of a morning”, the views of the OECD and the International Monetary Fund notwithstanding.

What was needed was everything possible, including the second-best option of direct action. John Quiggin said Australia needed direct action in the literal sense of government investment in renewable electricity and infrastructure.

Rana Roy said nothing should be ruled out, including the resurrection of a carbon tax or a carbon price, perhaps by a different name. An option rejected once was not rejected “for the rest of time”.

Others pointed to Australia’s natural advantages in solar, wind, geothermal energy and carbon removal via means such as reforestation and storing carbon in soil.

With the right settings in place, Australia could become a major producer of zero-emissions hydrogen, and an industrial powerhouse that used its own iron ore and green energy to export green steel to the world.

With one of the most important settings missing, Australia would find it harder.

Detailed responses:

The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, October 13, 2021

As home prices soar beyond reach, we have a government inquiry almost designed not to tell us why

Never has an inquiry into the skyrocketing price of homes been more urgent.

Rarely has one been as insultingly ill-suited as the one under way right now.

Midway through last year in the midst of COVID, the average forecast of the 22 leading economists who took part in The Conversation mid-year survey was for no increase in home prices whatsoever in the year ahead (actually for slight falls).

At that time the typical (median) Sydney house price was A$1 million, where it stayed until the end of the year.

Then it took off. In the ten months to the start of this month the typical Sydney house price soared $300,000 to $1.3 million – a breathtaking increase (and an awfully big penalty for delaying buying) of $1,000 each day.

For apartments, the increase isn’t as big, although still extraordinary. The cost of delaying buying a typical Sydney apartment has been $334 each day.

The cost of delaying buying a typical Melbourne house has been close to $600 per day, the cost of delaying buying a typical Melbourne apartment $150 per day.

In that time, in the year in which the typical Australian home price climbed 20.3%, the typical Australian wage climbed just 1.7%

What people stretched to the limit or now locked out of the housing market are desperate to know is

  • why it is happening

  • when it is likely to stop

  • what (if anything) we can do about it.

Instead, we have been given an inquiry into affordability in name only. Seriously. The parliamentary inquiry commissioned by the treasurer in July and chaired by backbencher Jason Falinski is called an inquiry into affordability and supply, but the word “affordability” appears in none of its three terms of reference.

It’s an inquiry into ‘supply’

Instead, the terms of reference refer to the impact of taxes, charges and other things settings on “housing supply”.

I guess the idea is that it is obvious that supply is the key to affordability, but it rather negates the idea of holding an inquiry, and it sits oddly with the explosion in prices we have seen in a year in which building approvals have surged by a near-record 224,000 and our population has as good as stayed still.

In its submission to the inquiry the Reserve Bank includes a graph showing the supply of housing (the stock of houses and apartments) outpacing population growth for the best part of the decade leading up to the latest price explosion.

Supply has been holding up

But in a sense (and stay with me here) whoever drafted the restricted terms of reference is right. Housing affordability is linked to the supply of housing.

And housing affordability has been doing okay.

In evidence to the inquiry last month Treasury assistant secretary John Swieringa drew a distinction between housing affordability (best measured by the cost of renting housing) and the cost of buying a house, which was partly an investment.

When you are a purchaser of a house you are partly investing in an asset and partly buying dwelling services; whereas when you are renting it’s probably a cleaner read on what cost dwelling services is.

That clean read – rent as a proportion of income – hasn’t much changed in 20 years. For middle earners it has remained comfortably between 20% and 25% of household disposable income.

The Reserve Bank says advertised rents for units in Sydney and Melbourne have drifted down by $30 to $50 per week over the past five years while rents in other places have mostly drifted higher.

As it happens, it says another measure of housing affordability is improving.

The cost of home loan payments as a proportion of income has been falling since the onset of COVID. Dramatically lower interest rates mean payments take up less household disposable income than they did five years ago, even with the much higher prices.

The problem is accessibility

What has worsened is what the Reserve Bank calls “housing accessibility”, to distinguish it from housing affordability.

Accessibility is the ability of a first time owner or renter to get into the market at all by finding the deposit or bond.

Astounding price growth and five years of weak income growth have pushed up the cost of an average first home deposit from 70% of income to more than 80%.

On average it now takes a 24-35 year old nine years of tucking away one fifth of their income each year to save for a typical Sydney deposit, up from five to six years a decade ago.

Average First Home Buyer Deposit

Owner-occupier; estimated as a share of average annual household disposable income using average first home buyer commitment size and assuming 20 per cent deposit. Seasonally adjusted and break-adjusted. RBA, ABS

It’s okay if you have a parent who can get their hands on money, almost impossible if you don’t. In the words of former Reserve Bank official Peter Tulip, it’s making home ownership hereditary.

He’s not the first person to have noticed.

Liberal backbencher John Alexander chaired the Coalition’s 2015 inquiry into home ownership. He said then we were “on track to becoming a Kingdom where the Lords own all the land and the biggest Lord will be King and the enslaved serf tenant is paying rent to the Lord to become wealthier”.

Ownership is becoming hereditary

Prime Minister Turnbull and Treasurer Scott Morrison used the 2016 election (in which they attacked Labor’s plan to limit tax breaks for landlords) to shut down Alexander’s inquiry, and only agreed to restart it with someone else as chair. It had considered 30 hours of evidence.

The chair of this current (limited) inquiry seems unperturbed.

He opened September’s hearings saying no question was off-limits, no idea too stupid, all forms of inquiry were worthwhile. It’d be great if that was true.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.