Why the states should charge income tax

Suddenly the election is about something else: how our states have had it too good for too long. And about how we've had it even better.

In every previous election we've been able to vote for better hospitals, schools and roads at the state level (which of course we want) and for lower taxes or lower budget deficits at the Commonwealth level (which of course we also want).

We've been able to kid ourselves we can achieve both.

It's been excruciating for our prime ministers and treasurers, and for anyone who cares about things being done properly. Elected in 2013 to cut the deficit without putting up tax, Tony Abbott and Joe Hockey slashed future grants to the states for hospitals and schools by $80 billion over10 years. They said after 2017 they would lift grants for hospitals by only inflation and population growth. The actual cost of running hospitals is climbing much faster.

It's the sort of thing we asked them to do, to find savings to eliminate the deficit. But then the state governments squealed and said they were unable to do the sort of things we asked them to, and pressured Malcolm Turnbull to relent.

He will relent. He'll offer to lift grants more or less in accordance with the actual cost of running hospitals for another three years. But only if the states agree to negotiate in good faith about what happens next. Beyond 2020 he'll revert to the miserly formula of inflation plus population growth. If the states feel they need more (and over time they will) they'll have the option of imposing their own income tax surcharge. Turnbull will cut Commonwealth income tax by a few percentage points to make room, and then allow each state to replace some or all of those points.

Initially the states >would be limited to merely replacing what the Commonwealth took away, but after that they could charge more. In Turnbull's words, they would be "accountable to their own voters".

It would cut both ways. Any state that wanted to offer a Rolls-Royce hospital service would be able to do so, as long as it charged for it through tax. Any state that wanted to keep its taxes low would be able to do that, so long as it offered fewer grand services.

Voters would be able to choose, or in extreme cases move. Queensland (to use a hypothetical example) might want to position itself as the low tax state. Anyone who moved there, attracted by the low tax, would know they were also taking chances with their health. Anyone who moved to South Australia to take advantage of good health services would know they had to pay for the privilege.

Every election, for decades now, the Australian National University has surveyed voters about what matters to them most. Until recently their number one concern was tax. In 1998 about 23 per cent labelled it "extremely important". Only 10 per cent thought health and Medicare were extremely important.

But at the turn of the century things began to shift. In 2001 tax and health were on level pegging at 16.3 per cent and 16.1 per cent respectively. By 2013 the positions had reversed. Now 19 per cent think health and Medicare are extremely important and only 11 per cent are as concerned about tax. It's the sort of change you would expect as the population gets older and richer.

Critics of these surveys say they don't mean much. People aren't asked to put their money where their mouths are. But under the scheme being hatched by Turnbull they will. For the first time Australians would be forced to choose between more health spending and lower tax when they vote. I'm betting the surveys are right and people will opt for better hospitals. But that's not what excites me. It's that voters will have to make a choice, to acknowledge that good hospitals cost money and wear the consequences of their decisions.

To tell the truth, I'd love it if each state decided on a different mix. Then each could look at the other and see what worked best. NSW was the first to make Australian history compulsory in high school. Victoria was the first to make seat belts compulsory. Tasmania was the first to introduce daylight saving. Each picked what worked. Experimentation is what federations are meant to be about. It's no accident that federations such as Canada, the United States and Germany usually work better than unitary states such as Italy, Greece and France.

By presenting states with hard choices Turnbull will not only make the experimentation more real, he'll also make the states run things better. There isn't a terribly strong incentive to run hospitals and schools well when you're not coming up with all the money yourself. There's a much stronger incentive if you're paying for the lot.

States funding what they provide is hardly new. Each state raised its own income tax before the Commonwealth entered the field in 1915 and then generously offered to also collect income tax as an agent for the states during the depression. In the Second World >War, without consultation, it kept the lot for itself as a "temporary" measure and never gave it back.

It isn't surprising that in modern times the states haven't asked for its return. Politically they've had the best of both worlds and we've been able to vote as if we are in La La Land. Turnbull wants us to face reality.

In The Age and Sydney Morning Herald

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CEDA experts back Labor policy to tackle budget

A high-powered independent commission has backed Labor's approach to capital gains tax and negative gearing, undercutting Prime Minister Malcolm Turnbull and Treasurer Scott Morrison who say it will "smash" housing prices.

The Balanced Budget Commission, established by the Committee for the Economic Development of Australia, includes two former heads of the Department of Prime Minister and Cabinet and one former Cabinet Secretary. Between them, Paul McClintock, Terry Moran and Ian Watt have served prime ministers Howard, Gillard, Abbott and Turnbull.

"No economic problem which is in our power to resolve is graver or more urgent in Australia than the persistence of large budget deficits," the Commission chair Mr McClintock said, launching the report at the National Press Club on Tuesday.

The Commission finds that in order to eliminate the budget deficit by 2018-19, spending should fall by $2 billion and revenue should climb by $15 billion.

It sets out five options for achieving that goal, all of which include a cut in the discount applied to the capital gains tax along the lines proposed by Labor.

Option 1 would halve the 50 per cent discount on capital gains tax, as proposed by Labor, apply a progressive tax scale to superannuation contributions, halve the fuel tax credit scheme and increase taxes on luxury cars, alcohol and tobacco. It would also cut government payments for drug manufacturers under the Pharmaceutical Benefits Scheme and cut budget spending on industry assistance by 10 per cent.

The report says the recommended halving of the capital gains tax discount would "take much of the power out of negatively geared investment strategies" as more of the gain on each investment would be taxed.

As recently as last week, Mr Turnbull derided the proposal saying: "Capital gains tax is obviously a tax on gains from investments, so you increase that tax, what are you going to get? Less investment. The government takes more of the investment gains so people will invest less and they'll certainly invest less in things that are risky."

Mr McClintock said he accepted that the proposal had the potential to cut investment spending, but added that the right question to ask was: "How much support are we prepared to give to a particular activity?.

"It doesn't mean it is a bad activity, but you can say there is too many billions of dollars going into that activity and we cannot afford that. With things like negative gearing, the inflation rates are lower, there is a strong argument to suggest you can lower that and still produce an environment where people are willing to invest. Our judgment call is that, yes, of course, it will have some marginal impact, so will everything, but it's a manageable impact."

Option 2 also adds in a 25 per cent cut in the private health insurance rebate and an efficiency dividend in the higher education sector.

Mr McClintock, a former Chairman of Medibank Private, said the right approach was not to criticise the private health insurance sector but to say: "We respect the role you are playing; we know you are healing the sick and doing good things but we have run out of money and we have to find savings. I am very sorry but we have selected you to assist."

The report says cutting the rebate would not have a big influence on the number of people insured because most were more affected by the prospect of paying the Medicare levy surcharge and the rules governing lifetime cover.

The third option cuts the capital gains tax concession even further, by 75 per cent and removes negative gearing on all types of assets purchased after December 2015. Between them, those two measures save the budget deficit by $8 billion per year. The fourth option boosts petrol tax by 10 cents per litre and cuts industry tax concessions across the board by 25 per cent. The fifth option cuts the capital gains tax concession from 50 to 40 per cent and continues the high income temporary budget deficit repair levy due to expire in June 2017.

Mr McClintock said he thought the public was much more willing to accept measures to cut the deficit than were politicians. After it was cut to zero the government could consider genuine tax reform.

In The Age and Sydney Morning Herald

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Restoring the ABCC a poor foundation to build an election on

Of all the unlikely reasons to call an election. Industrial relations has never been anything like the most important issue facing Australia in Malcolm Turnbull's mind. Most of his speeches, including his first in Parliament, barely mentioned it.

Instead that speech talked about the green hills and golden beaches of his Sydney electorate, "strung like jewels between the harbour and the sea". It talked about the republic, how Australia's head of state should be one of us. It talked about climate change and the need to better manage water, it talked about the importance of marriage, families and having children.

And it talked about the importance of boosting productivity. But it said nothing about unions or workplace relations, except perhaps this: a reference to Turnbull's first job, loading bananas in the Sydney markets.

He told me about it a few years later: "I think I had been sacked or I was having some problems with my employer so I went down to the Trades Hall to ask for help. [Labour council secretary] Barry Unsworth listened with a modest amount of interest and said, you should see another Trades Hall official, Bob Carr."

"Bob didn't seem particularly interested in my employment issues in the market, but then uttered the line I've never forgotten, which was: 'Do you know, I've just read a fascinating book on the politics of Eastern Europe, would you like to borrow it?'"

Carr went on to become foreign minister, Turnbull prime minister. Neither spent much of their careers complaining about unions. Until now.

"Unlawful conduct on building sites around Australia is holding back our economy," Turnbull told Monday's press conference. The extra costs were "a serious handbrake on economic growth".

What changedwent wrong? Labor abolished a Howard-era "cop on the beat" named the Australian Building and Construction Commission (ABCC) and replaced it with a cop called the Fair Work Building and Construction (FWBC). Whereas the ABCC could compel witnesses to appear and answer questions (contrary to common law principles in the view of the Law Council) after a three-year transition period the FWBC could not. Whereas the ABCC could reopen disputes after they had been settled, the FWBC could not.

These modest changes, along with changes to penalties and the right of union officials to enter workplaces, amounted to something of a silver bullet, in the view of the Prime Minister. "When the Australian Building and Construction Commission was in force, productivity in the sector grew by 20 per cent," he said on Monday. "Since it was abolished, productivity has flatlined."

It's an extraordinary statistic. Rarely does anything have such a clear-cut effect. Turnbull gave a hint as to where it came from when he told  the ABC's 7.30 that there was "plenty of work been done on this by Independent Economics✓ that shows there was an increase in productivity following the introduction of the ABCC".

Independent Economics, formerly known as Econtech, did the work for the ABCC itself. After academics from Griffith University✓ uncovered errors in the analysis, the ABCC removed it from its website. Then the Master Builders Association✓ commissioned Independent Economics to update it. The Productivity Commission examined the findings in 2014 and disassociated itself from them in unusually strong terms.

"When scrutinised meticulously, the quantitative results provided by Independent Economics or others do not provide credible evidence that the Building Industry Taskforce – Australian Building and Construction Commission regime created a resurgence in aggregate construction productivity or that the removal of the ABCC has had material aggregate effects," the Productivity Commission said. "Indeed, the available data suggests that the regime did not have a large aggregate impact."

The absence of a big effect was "neither surprising nor inimical to the need for further reform". It thought productivity in some parts of the industry probably had improved during the ABCC era, and it recommended boosting penalties and adequately resourcing the body that replaced it. But it stopped short of recommending the re-establishment of an organisation with the power to compel witnesses to answer questions. It's a power denied to courts and denied to the Australian Security Intelligence Organisation.

It thought productivity in some parts of the industry probably had improved during the ABCC era, and it recommended boosting penalties and adequately resourcing the body that replaced it.

But it stopped short of recommending the re-establishment of an organisation with the power to compel witnesses to answer questions. It's a power denied to courts, denied to the Australian Securities and Investments Commission and denied to the Australian Security Intelligence Organisation.

Turnbull's office says his claim about a 20 per cent jump in productivity came from the Australian Bureau of Statistics. It's there all right, if you use 2012-13 as the end date for the ABCC even though it finished at the end of 2011-12. But over the same period productivity in the entire market sector jumped 14 per cent. Something other than the ABCC was at play. In the post-ABCC era productivity in the construction sector climbed 3 per cent. Productivity in the entire market sector climbed 7 per cent.

Industrial disputes are indeed high in construction. In the 14 quarters since the ABCC they've totalled 180 working days lost per 1000 workers. But in the previous 14 quarters during the ABCC era, they totalled 164 working days lost.

This week's Essential Poll finds more Australians support reinstating ABCC than oppose it, even among Labor and Greens voters. Civil liberties aside, the ABCC ought not to be particularly controversial, certainly not enough to build an election around.

In The Age and Sydney Morning Herald

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Revealed. The 56 Australian millionaires who pay no tax:

Paying tax has become optional for 56 of Australia's highest earners.

Newly-released tax statistics show each of the 56 paid next to no income tax in 2013–14, not even the Medicare Levy, even though each earned more than $1 million.

But escaping tax cost the millionaires dearly. The same document shows 27 of the 56 claimed a combined $46.7 million for the "cost of managing tax affairs", around $1.7 million each.

The Tax Office says "cost of managing tax affairs" includes the cost of preparing and lodging tax returns, the fees paid to recognised tax advisors, the cost of court appeals and interest charges imposed in relation to tax disputes.

Combined, the 56 earned $128.6 million, around $2.3 million each.

The claims for the cost of managing tax affairs are so big in relation to their reported incomes as to raise suspicions that at least some had access to extra income they did not report.

Each of the 56 managed to drive their taxable incomes down below the $18,200 tax-free threshold. Fifty-one managed to drive their taxable incomes down below $6000. Forty-three reported taxable incomes of zero. Eight reported combined losses of $19.3 million.

Fifteen claimed a combined $21 million for gifts or donations to charities and political parties, equating to $1.4 million each. Three claimed deductions for uniforms or clothing, amounting to $150 each. Seven claimed deductions for interest payments, amounting to a combined $4 million.

Nine had been unsuccessful farmers, carrying forward previous losses of $6 million. Four had been unsuccessful in other businesses, bringing forward previous losses of $18.1 million. Seventeen had sold assets at a loss, carrying forward capital losses of $28.2 million. Five negatively geared, losing between them $240,000 in rent.

All but two paid no income tax at all. One paid $3603, the other was asked to pay just $4...

>Millionaires weren't the only high-income Australians who managed to bring their taxable incomes down below the tax-free threshold. Another 117 high earners taking home between $500,000 and $1 million managed to drive their taxable incomes below the $18,200 tax-free threshold, paying no tax. They paid a combined $15 million to manage their tax affairs.

Another 2305 Australians earning between $100,000 and $500,000 succeeded in bringing their taxable incomes below the tax-free threshold in order to pay no tax. Between them they made $420 million. After deductions they lost a combined $38.2 million. They spent $47.9 million managing their tax affairs and lost $16.2 million negatively gearing.

A Tax Office spokesman said there were legitimate reasons wealthy taxpayers might escape paying tax in any particular year. Nevertheless wealthy taxpayers that do not pay tax were more likely to attract the attention of the Office and be subject to further scrutiny to ensure they are complying with their obligations.

"It is the Tax Office's role to safeguard Australia's tax and superannuation systems and ensure a level playing field," he said. "A key part of this is working closely with individuals we have identified as being wealthy (controlling assets between $5 million -$30 million) or highly wealthy (controlling more than $30 million)."

The figures show 1.26 million Australians negatively geared during 2013–14, around 1 in every 10 taxpayers. A further 777,000 rented properties for profit. The negative gearers lost $11 billion between them, far more than the $7.2 billion made by landlords who rented for profit.

The average wage or salary income in 2013-14 was $56,690. The highest taxable incomes, averaging $200,015, were found in the Sydney postcode of 2027, which takes in Darling Point, Edgecliff, Rushcutters Bay and Point Piper in the Prime Minister's electorate of Wentworth. The second-highest average taxable incomes of $167,407 were in the Melbourne postcode of 3142, which takes in Hawksburn and Toorak.

In The Age and Sydney Morning Herald

 

 

 

 

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Expect great things from Turnbull’s first budget. No, seriously

While the media has been obsessing about tax, Malcolm Turnbull has been focused on setting Australia up. To do it, he'll need to borrow big sums of money for exceptionally long periods at at extraordinarily low interest rates.

We should have done it sooner. Right now Australia can borrow for 10 years at 2.7 per cent, just a few points above the the Reserve Bank's inflation target of 2.5 per cent, meaning we are able to get money for close to nothing. But it's still unattractive for long-term projects because there's a risk that in a decade's time when the loans have to be refinanced, the new rates will be higher. So Turnbull's looking at borrowing for 30 years.

Australia has never before issued 30-year bonds, although we have been experimenting with borrowing for 24 and 25 years. The US and Britain borrow for 30 years and get certainty for their repayments right through the life of very big projects.

What will Turnbull want the money for? Here's where it gets interesting. He dropped broad hints in a speech in Sydney on Friday.

The mining boom was made possible by investment in physical infrastructure such as mines, railways and ports. Over time it will make Australia rich. Turnbull believes the next boom will also require physical investment. If it's the result of people providing services in fields such as finance, law, health and others not dreamt of, you may think it requires little more than people, a good education system and the phone system or national broadband network to bring them together.

The Grattan Institute finds that workers in the Melbourne CBD (including Docklands and Southbank) typically produce $87 an hour, much more than the Melbourne-wide average of $53. Workers in the Sydney CBD produce $100 an >hour, much more than the Sydney-wide average of $61. The combined CBDs of these two cities alone – a landmass of just 7.1 square kilometres – accounts for nearly 10 per cent of Australia's production, three times what's produced by agriculture.

Turnbull quotes economist Edward Glaeser, who wrote Triumph of the City, to make the point that cities are our greatest invention. We not only work better when we rub shoulders with others, we are also more likely to be hired by them, more likely to hire them and more likely to steal ideas from them.

The fact that people need to work with each other and bump into each other was a point never acknowledged in the screeds of reports Labor commissioned about how the NBN would free us from travelling in to work.

Getting more people into cities boosts the Australian economy, boosts incomes and boosts government revenue. Which is where the budget comes in.

Turnbull's predecessor funded roads more or less as he wanted. He didn't insist on thorough analysis. And despite labelling himself the infrastructure prime minister, Tony Abbott never spent that much money. Turnbull is prepared to spend more, so long as it can be rigorously demonstrated that the project will pay dividends.

In Britain it is done through so-called "city deals". If a city such as Manchester can demonstrate that a road or rail line that gets more people into it will lift incomes, the central government backs it as a long-term investment. It knows it will cream off one-third of the extra earnings in tax. The Melbourne Metro would have passed such a test. The East West Link would have failed it...

As well, Turnbull will insist that the states go further than they have been prepared to in grabbing benefits for themselves. Traditionally when a railway station or a hospital opens in a new location, the nearby businesses and landowners get a windfall. Turnbull wants the states to grab a large chunk of it, perhaps charging the locals a third of the increase in value of their businesses or their homes. Then he'll need to put in less, funding perhaps four major projects for what would have been the price of two.

States talk about capturing value, then chicken out. They don't like offending the locals. Turnbull wants to give them cover. By insisting that they won't get anything unless they grab some of the proceeds for themselves (and perhaps for the Feds) he'll allow them to say he made them do it.

Value capture isn't a new idea, just one that's fallen into disuse. Melbourne's underground rail loop was funded in part by a long-running 1 per cent levy on the value of land held by city businesses and householders. It turned out to be more than worth their while.

Turnbull's major projects minister, Paul Fletcher, will produce a discussion paper outlining how value-capture will work within weeks. It could open the way for all sorts of projects previously regarded as uneconomic or not yet economic, including a Melbourne-Brisbane freight rail line, a railway to the site of Sydney's second airport,  and (perhaps) a Melbourne-Brisbane high-speed passenger line.

At the same time it would close the door on future projects like Peninsula Link, that arguably did little more than allow high-income Melbournians to escape quickly to their holiday homes.

If he is really bold, Turnbull will change the way the budget is presented, showing the income and expenses related to the ordinary running of government on one page (where the deficit is hopefully shrinking) and the borrowing and spending on major projects as well as the projected payoffs on another (where the borrowing will be hopefully growing).

It will take some explaining. But Turnbull, more than any prime minister since Hawke, is capable of explaining good ideas and taking the Australian public with him. The rare coincidence of unusually low long-term interest rates and good ideas with demonstrable payoffs is too good to waste.

In The Age and Sydney Morning Herald

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'New wave of quitting' likely as we smoke less

Plain packaging and higher cigarette prices appear to have done more than cut the number of people who smoke. They've also cut the amount remaining smokers smoke.

Official surveys conducted by the Institute of Health and Welfare and the Bureau of Statistics find that in the past decade the number of Australians smoking has fallen 25 per cent. But an analysis of the December quarter Australian National Accounts conducted by health policy specialist Martyn Goddard finds the volume of tobacco consumed over those 10 years has fallen 48 per cent.

He says the difference can only be explained by the remaining smokers smoking less – at least 30 per cent less.

"It might well be more, because people who successfully quit are more likely to be low to moderate smokers than those who remain."

"On that basis, they would be responsible for less than an equal share of any overall consumption decline, and current smokers responsible for more."

Mr Goddard said it was impossible to say which tobacco control measure was the most responsible. But it was clear that restrictions on where people could smoke had made it more difficult to be a heavy smoker and almost impossible to be a chain smoker. Many of the restrictions had been introduced in the past 10 years.

It wasn't at all clear that the Australians who had cut back were less likely to die, but it was certain they were better placed to give up completely.

"They have less of a nicotine habit, they may already have tried to give up and not yet succeeded; and lowering smoking gradually to zero, combined with nicotine patches, is just as effective as going cold-turkey," he said.

The cutbacks were setting the scene for a new wave of quitting.

In March an extra 19 cents was added to the price of a packet of 30 cigarettes in the latest half yearly round of excise increases, taking the price to $16.12.

In September an extra $3 a pack will be added in addition to the excise increase in the last of the four increases of 12.5 per cent imposed by the Gillard Labor government and maintained by the Coalition.

Labor has promised an extra four more increases of 12.5 per cent if elected, lifting the excise to around three quarters of the retail price.

Australia survived a challenge to its plain packaging laws from Philip Morris International under a Hong Kong Australia investment treaty, and is at present defending itself against a challenge in the World Trade Organisation from Cuba, the Ukraine, the Dominican Republic and Honduras.

In The Age and Sydney Morning Herald

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Negative Gearing. It's turning us into landlords and serfs

Once we talked about the great Australian dream. Now it's something meaner: "getting ahead".

The great Australian dream meant owning your own home. "Getting ahead" means getting ahead of someone else. It's how Treasurer Scott Morrison sees the Australian dream.

"I think it is great in this country that people want to aspire to do better and provide for their kids, so I don't judge people for actually wanting to get ahead," the treasurer told radio host Neil Mitchell a few weeks back. "That's what this country is about."

It's certainly what negative gearing is about. "The vast bulk of Australians who use negative gearing are just trying to get ahead and trying to get their family in a better position," Morrison says. But negative gearing only gets them ahead if prices climb. The more that people negatively gear in order to get ahead, the more prices climb. The further they climb, the harder houses become to buy. And the harder they become to buy, the more the Australian dream recedes.

This is what has happened. Back before the explosion of negative gearing around the turn of the century, 52 per cent of Australians aged in their mid-20s to mid-30s actually owned their home. At the most recent census in 2011 it was 47 per cent. Before the turn of the century, 70 per cent of Australians aged in their mid-30s to mid-40s owned their own home. It's now 64 per cent.

The negative gearing-driven explosion has made it harder for Australians to buy houses to live in. Here's how Luci Ellis, head of the Reserve Bank's financial stability department, puts it: "It's a truism that if an investor is buying a property an owner-occupier is not."

It gets better, for investors: "To the extent that person is not then buying their own home, they are therefore creating a market for rental and making it attractive to purchase investor properties."

Betting on prices going up becomes a self-perpetuating machine. The further they climb out of reach of owner-occupiers, the more the Australian dream recedes and the more renters there are to rent to, which allows investors to bet still more on prices rising.

The man who chaired the inquiry that Ellis spoke to was John Alexander, the Liberal member for Bennelong. He says the changes are turning Australia from a "commonwealth", with huge home ownership, into more of a "kingdom" in which landlords rent to involuntary tenants who pay through the tax system for their acquisitions...

"Some have said we are 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," he told the Financial Review. "Is that an over-dramatisation or is it very, very close to the truth?"

A landlord-heavy housing market is inherently unstable. Whereas owner-occupiers aren't that likely to sell if interest rates rise or prices threaten to stop climbing, landlords can run for the doors. The Property Council makes the point dramatically in an advertisement depicting housing as a house of cards.

One way to wind things back would be to gently limit negative gearing. It's an idea endorsed by the Murray Financial System Review and now the Business Council of Australia. It's Labor policy, and despite Morrison's talk about the need to support mum and dad investors (over mum and dad buyers), it might yet be adopted by the Coalition in some form.

Alexander's committee was considering limiting the amount of mortgage interest that could be deducted from wages. At the moment it's 100 per cent. That proportion could be adjusted by an authority such as the Reserve Bank to keep the market stable. And the committee was considering extending to owner-occupiers the concessions afforded to investors.

Right now investors get to deduct interest payments from their income for the purpose of determining tax. Under the proposal owner-occupiers could opt to have a portion of their interest payments treated the same way. If for example they chose to deduct 20 per cent of their interest payments from income they would be taxed on 20 per cent of the eventual gain when they sold. 

Every time a negative gearer sold to an owner-occupier the government's tax position would improve, the housing market would become more stable, and more Australians would be protected from poverty in their old age.

The changes in politics at the end of last year saw Alexander removed as chairman of the committee and another chair appointed who has also since moved. The report was due at the end of last year, but it will now be finalised later this month as soon as another chair is appointed.

Public opinion backs Alexander, just. This week's Essential poll shows 34 per cent of Australians would prefer lower housing prices and 32 per cent would prefer higher prices. Landlords strongly favour higher prices.

For a while, before politics overtook things, it looked as if we would have a sane discussion about what our headlong rush into negative gearing was doing to us. I'm hoping it's not too late.

In The Age and Sydney Morning Herald

 

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Modeller lauded by Morrison once opposed negative gearing

Negative gearing encourages excessive use of debt, lifts overseas borrowings and raises real interest rates, according to the economist whose work on the subject has been lauded by the Treasurer Scott Morrison.

Kim Hawtrey, now with consultancy firm BIS Shrapnel, wrote the words more than 20 years ago when he was an academic at Macquarie University in an article in the journal Australian Tax Forum.

"Deductibility of interest payments on debt creates a tax advantage for debt over equity," he wrote. "Negative gearing ensues by way of combining debt interest deductibility with concessional tax treatment of capital gains, encouraging over-investment in property and related asset inflation sectors."

More than two decades on, Dr Hawtrey says he won't divulge his personal position on negative gearing, saying the work his firm released last week was "technical" and "dispassionate".

"I have not commented on my views and I am not going to comment on my personal views, from a policy point of view, or as a voter or whatever," he told Fairfax Media.

"We were simply given a task and we carried out that task, and no attribution or nothing should be read into that as to any policy preference."

"Any policy issue in Australia, we do reports on both sides of those issues for parties that are on both sides of the political fence, if you like, and we do that impartially and dispassionately as economists, as technicians, if you like"..

Dr Hawtrey said then that negative gearing created a more highly leveraged economy than would otherwise prevail. The study he released last week at the request of an unknown undisclosed client said measures that clamped down on negative gearing would result in higher rents, lower dwelling prices and less home building than would otherwise be the case.

After 10 years, dwelling prices would be 15 per cent higher instead of 22 per cent higher. Rents would be 41 per cent higher after 10 years instead of 34 per cent higher.

"That report is not recommending for or against negative gearing," he said. "It is an if-then report: if this happened, then this would happen. It doesn't pass any judgement about whether the policy is good or bad, about whether the results are good or bad."

On ABC radio last week Mr Morrison described the report as a damning indictment of Labor's policy. "What this report shows is that it will drag growth, it'll send growth backwards and retard grown in the economy," he said. "It has a devastating impact on property markets and people's homes."

Dr Hawtrey said the report made no "judgement one way or the other about negative gearing".

"Our report contains no recommendations about policy, and my personal views about negative gearing as a voter may bear no relationship to the report," he said.

In a survey of 51 leading economists conducted by the McKell Institute last week 90 per cent described negative gearing and capital gains tax concessions as major tax distortions that led to an inefficient allocation of resources. More than 70 per cent thought house prices would continue to grow under Labor's proposed cutbacks.

Labor wants to limit the deduction of losses from investments to investment income and capital gains. They could no longer be deducted from wage income. Existing negative gearing arrangements would continue and would also apply to investments in newly built properties.

The Coalition is considering imposing a cap on the amount that can be deducted from wage income. Mr Morison said last week that a cap of $50,000 per year would affect only 1.6 per cent of the taxpayers who negatively geared.

In The Age and Sydney Morning Herald

 

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Confused by the modelling about negative gearing? That's the whole idea

Politics is about trust.

Prime Minister Malcolm Turnbull has been claiming for weeks that Labor's plans for negative gearing would smash house prices.

"The 70 per cent of Australians who own houses will see the value of their single most important asset smashed to fulfil an ideological crusade," he told parliament.

His Attorney-General George Brandis​ has made it sound even worse. "There is one thing we know about the negative-gearing debate," he told us. "If the Labor Party were to implement its policy, the value of most Australians' homes would collapse".

His assistant treasurer Kelly O'Dwyer​ briefly said the opposite. Labor's policy would "increase the cost of housing for all Australians; for those people who currently own a home and for those people who would like to get into the housing market".

And then his treasurer Scott Morrison latched on to a "credible report" that said Labor's policy would have "a significant impact on property values".

He latched on too quickly. The report, by BIS Shrapnel, said no such thing. Prices would continue to rise in all but two of the next 10 years under the scenario it modelled, just as they would if negative gearing was maintained. After a decade, they would have climbed 15 per cent. That's less than with full negative gearing, but its still an increase.

The report explained that house prices are typically "sticky in a downwards direction," unable to fall lower than the cost of construction plus a markup. When new attempts at negative gearing were temporarily suspended between 1985 and 1987 real estate prices continued to climb.

While new investors would be less keen to buy if Labor's policy stopped them negatively gearing, existing investors would be also less keen to sell, because they could only continue to negative gear if they hung on to the properties they had. Prices wouldn't be smashed.

It's all there in the report Morrison lauded as credible (because it said rents would rise), but appeared not to properly read....

Certainly his eyes appeared to glaze over the howling error on page one. The report said Australia's national income would average $190 billion over the next ten years when it meant $1.9 trillion.

And they appeared not to be troubled by its suggestion that a measure that raised around $2 billion per year would shrink the economy by $19 billion per year. That's $9 of economic damage for every $1 collected, a sum so big as to be way out of the ballpark of anything his department has ever modelled.

When Treasury modelled a range of taxes for its tax discussion paper, it found the worst of them, stamp duty, did 70 cents of economic damage for each dollar collected. Yet first thing Thursday morning on AM Morrison described as "credible" a report that found removing negative gearing would create multiples of the biggest damage his department could find.

The Grattan Institute's John Daley says the finding doesn't even pass the giggle test. Try it for yourself. Attempt to say: "a tax that raises $2 billion will shrink the economy by $19 billion" without laughing.

What's really odd about the report is its false precision. Limiting negative gearing would create 175,000 fewer jobs over ten years. The unemployment rate would settle at 5.9 instead of 5.8 per cent.

And its woolliness. It assumes away the role of the Reserve Bank in stimulating the demand as economic growth slips, and also the role of state governments in controlling the release of land to regulate the housing market.

The oddest thing is its origin. Who commissioned it? BIS Shrapnel won't say. Why did it release it instead of the client? And was the whole idea to get a gullible politician to swallow and regurgitate it so that the public became even more confused and decided any change was too risky?

It's happened before, in the mining tax debate, in the carbon tax debate and whenever anyone suggests anything that might hurt the superannuation industry.

Economic modelling is the cheapest and dirtiest way to muddy a debate. It lends an appearance of authority to what amounts to guesswork, with key mechanisms often deliberately or accidentally left out. The Australia Institute wants a code of conduct for economic modellers. There's one for auditors and accountants. They'd have to spell out their assumptions and who was paying them.

Right now, with the enthusiastic assistance of people who should know better, we're being had. And we don't even know by who.

In The Age and Sydney Morning Herald

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TPP: Would anybody mind if the deal fell over?

Hillary Clinton is misguided. Her opposition to the Trans-Pacific Partnership is based on "misinformation". Malcolm Turnbull's new trade minister says so.

Within hours of being sworn two weeks ago, Steven Ciobo eschewed the traditional approach of getting up to speed and consulting widely, and blundered into the US presidential race.

"I am not surprised that the trade union movement and, of course, the political arm of the Australian Labor Party is on a similar platform to, for example, Hillary Clinton," he told the Financial Review. "They both derive their key support from the union movement."

The woman most likely to be the next US president, the former secretary of state who ran America's missions abroad, the woman who criss-crossed the world pressing flesh about the Trans-Pacific Partnership, knows less about it than Steven Ciobo.

Asked directly whether he thought her opposition to the TPP was based on misinformation, he replied: "Absolutely".

And he was going to clear it up. "I will not take a backwards step in terms of putting forward the clear truthful situation in the face of an ongoing campaign of misinformation," he said.

So what is the clear truthful situation? What is it that Clinton (and also Trump) are failing to grasp? The awful truth is that Ciobo's department isn't particularly keen on finding out.

Back in 2010 the Productivity Commission found little evidence that Australia's trade agreements to that point had "provided substantial commercial benefits". It recommended the government first work out what it wanted to achieve, review its goals annually, and enter into trade negotiations only if they were likely to meet those goals and only after examining alternatives, including the alternative of "no further specific action".

The examination would be independent and made public. When the agreement was complete and about to be signed it would be examined again by an independent body which would produce a public assessment of the costs and benefits.

None of those things have happened with the Trans-Pacific Partnership, the biggest trade deal in Australia's history. Set to take in nearly 40 per cent of the world's economy including Australia, Canada, Singapore, Brunei, New Zealand, Chile, Mexico, the United States, Japan Malaysia, Peru and Vietnam, it will encourage us to buy and sell from each other rather than the rest of the world, and it will tie us to common (largely US-driven) standards.

Former trade minister Andrew Robb signed it in Auckland last month without commissioning any outside analysis. His department's so-called national interest analysis, required by law, ran to just 19 pages, most of which merely summarised the 6000 page agreement. New Zealand's national interest analysis ran to 277 pages.

Robb's department turned down an offer from the Productivity Commission to do the job properly, observing that modelling such an agreement was "very, very difficult to do"...

The modelling that's been done overseas finds the benefits for Australia close to non-existent. The World Bank finds that after 14 years the agreement will have boosted Australia's GDP by 0.7 per cent. Depending how you round it, that's a boost of either 0.0 or 0.1 per cent per year. A separate study by Tufts University in the US concurs, but says the growth will come at the expense of jobs, around 39,000 after 10 years. The agreement won't exactly "drive jobs and growth".

Willful blindness over the benefits wouldn't matter so much if there wasn't also wilful blindness to the costs. The Department of Foreign Affairs and Trade appears to have never examined any of Australia's 18 free trade agreements after the event, but the Australian National University has. Ten years after the US-Australia free trade agreement it found it had cut rather than boosted trade.

That's because free trade agreements help and hinder trade. By rewarding trade within a group they penalise trade outside the group, even the use of foreign-tainted inputs which can see entire classes of exports labelled non-compliant. Businesses find it easier not to import from outside, or not to use the agreement.

And they miss out on getting benefits they could have had years ago. The TPP promises tariff cuts worth $135 million over four years. But they could have been delivered without the TPP had the government not held them back, possibly in order to have tariffs to negotiate away.

Because we've comparatively few barriers to negotiate away we've been under pressure to agree to other things, like tighter copyright rules and extra-territorial tribunals to which foreign firms (but not our own firms) can take the Australian government after losing their case in Australian courts.

It may be that these concessions are worthwhile. It would be good to know, and it's not too late. The TPP may have been signed, but it won't come into force until at least half of its members have ratified it, including Japan and the United States. The parliament's treaties committee is examining it now and is accepting submissions until Friday March 11.

I'd feel better about the whole process if I didn't have a sneaking suspicion that leaders, including our prime minister, know full well that its not such a great deal and wouldn't much mind if the US kicked it over.

In The Age and Sydney Morning Herald

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Terrified on tax: why Turnbull will squib it

A decade ago in a speech titled The Way Ahead, Malcolm Turnbull labelled negative gearing "tax avoidance". Tellingly, he observed that "every tax deduction, once created, develops a constituency which will fight to defend it".

What a long way he's come.

This week, he became a spruiker for the tax-subsidised end of the real estate industry. He even repeated its lines. The Property Council is pushing around a blackmail sheet listing the number of negative gearers in each electorate and how many votes it would take to change hands. In Parliament Turnbull used it against Labor's Chris Bowen. "There are nearly twice as many people in his electorate who are negatively geared as there are votes needing to change hands for him to lose his seat," he warned. "He should think about that."

Turnbull feels able to decisively side with the property industry against Labor in part because he has finally narrowed his options. He was right when he said "increasing capital gains tax is no part of our thinking whatsoever". He and his inner circle have narrowed their options to, not much, really.

Superannuation. They've carefully considered and rejected the radical concept of taxing super contributions at the marginal rate minus a discount. The change would have meant that instead of paying the 15 per cent tax on super contributions, most high earners on the 45 per cent rate would have paid 30 per cent, if the discount was 15 per cent. The accounts of low earners on a zero rate would have received a 15 per cent top up. It's a measure of how far the tax debate had moved under Turnbull that the super industry had embraced the concept, arguing only over the size of the discount. Turnbull sought a briefing about the idea from one of its authors, Chris Richardson of Deloitte Access.

Turnbull and his senior colleagues baulked at the idea because it would have made some middle earners (slightly) worse off. Australians on the 32.5 per cent tax rate would have found themselves paying 17.5 per cent. The small increase would have been visible on their statements when the funds paid the extra 2.5 per cent after their salaries had been reported at the end of the tax year.

They took the view that complex change was a bad idea in an election year, all the more so if it could be portrayed as an extra tax on ordinary Australians.

Instead they have decided to tighten the caps on how much an individual can contribute to super at the subsidised rate. The present very high cap of $30,000 per year ($35,000 past the age of 50) troubles exceptionally high earners only. The Grattan Institute wanted it cut to $11,000, an amount it said would still allow comfortable retirements while improving the budget bottom line by $3.9 billion a year. Turnbull and colleagues are looking at a less severe cap of around $20,000.

They will also wind back the separate outrageously high annual cap of $180,000 on so-called non concessional contributions that still get access to a low or zero rate within funds.

The earnings of funds won't be touched. Payouts for most retirees and earnings within their funds will remain untaxed.

Capital gains tax. The existing concession whereby half of each capital gain is exempt from tax (and three quarters for small businesses) is safe. Turnbull and colleagues know that it makes little sense when other types of saving are fully taxed (including bank interest, as pointed out by their tax discussion paper) but they've decided against a more level set of concessions on the ground that it would create losers as well as winners.

Negative gearing. They plan to curb only "excesses", limiting either the number of investment properties a taxpayer can negatively gear (one MP owns 32) or the total loss that can be claimed in any one year, perhaps picking a figure like $50,000. Limiting the financial loss is fairer and also easier to administer than limiting the number of properties, but less simple to sell...

Tax deductions. Although Turnbull and colleagues are about to receive the report of a House of Representatives inquiry into tax deductibility, they have formed the preliminary view that the rules are so complex (and popular) that they would make enemies if they tried to simplify them, even in order to fund a tax cut.

Bracket creep. Treasurer Scott Morrison wants to deliver a tax cut to the 25 per cent of workers earning more than $80,000 and paying at least 37 cents in the dollar on the ground that an extra 300,000 will join their ranks over the next two years. He will attempt to move the threshold a bit beyond $80,000 using the extra tax that should flow from the tighter caps on super contributions and negative gearing. While he will face criticism for attempting to redress bracket creep only for high earners, he will be able to rightly point out that it will be extremely high earners who will fund the attempt by losing concessions. He and Turnbull will have delivered on their promise to make the tax system (a bit) fairer.

Company tax. Turnbull and Morrison may yet announce a target for cutting the 30 per cent company tax rate, but it wouldn't bite for years. It would serve as a signal to overseas investors.

They will have lived up to nothing like the ambition of Tony Abbott who in opposition promised a comprehensive tax white paper saying it would finish the job the Henry Review started and Labor squibbed.

Turnbull and colleagues have squibbed it themselves partly because they've discovered that people are much better able to understand who wins and who loses than they used to be. Even though for two years their Coalition has withheld from the Budget the table that shows who wins and who loses, the details are easy to find. Turnbull and his colleagues are terrified of offending the public and they certainly don't want nasty details discovered in the lead-up to the election.

In The Age and Sydney Morning Herald

Related Reading

. Turnbull walks away from tax reform

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Parliamentary Budget Office: the next election fix

Fixing the Senate voting system is good, but it isn't enough. Unless Malcolm Turnbull goes further and also fixes the rules governing the Parliamentary Budget Office, the election will be a charade.

Here's what happened last time.

The Coalition (then in opposition) released policy after policy, which it said had been fully costed by the PBO. But it didn't release the actual costings.

In effect, it verballed the PBO. The Office assigns each of its costings a reliability rating on a scale ranging from "low" to "highly reliable". Where the costing is unreliable, it says why. And it sets out the assumptions it used to derive it.

While keen to lend the authority of the PBO to its claimed costings, the Coalition, for the most part, sat on the documents that would have allowed us to understand what they meant.

At times, it went to absurd lengths. It had claimed that cutting the public service by 12,000 would save $5.2 billion. When the government and others started questioning the costing, it showed the PBO costing document to select journalists so they could see it was genuine, before whisking it away so it couldn't be photographed...

It was happy for the public to pay for the PBO ($7 million per year) so long as the public couldn't read what it had written.

Now Labor is doing it. It's now in opposition and it is misusing the PBO in the same way that the Coalition did. It has released policies on negative gearing, capital gains tax, superannuation, tobacco tax and school funding, all quoting what it said were the PBO's conclusions but without releasing the documentation needed to assess them.

The Greens have no such reluctance. They often release PBO costings with policies. They've no reason not to.

Labor says its negative gearing policy would raise $32.1 billion over a decade. But without knowing whether the PBO regarded the figure as reliable and without knowing how it got it, its claim is difficult to assess.

It can and should be fixed by requiring the PBO to release each costing (just the final document, no drafts) as soon as the party that commissions it made the costing figure public.

It'd hurt the opposition (whoever is in opposition) but it would make the election make sense. We would be better able to decide who to vote for, as well as better able to fill in the form.

In The Age and Sydney Morning Herald

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Bracket creep is code for cutting high-end taxes

I've never complained about being pushed into higher tax brackets. In fact I've been quite pleased.

I've seen it as a sign that I've made it, that I've moved up another notch.

And it has never meant that I've paid much more tax.

Work it out for yourself using the $80,000+ tax bracket. Put to one side the Medicare levy. If you had been earning $79,000 and then got paid $81,000, the tax rate on the last few dollars you earned would climb from 32.5 to 37 per cent.

But that doesn't mean you would pay 37 per cent of your wage in tax, or anything like it. It would mean your total tax bill would climb from $17,222 to $17,917. As a proportion of your (higher) salary it would climb from 21.8 per cent to 22 per cent.

It would be barely noticeable, but it would give you bragging rights.

And the strange thing is it would happen whether or not you moved into a higher bracket. Imagine you had been earning $75,000 and then got $77,000. You wouldn't change brackets but your tax bill would climb from $15,922 to $16,572. As a proportion of your salary it would climb from 21.2 to 21.5 per cent. Tax rates go up as income climbs whether or not people change brackets. The phenomenon shouldn't even be called bracket creep.

It happens because the more we earn, the more the proportion of our salary in the tax-free zone shrinks. "Crossing the threshold" matters symbolically but not practically.

But don't tell the Coalition, or talkback radio.

Here's Ray Hadley on Monday: "It is very hard to explain to people so-called bracket creep ... it simply means that people who were formerly taxed at the lower income rate through no fault of their own go on to the next income rate, taxable rate, and they are paying a lot more tax."

Here's Scott Morrison, agreeing with him: "Next year if you are on the average wage, you are going to go onto the second-highest tax bracket ... if we don't change the personal income tax rates you will end up paying more."

At this point you are probably feeling grumpy. The Treasurer has just told you the average wage is set to sail past $80,000. But your own wage probably isn't. Here's why. Most earners get nothing like the average wage. Right now the average full-time wage is $78,000, but the typical full-time wage is nearer $65,000. The average is pushed up by a comparative handful of high-earning megastars. In the real world three quarters of us earn less than that "average"...

Most are at no risk of crossing into the second-highest tax bracket. Morrison himself says over the next two years it'll be only 300,000 of Australia's 13 million taxpayers. And they'll hardly notice it. Again, don't take my word for it, listen to the Treasurer addressing economists last November:

"Income tax has become the silent tax for many Australians, particularly young Australians. When they go to the automatic teller machine to draw out their cash they do not see, as they do with the GST on their sales receipt, the 19 cents or 32.5 cents or 37 cents or 45 cents that has been deducted in income tax, let alone the extra 2 cents for the Medicare levy. They just take the cash."

Given enough time, bracket creep could hurt. But just at the moment wages are growing at their slowest sustained rate in memory.

Many of us would welcome bracket creep if it meant actually getting a pay rise.

It's as if the Treasurer picked up a script about the dangers of bracket creep and decided to use it just as if it mattered the least, a bit like Eric Abetz warning of a "wages explosion" as wage growth collapsed.

What's worrying is what he plans to do about it. Bracket creep hurts low-income taxpayers more than high income ones, yet Morrison says he is "deeply troubled" by the fate of those about to move into the $80,000 tax bracket. He "may be able to prevent that outcome going forward". It sounds as if he wants to adjust the $80,000 threshold to help them and leave the bottom three quarters of taxpayers alone.

The prime minister assures us that fairness will be at the heart of everything he does about tax. It would be good if Morrison ensured that it was.

In The Age and Sydney Morning Herald

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There's more than one way to kill negative gearing

How easy would it be to move against negative gearing?

Soon after the introduction of the higher education student loan scheme, the Tax Office noticed something odd. Graduates were meant to start repaying their loans when their income climbed above a certain level. But instead, some borrowed to buy investment properties which they rented out at a loss to keep their taxable income below the threshold.

So government changed the rules. From then on graduates could lose as much as they liked on rental properties, but their income for purpose of determining their HECS repayments became their income before negative gearing rather than after.

Government toughened up more than HECS. Quietly, it outlawed negative gearing in the calculation of the Medicare surcharge, the Private Health Insurance Rebate, the Seniors and Pensioners Tax Offset and the Higher Income Superannuation Charge.

It would be dead easy to do it for the calculation of tax, and it would be consistent. Taxpayers would be able to lose as much as they liked renting out properties. They would even be able to use the losses to offset profits from other investments and carry them forward to offset any profits when they eventually sold. But, as in Britain, Canada, the US, France, Germany, Japan and most of the nations with which we compare ourselves, they wouldn't be able to use real estate losses to cut the taxable income from their salaries.

There's a reason surgeons, lawyers and mining engineers are far more likely to negatively gear than nurses, teachers or police. They have much bigger taxable incomes they are trying to get down. They often try to get them down below $80,000, where the second-highest tax rate cuts in.

At the heart of negative gearing is a lie, or perhaps a mistake. Most spending isn't tax deductible, but spending for the purpose of earning an income is. The lie is that the interest payments and the rates and other expenses involved in renting out a property are for the purpose of earning an income. Somehow there has been a mistake and the rent hasn't covered the costs, but because the intention was to earn an income the costs should be written off against other income.

Our tolerance of that lie institutionalises dishonesty, and it institutionalises losing.

Before John Howard halved the headline rate of capital gains tax at the turn of the century, negative gearing was relatively unattractive. Landlords as a group made money. In 1999-2000 they made a combined $219 million. Ever since then they've lost money. In 2012-13 they lost a net $5.4 billion...

Capital gains matter because they are the mechanism negative gearers use to make money. The profits they make from eventually selling their properties are meant to exceed their annual losses from rent. A cut-rate capital gains tax makes those profits more likely. Investors can write off their annual losses at the full tax rate and pay tax on their eventual profits at only half the rate.

But there are wider benefits, or so we have been told.

Howard's tax adviser John Ralph times disposable income.

At the last count one in every seven taxpayers were landlords.

But they've been increasing the stock of houses, right? Not much lately. Back the 1980s one in every five dollars lent for investor loans was used to build a home. Now it's one in every 35.

We're told that negative gearers are at least increasing the supply of rental housing, and many believe they are. But by pushing up prices and outbidding would-be owner-occupiers they are also helping create the supply of tenants to rent those properties to. They are often renting to people they have outbid.

And we are told they are holding down rents. That's >impossible to test without restricting negative gearing, as Labor actually did for 2½ years in the mid-1980s. The charts show Melbourne, Brisbane, Adelaide and Darwin rents fell, Canberra rents dived, Hobart and Sydney rents climbed and Perth rents soared. Nationally, there wasn't much in it.

With little obvious justification for continuing the tax dodge, both sides of politics are planning to wind it back, but gently.

Labor would allow everyone who is already negatively gearing to continue to gear their existing properties (a concession it didn't extend when it tightened HECS), and it would allow taxpayers to negatively gear new properties so long as they were newly built.

The Coalition is looking at capping either the number of properties each taxpayer can gear (one of its members, Queenslande rBarry O'Sullivan owns 42) or the total loss any one taxpayer can claim.

Neither measure would do much. But what would is the associated cut in the capital gains tax concession. Labor wants to cut the concession from 50 per cent to 25 per cent, meaning that for assets bought after mid-2017, three-quarters of the eventual capital gain would be taxed rather than half.

The Coalition is toying with matching Labor's proposal (if has been careful to attack Labor's proposed changes to the negative gearing rules rather than the capital gains concession) or cutting the capital gains discount from 50 to 40 per cent.

A 40 per cent discount was recommended by the Henry tax review on the proviso that it was extended to income from other forms of saving such as bank interest. It would be a popular measure.

"A more consistent treatment of household savings would encourage households to seek the best pre-tax return on their savings," the review said at the time. "It would also largely remove the current bias towards negatively geared investment in rental properties and shares and so reduce a major distortion in the rental property market."

In The Age and Sydney Morning Herald

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Negative gearers aren't poor, Mr Morrison

It's the myth that keeps going round, in part because it contains an element of truth.

"Two-thirds of the people who use negative gearing currently have a taxable income of $80,000 or less," Treasurer Scott Morrison told Sydney radio station 2GB on Monday.

The figure makes it sound as if negative gearers aren't particularly well off, which is why the Property Council started circulating it.

It's genuine as far as it goes. It comes from the Tax Office. But it's not what it seems. Note the use of the words "taxable income". The figure of $80,000 is what two-thirds of the people who use negative gearing manage to reduce their taxable income to as a result of negative gearing. Before negative gearing, their incomes were higher, in some cases far higher.

The same figures show an astonishing number of negative gearers report taxable incomes of $10,000 or less. They would make no sense if that was what the negative gearers actually earned (what bank would lend to them?) but they make a lot of sense if they had used negative gearing in order to push their taxable incomes below $10,000.

The word "chutzpah" is often illustrated by the joke about the the boy on trial for murdering his parents who begs the judge for leniency because he is an orphan.

It's funny because the boy has done it to himself. Most negative gearers appear to be less well off than they are because they have used negative gearing to do it, sometimes to absurd lengths.

Labor has dug into the same figures and discovered that 64,000 negative gearers report taxable incomes of less than zero. No one, certainly not the Treasurer, would believe they actually earned less than zero.

There may well be good arguments for retaining negative gearing. The apparent poverty of negative gearers is not one of them.

In The Age and Sydney Morning Herald

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Melbourne booms while the rest of Victoria sinks

Melbourne has pipped Sydney to become Australia's fastest-growing city, but risks a "lost decade" after years of underinvestment in public transport.

The latest spatial breakdown of economic growth produced by SGS Economics and Planning puts Melbourne at the top of the pack at 3.1 per cent, a growth rate exceeded only in regional Western Australia and the Northern Territory. Sydney's economy is growing at 3 per cent, Brisbane's 0.9 per cent and Perth's 0.3 per cent.

Adelaide is growing faster than the other second-tier capitals at 2.1 per cent, Canberra at 1.4 per cent, and Tasmania (no separate results are calculated for Hobart) at 1.6 per cent.

But regional Victoria is languishing. Away from Melbourne the calculations put Victorian growth at just 0.3 per cent, a rate that fails to cover population growth, meaning income per person is going backwards.

"It's been a bad year for both manufacturing and agriculture," said SGS partner Terry Rawnsley. "The closure of the Alcoa refinery in Geelong hit manufacturing, and we had drought in the Wimmera. Agriculture is seasonal so things might improve, but Melbourne is where the growth is."

Driving Melbourne's economy has been a rapid growth in the financial sector and a boom in apartment building, but Mr Rawnsley says both are at risk from years of underinvestment in public transport.

"Putting aside the regional rail link which has just opened, Melbourne's last big investment was the city loop in 1985. It expanded the capacity for people to get into the city, and the banks moved their operations to the Docklands. But by 2009 or 2011 that capacity was exhausted and the trains became extra crowded. While you can throw extra rolling stock at the problem, you really need an uplift in capacity."

Mr Rawnsley says the Melbourne Metro won't be completed until 2026 and the government's program of removing level crossings will achieve only incremental benefits...

"Like Sydney after the Olympics, we are facing a lost decade because of infrastructure which has failed to keep pace. Global and national firms are likely to bypass Melbourne because they won't be able to get their workers to work. They will go to Sydney or Brisbane or Auckland instead."

The 2014-15 accounts show Sydney was responsible for 23.3 per cent of Australia's gross domestic product and Melbourne 17.7 per cent. The next most important locations are Brisbane (9.6 per cent), Perth (9.5 per cent), regional Queensland (8.9 per cent), regional NSW (8 per cent), and regional Western Australia (7.5 per cent). Regional Victoria accounted for just 4.4 per cent.

In order to demonstrate the different economic fortunes in different parts of Australia, SGS Economics calculates what the Reserve Bank should do to interest rates in each location to allow it to grow at its long-term potential. In Sydney the bank should lift its cash rate from 2 per cent to 3.5 per cent, in Melbourne it should keep it steady at 2 per cent, and in much of regional Australia, including regional Victoria, it should cut it to 1 per cent.

The exceptions are regional Western Australia and Northern Territory where the Bank should increase rates to 2.75 per cent and 5 per cent.

In The Age and Sydney Morning Herald

 

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The high earners who think they are battlers

High income earners are reluctant to part with their tax breaks in part because they think of themselves as battlers, new research suggests.

Two-thirds of the highest-earning households surveyed by Ipsos Australia for MLC Wealth define themselves as "middle class" or "lower middle class" or "working class".

Each brings home at least $200,000, putting it near the top 10 per cent of households.

Yet, according to the survey to be released on Monday, only 2 per cent of the high earners define themselves as upper class and only 31 per cent as upper middle class.

Almost half (44 per cent), say they are middle class. A further 10 per cent say they are lower middle class, and 13 per cent working class.

Many households in the top 10 per cent struggle to save. The survey finds one in five live "pay cheque to pay cheque", spending everything they earn.

Two out of three say the cost of maintaining their mortgage is "having a big impact on their lifestyle".

"It's a paradox," says Lara Bourguignon, MLC's general manager of corporate superannuation. "The people who are earning more are also spending more and feeling left behind.

"It might be because they are living in the major cities, living in the expensive areas of major cities, or working so hard that conveniences such as eating out seem essential."

Asked to nominate the average income of a household that was genuinely upper class household, high income households nominated $454,000...

Middle earning households were more realistic, nominating $280,000.

Curiously, very low income households defined upper class in much the same way as high income households, nominating $549,000.

But low earning households were realistic about their own status. Four out of 10 described themselves as working class. None described themselves as upper class.

Ms Bourguignon said perceptions about what constituted a comfortable lifestyle were changing.

"It used to mean having access to a home, food, healthcare and schooling," she said. "Now it extends to overseas holidays, private schools and the latest technology. We have come to define comfortable as being able to do whatever we want. We have changed our perception of what normal is."

In The Age and Sydney Morning Herald

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Treasury considering cap on tax deductions

Treasury is considering a universal cap on income tax deductions that would apply to negative gearing as well as employment-related expenses such as self-education, transport, union fees and work-related clothing.

Arising out of the government's review into taxation, the proposal would abolish caps on specific expenses and replace them with an overall ceiling that would limit total deductions to a proportion of income or an indexed ceiling.

In Britain, which adopted the system in 2012, the ceiling is £50,000 pounds or 25 per cent of income, whichever is the higher.

"It means there's an upper limit. If you set the ceiling high enough, 90 per cent of the population could be unaffected while the big claims would be knocked back," said Neil Warren, professor of taxation at the University of NSW.

Australia is unusual in imposing no total ceiling to the amount of deductions that can be claimed, meaning some claims exceed 100 per cent of income.

Tax Office statistics for 2012-13 show 55 of Australia's highest earners paid no income tax at all during that year. All earned at least $1 million and managed to write their taxable incomes down to below the $18,200 tax-free threshold.

Although most Australians claim only small deductions, Australians with multiple negatively geared properties are able to claim large proportions of their income.

While pledging to continue to allow negative gearing, Treasurer Scott Morrison told Parliament last week that the government was prepared to look at "areas where the system is being abused or areas where they are excessive".

Professor Warren said harsher rules applied in many of the countries to which Australia compared itself. The United States imposes a minimum tax rate below which deductions could not reduce tax, Canada allows only specifically leglislated deductions and New Zealand allows negative gearing, but not work-related deductions.

In a submission to the Parliament's inquiry into tax deductibility the Treasury pointed out that Britain much more tightly limited the type of claims that could be made. Rental losses could only be offset against other rental income. Work-related deductions had to be incurred by every holder of that form of employment.

"It is not enough that one employee, or a subset of employees, happens to incur the expense," the submission said.

Work-related deductions amounted to $19.8 billion in 2012-13. Rental interest deductions amounted to $22.5 billion. The cost is believed to have climbed since with the spread of electronic lodgement.

In a paper being considered by the Treasury, Professor Warren suggests Australia adopt Britain's model of applying a global limit to all deductions including those related to work, health, negative gearing, the cost of managing tax affairs and gifts and donations.

Figures from 2010-11 showed a cap of $50,000 or 25 per cent of income, whichever was the greater, would affect only 0.9 per cent of landlords and only 1.3 per cent of those incurring a rental loss. A lower cap of $12,500 would affect 9 per cent of landlords and 14 per cent of those incurring a loss.

Professor Warren said the level of the cap would be a political decision. The important thing was to wind back excesses without affecting most taxpayers' ability to claim deductions.

In The Age and Sydney Morning Herald

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Morrison's tax swap would have taken from the poor and given to the rich

The most shocking thing in the Treasury analysis delivered to Scott Morrison on January 25 isn't the finding that a cut in income tax funded by a lift in the goods and services tax wouldn't boost the economy at all.

It's what Morrison asked the Treasury to model.

He asked it to model a lift in GST from 10 to 15 per cent and then the handing back of every possible cent in income tax cuts. Because boosting the GST automatically results in extra spending on benefits such as Newstart, family allowances and pensions as prices climb it isn't possible to give all of it back.

But it is possible to hand back $30 billion of the $35 billion as tax cuts, and that's what Morrison asked the Treasury to model in the first instance, not legislated increases in benefits of the kind delivered by his predecessor Peter Costello when introducing the GST.

The impact is horrific.

High earning households do very well. In the top fifth, 81 per cent are better off. In the fifth below that, 80 per cent are better off.

In the bottom fifth, only 9 per cent are better off. Put another way, the change makes 91 per cent of the lowest-earning households worse off.

It makes 79 per cent of the next lowest earning households worse off, and 60 per cent of middle earning households better off.

Morrison had asked the Treasury to model a change that enriched middle and high earners at the expense of the least-well off.

And the results tell us something about the nature of the change. It appears to have been one that cut tax rates or adjusted thresholds at the top more than the bottom. All of the Prime Minister's talk about how any change must be fair appears to not have sunk in.

At his request Treasury and its consultants Econtech and KPMG also did sensitivity analysis. What would happen if, say, $6 billion of the tax cuts were diverted to low earners in extra benefits? They found that the more the tax cuts were diverted to benefits, the worse the economic payoff. Econtech found the payoff turned negative. KPMG found it was positive but got weaker the more low earners were compensated.

Morrison will make much of the finding in a later Treasury brief that doing nothing and allowing bracket creep to push people into ever higher tax brackets is is set to take 0.35 per cent from GDP over four years. But tax cuts funded by a hike in the GST wouldn't have halted bracket creep, they would have postponed it. And during the time they postponed it, the projected budget deficit would have swelled.

Morrison will be able to deliver income tax cuts, but they will be smaller, funded by a tightening up of superannuation and other tax concessions.

There's no realistic prospect of tax cuts being funded by slashing government spending. Treasury believes that at the moment the economy couldn't stand it. Cabinet ministers believe that spending cuts of the size needed to pay for big tax cuts just aren't possible.

In The Age and Sydney Morning Herald

 

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