Why I Won’t Attack Negative Gearing

Why I Won’t Attack Negative Gearing
Kris Sayce 20/07/2015

Central bankers seem to hate it.

Politicians don’t like it.

Social welfare do-gooders despise it.

A weird combo of mainstream and contrarian commentators rail against it too.

And given your editor’s stance on the Aussie property market, you may think we hate negative gearing too.

But we don’t. We’re not saying we love negative gearing. Just that there’s no benefit to abolishing it…

Those who argue against negative gearing tend to do so for two reasons.

First, they say it’s causing a house price bubble.

Second, they say it’s not right that one group of people should get an ‘unfair’ tax break. They say that it means others are ‘paying’ for the negative gearing tax break.

Most assume that both arguments are true. But they’re not.

Banning negative gearing will just be the start
As far as we’re aware, there is no evidence that negative gearing pushes up house prices.

In fact, it’s crazy to suggest it does. Investors only own one-third of Aussie housing. And not all of those properties have mortgages.

Plus, to suggest that negative gearing pushes up house prices, suggests that investors are in the game to buy every house in Australia.

That’s not true. Sure, there may be times where someone is bidding against an investor, but that doesn’t mean the investor has more money to spend than the owner-occupier.

Not only that, but to be consistent, arguing against negative gearing for investment properties also means that folks should argue against tax breaks for borrowing against all investing and business purposes.

Want to take out a loan to buy shares and offset the interest costs against your income? If they abolish negative gearing, they’ll need to abolish margin lending for shares.

Want to borrow money to buy some new machinery that will help grow your business? If they abolish negative gearing, they’ll need to abolish tax breaks on business loans too.

The case against negative gearing is really an argument for tax increases. And as we’ll explain, anyone who thinks negative gearing is costing them money is a fool.

Negative gearing is just a scapegoat
Folks say that it’s not fair that they’re funding the tax breaks of property investors.

They say the same thing about franking credits on shares.

These views must be music to the government’s ears. The social welfare do-gooders spouted off the same case against super earlier this year.

It’s the idea that rich people are rorting the system and costing everyone else more in taxes.

The reality is that it’s not costing others more in tax at all. They assume that if the government abolished negative gearing, the government would get more in taxes from property investors, and then would cut taxes elsewhere.

In fact, it’s more likely that the government would just keep any increase in tax revenues and increase spending. History tells us they would increase spending even more than they increased their tax take. That would send the federal budget further into the red.

But even if the government did abolish negative gearing, what would it mean for government revenue?

Take this from the Sydney Morning Herald:

‘Australians would no longer be able to claim losses on their investment properties against their wages, saving over $1 billion in federal revenue a year, under a plan put to the federal government by the Australian Council of Social Service.’
Wow! A one billion dollar saving each year. It sounds a lot, right? However, we’ll just remind you that, as of last Friday, the federal debt stood at $375.5 billion.

One billion dollars would just about cover one month of the federal interest bill on its debt.

So, folks may not like negative gearing, but you won’t hear your editor railing against it. We’re all for it. We’re in favour of any method any investor can use to reduce their tax bill.

And besides, if you want to blame anyone for high house prices, blame the central banks. Low interest rates, money printing, and easy credit are the real cause. Those in power are just using negative gearing as a scapegoat.

As we always say, your money is always better off in your hands than it is in the government’s hands.



PS: Whenever you see the government or social welfare groups arguing about a tax break, don’t take it at face value. More often than not, the real problem isn’t individuals supposedly ‘rorting’ the system. It’s usually the government and the central bank creating distortions in the economy. Of course, this isn’t just happening in Australia. It’s happening on a global scale. Go here for details.