SAUL ESLAKE

Economist

SAUL ESLAKE

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I’m an independent economist, speaker, company director
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Debate: Saul Eslake and Sinclair Davidson


News | 10th May 2016

Emma Alberici | ABC Lateline | 10th May 2016

EMMA ALBERICI: A short time ago I was joined by independent economist Saul Eslake from Hobart; and in Melbourne, Sinclair Davidson, professor of institutional economics at RMIT University and a senior research fellow at the Institute of Public Affairs.Gentlemen, welcome.

SINCLAIR DAVIDSON, PROF., RMIT UNIVERSITY: Thank you.

SAUL ESLAKE, ECONOMIST: Thank you for having me, Emma.

EMMA ALBERICI: Saul Eslake, for 30 years you’ve held the view that we should be getting rid of negative gearing altogether. Sinclair Davidson you say no curbs on that area of the tax system are needed at all.

First to you, Saul Eslake: why are you so opposed to negative gearing?

SAUL ESLAKE: Well, first of all because it has a significant cost to the budget, which I estimate is somewhere between $4 billion and $5 billion per annum – although in recent years, when interest rates have been very low, it’s at the low end of that range.

But it’s a lot higher that it was before the change to the capital gains tax regime, back in 1999, that has made negative gearing much more popular since then than it was before.

Second, that cost to the budget achieves very little in terms of the stated aim of promoting increased investment in rental properties that are actually available for rent. Over 90 per cent of geared investors now purchase an established property.

So the main impact of negative gearing, in my view, is to put further upward pressure on the price of established dwellings, to the detriment to those who are looking to buy dwellings to live in them as home owners.

And I think it’s one reason – it’s certainly not the only reason – but one reason why the home ownership rate among people aged 25-55 has fallen by an average of nine percentage points since the 1991 census.

And since the figures show that someone in the top income tax bracket – that is, with a taxable income exceeding $180,000 per annum – is almost three times as likely to be a negatively geared landlord as someone with a taxable income of below $80,000 a year, I think it undermines the integrity and equity of the tax system from a fairness perspective as well.

EMMA ALBERICI: OK. Sinclair Davidson: abolishing negative gearing would free up, if you agree with Saul Eslake, somewhere in the vicinity of $4 billion to $5 billion. Is that tax measure worth the cost?

SINCLAIR DAVIDSON: There is no real cost, because what happens now at the moment is: you have a deduction against other income in the present. But as a small business, if you were losing money on a negatively geared property, you would simply deduct the money in future.

So it’s not a cost to the economy so much as a transfer in time: you either deduct money now or deduct money in the future. So it’s actually swings and roundabouts. It’s not a cost to the economy. Money or wealth hasn’t been destroyed. It’s simply been moved in time.

So it’s nothing to worry about at all. We should get on with the serious business of managing budgets by cutting spending, more or less.

EMMA ALBERICI: I’d like to unpick some of the claims and counterclaims surrounding this issue.

First from the Treasurer: Scott Morrison says it’s “a complete and utter myth” to say negative gearing benefits the rich. Sinclair Davidson, you’ve gone some work analysing the numbers. The Prime Minister says nearly two-thirds of Australians who make a capital gain on their investments have a taxable income of $80,000 or less. Is he right?

SINCLAIR DAVIDSON: More or less, yes. The numbers that I crunched showed that 80 per cent of the beneficiaries of negative gearing have a total taxable income – that includes their income from their negative-geared property – of less than $150,000 per year.

So if you are thinking a schoolteacher or a policeman or somebody of that category of worker earning about $80,000 a year, having a rental income of just $20,000 a year: all of a sudden, they are looking at $100,000 or more.

And there’s going to be people saying, “Well, on $100,000, you are pretty rich.” Well, in actual fact, you’re not if that is an expense before deductions, before maintenance, before rates and taxes: all these sorts of things.

So the idea that this is a lurk or a rort for the rich is completely misleading. This is a stock-standard tax principle that benefits all investors and to a large extent benefits middle-income earners.

EMMA ALBERICI: Saul Eslake, Scott Morrison says Labor’s plan will attack mum-and-dad investors whose are just trying to get ahead?

SAUL ESLAKE: Yeah, it’s funny how they keep saying the same the same things every time. I mean, when I hear people say that negatively geared investors are just “mums and dads trying to go get ahead,” part of me wants to ask: ahead of whom are they trying to get ahead?

And the answer is, when you examine it: their own children or their children’s peers who are finding it increasingly difficult to enter the housing market as home owners in competition with investors who get their interest costs subsidised by other taxpayers through negative gearing.

And let’s just unpick that a little bit, if I can. I mean, it’s not true, I believe, to say that all negative gearing does is transfer income through time with no net result over time.

What negative gearing allows investors to do is to deduct, at their full marginal rate, the excess of the interest they pay over the net rental income they earn. But when they subsequently sell the assets, hopefully at a profit, they pay capital gains tax at half their marginal rate.

So what negative gearing does is allow predominantly high wage and salary earners – even some on moderate wages and salaries – to defer and permanently reduce the amount of tax they would otherwise have to pay on their wage and salary income.

The Reserve Bank made the point more than 12 years ago, in its submission to a Productivity Commission inquiry into first home ownership, that Australia’s tax system is much more generous to property investors in this respect than the tax systems of broadly comparable countries like the US, the UK, Netherlands, France and Germany, among others.

And moreover: it’s simply not true that other businesses can offset their losses against their wage and salary income as readily as property investors can do.

And finally, if I can make this point: that yes, as a matter of arithmetic it is true that a large proportion: according to the most recent Taxation Office statistics, 64.3 per cent of taxpayers who have rental property losses have taxable incomes of less than $80,000 a year. But that’s not surprising, because they account for – that is, people with taxable incomes of less than $80,000 a year – account for just over 80 per cent of all taxpayers.

What the same set of figures show is that, of people with taxable incomes of less than $80,000 a year, fewer than eight per cent are negatively geared landlords. Whereas people with taxable incomes of over $180,000 a year: 23 per cent of those are negatively geared landlords.

SINCLAIR DAVIDSON: The moral panic or outrage around negative gearing to a large extent is that housing prices are very high and people are worried about affordability.

And people then look around and they say, “What is this? Why is this happening?” And they pick on negative gearing.

Now, it is true that housing prices are high; that younger people are struggling to get into market. But there are both supply and demand conditions that are driving that. And I think people who just pick on negative gearing are only touching on the demand side.

I’ve been very disappointed that the Liberals, for example, have abandoned the supply-side arguments that they’ve made for a long time in justifying why negative gearing wasn’t the problem to be looked at. And I think they’ve kind of dropped the ball on that.

We should be looking at supply constrictions and those sorts of things, that happen at the state government level, that the Federal Government has probably got very little control over.

So I hear the concern there, but I’m still not convinced that this has been driven by negative gearing which, as I say, has been around for a long, long time. Now, it is true that we are probably a bit more generous than a lot of OECD countries on this, because we allow landlords to offset their negative losses against all other income, which other countries very often don’t do – they quarantine.

But that in turn rises all sorts of other distortions. So we’ve actually moved towards a system where you have more tax neutrality, which is a good policy. Now, it may be true that you can’t always offset everything. And I really think that the ATO should be making our system more tax-neutral if that is the case.

But in any diversified company, you can offset losses in one division against losses in another division. And the better way to be thinking about negative gearing is that this is an unincorporated business that people of relatively modest and, sometimes, maybe slightly higher incomes undertake, in order to provide for their own security and the security of their children.

There is nothing wrong with going into a small business, making investments to improve your lot in life. I actually think we should be encouraging more of that.

EMMA ALBERICI: This did begin as a debate about housing affordability. Malcolm Turnbull says the changes being proposed by Labor will smash property prices. Is there any substance to that claim, Saul Eslake?

SAUL ESLAKE: No, I don’t believe there is. And I’m astonished that someone as intelligent and sophisticated as Malcolm Turnbull would continue to promote it.

You know, it’s interesting to see that over the last few years governments, mostly Coalition governments, have presided over three distinct policy changes that have been explicitly designed to dampen the demand for established housing in particular.

You’ve had state and territory governments abolish the grants they used to give to first-time buyers of established properties. You’ve had the Foreign Investment Review Board beef up its oversight of the purchase of established properties by foreign investors. And you’ve had, as the Treasurer and Finance Minister have been pointing out today, APRA leaning on the banks to impose stricter lending criteria for loans to investors.

All of those things have been designed to – or have had the effect of – dampening down demand for established properties, bearing in mind that over 90 per cent of borrowing by investors is for the purchase of established properties.

Has the housing market been smashed by any of those? Answer: no. House prices have continued to go up.

What’s Labor’s policy intended to do? It’s intended to discourage new investment in established housing by denying access to negative gearing for that. Existing investors will be grandfathered: that is, they will have an incentive to hold onto their properties rather than to sell them.

I’m not a great fan of grandfathering, but I understand for political reasons why the Labor Party has made that compromise, as the Reserve Bank said in a note that wasn’t about the Labor Party’s policy: it was about the recommendations of the Murray inquiry that negative gearing be wound back and the capital gains tax discount be reduced.

It said that if negative gearing changes were grandfathered so that existing investors weren’t affected by it, there is no reason to expect large-scale selling of properties. And if you don’t have large-scale selling of properties, then you won’t get big falls in prices.

You might not get as big increases in prices, but that’s a good thing. That’s the whole point of the policy that the Labor Party is putting forward: to reduce upward pressure on property prices that works to the detriment of those who are seeking to become home owners.

EMMA ALBERICI: Sinclair Davidson, can Labor’s policy be seen as “reckless”, as the PM says: akin to putting a “sledgehammer” to the property market?

SINCLAIR DAVIDSON: I wouldn’t use such strong language in those terms. But I think, certainly, it could be seen as irresponsible, given that we can’t really be sure what would be happening to housing prices – though they could actually decline by a substantial amount.

EMMA ALBERICI: The Grattan Institute estimates Labor’s policy would see housing prices fall around two per cent. Within the context of a property market that’s grown something in the vicinity of seven per cent over the last 10 or 15 years, does a two per cent fall really justify the panic around Labor’s negative gearing policy?

SINCLAIR DAVIDSON: Well, it depends on how well you trust their modelling. They certainly are forecasting a decline and certainly that would be a transfer from existing home owners to potential future home owners. And I think existing home owners would be pretty annoyed about a policy-engineered decline in the value of their single largest asset.

EMMA ALBERICI: Sinclair Davidson, Saul Eslake, we do need to leave it there. Thank you both very much.

SINCLAIR DAVIDSON: Thank you so much.

SAUL ESLAKE: Thanks very much for having us.

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