Australian policy is dominated by interest groups and politicians pretending they are trying to do one thing, while actually doing the opposite, and by those same groups pretending that the policies in place are working while they actually fail. This is most obvious when we talk about negative gearing and housing.
Whenever discussing any policy, we always should step back and ask what we are trying to do, and whether what we have been doing has worked.
Take, for example, industrial relations. Have IR policies over the past 25 years improved productivity? After all, we hear it said all the time that this is the aim.
And yet, since the creation of the Productivity Commission 26 years ago, we have had a mass of things business groups dreamed about and told us would improve productivity – ever more flexibility, lower income tax, lower wage growth, less industrial action and much less union power. And guess what – productivity growth has been falling:
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But when the government passed the “close the loopholes” bill and included the right to disconnect, we have heard no end of voices from business groups, their media mouthpieces and Peter Dutton telling us that this will kill productivity.
Have they been telling us fibs for the past decades about what improves productivity? Or are they just ignorant about what productivity actually is? Have they failed?
The answer might seem to be yes, but if you instead ask if IR policy over the past 25 years has actually been designed to keep wages down and increase company profits, you get a different result. By that measure it has been spectacularly successful.
The same applies to housing policy.
We are told that the housing tax policy of negative gearing interacting with the capital gains discount will generate new housing investment and thus improve housing affordability.
In reality, it’s just a tax minimisation policy disguised as housing policy.
While negative gearing gets all the hate, it really was John Howard who destroyed our housing market by handing out a big tax-free gift to property investors.
Prior to June 2000, if you made a capital gain (ie a profit from an investment) you discounted the profits by the level of inflation over the period of the investment before paying tax.
Then Howard (and Costello) changed it to being a straight 50% discount.
If you bought a property for $500,000 and 10 years later you’re able to sell it for $1m at a profit of $500,000, rather than pay tax on the whole $500,000, you only pay tax on $250,000. The other $250,000 is yours, tax free.
That is about as sweet as it gets.
This change made speculating (sorry, “investing”) in housing very lucrative.
And it was a gamechanger for negative gearing, which had been around forever but which was not all that worthwhile.
Now you could buy a property, rent it at a loss, use that loss to reduce your taxable income (negative gearing) and when the value of the property had risen enough, you could sell it and only pay tax on half the profit.
That’s minimising your tax both coming and going.
It massively increased the amount of capital gains being earned and the amount of negative gearing:
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If that were all we were worried about, the issue would just be about fairness, because the benefits of both capital gains discounts and negative gearing deductions overwhelming flow to the richest:
The richest 10% get 82% of the total benefits of the capital gains discount. Treasury estimates that in 2023-24 that would be about $15.6bn of $19.05bn.
Remember that the entire cost of the new stage-three tax cuts is around $23bn.
Negative gearing is slightly less skewed to the rich but the top 20% still get just over half of the estimated $27.1bn in benefits for this financial year.
People earning over $250,000 make up 2% of all individuals in the tax system but they account for 11% of the amount of rental losses (ie negative gearing) and 62% of capital gains:
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And the more people earn, the larger their capital gain or rental loss:
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But bad as this is, it avoids the real issue.
Let’s go back to the start – have the 24 years of capital gains tax discount and negative gearing led to better housing affordability?
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Clearly not.
From June 1989 to June 2000, the average annual growth of both average household disposable income and average dwelling prices was 4.4%. Since June 2000, while household incomes have risen on average 6.8%, average dwelling prices have soared more than two times that at 15.9%:
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At some point you have to admit what you’re doing has not worked. Or perhaps we need to admit that the aim all along was higher house prices.
Howard infamously said in 2003: “I don’t get people stopping me in the street and saying, ‘John you’re outrageous, under your government the value of my house has increased’.”
The tax policies he put in place worked. They ensured house prices would go up much faster than income and reduce affordability. Maybe it’s time to admit that if we keep them in place that situation will continue.
• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
