Negative Gearing: Incompetence or Conspiracy?

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A rental property is said to be negatively geared if the owner’s expenses (including mortgage interest and maintenance) exceed the rental income, so that the property makes an annual loss. If the tax system allows negative gearing deductibility, that loss can be deducted from other income for tax purposes. Abolition of this deductibility, loosely known as “abolition of negative gearing”, would make the owner’s expenses deductible against the rent alone — not against other income.

SPIN: Negative gearing deductibility helps renters and first home buyers by encouraging property investors to “supply accommodation”; the larger the supply, the lower the rents and prices.

IR Reform: Who Really Wins

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Who are the real winners and losers under the Howard government’s industrial relations reforms? We think you can work it out for yourselves. Here are some hints:

1. If workers in firms with less than 100 employees have lost their protection against unfair dismissal (not to be confused with unlawful dismissal), and if all other workers have lost their protection against unfair dismissal as long as their employers can claim “operational requirements”, how will this effect workers’ ability to get home loans? And how will that affect the value of your home?

2. If workers’ wages become more dependent on the workers’ own bargaining power, which workers will lose more: those with more bargaining power, or those with less? In the past, have these workers been comparatively well-paid or poorly-paid? Are they more likely to be home owners or renters? How will this affect the rents received by mum-and-dad property investors, and the values of their investments?

FHOG Reloaded: New Home Builder’s Grant

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SPIN: The First Home Owners’ Grant (FHOG) helps first-time home buyers enter the market.

FACT: More precisely, the FHOG helps first-time buyers to compete with other buyers who can use the equity in their old homes to bid up prices. But by increasing bids from first-time buyers, the FHOG also raises prices, especially at the bottom of the market where first-time buyers are concentrated. Thus the FHOG partly defeats its own purpose. Moreover, the FHOG only helps people who are rich enough to be contemplating home ownership; it does nothing for life-long renters.

SOLUTION: Make the grant available only for new homes in order to encourage construction, so that the increase in demand is offset by the greatest possible increase in supply. Then make the grant available to investors as well as intending owner-occupants, so that the increase in supply extends to rental accommodation. But keep the grant in the form of a fixed sum per dwelling, so that investors have an incentive to build a larger number of cheaper dwellings rather than a smaller number of more expensive ones; that maximizes the supply at the affordable end of the market. In short, turn the FHOG into a New Home Builder’s Grant.

Globalisation: Shortcut to the Bottom

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In this age of internationally mobile capital, we are repeatedly told that if we want to attract and retain investment, we must make our tax system more “competitive”. Very conveniently for the investors, competitive taxes are taken to mean low taxes, in which case governments must engage in a “race to the bottom” — competitively cutting taxes and public expenditure, sacrificing their schools, hospitals, transport systems and other essential services on the altar of global finance.

Fortunately this is bunk. In fact the attractiveness of the tax system to investors has more to do with the type of tax than with the amount of tax collected. “Taxes ain’t taxes!”

Your Home: The Tax Haven That Never Was

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SPIN: The Family Home is exempt from land tax. (And all the people shall say: Amen.)

FACT: If home buyers don’t have to pay land tax, they can afford higher mortgage repayments, hence higher prices. While the price of a house is limited by the cost of construction and by competition among builders, a home is not just a house; it also includes land, which is a limited natural resource, and whose price is therefore determined by what people are willing and able to pay for it. So there is nothing to stop higher land prices from absorbing the entire benefit of the tax “exemption”, in which case the buyer still pays the tax — to the seller instead of the government!