The next tax promise Labor should break

Sam Hawley: Since the government broke an election promise and changed the Stage 3 tax cuts, the Coalition has been warning there could be many more broken promises to come. Specifically, it says the tax incentive, known as negative gearing, is the next thing on the chopping block, although the government denies that. Today, economics editor at The Conversation, Peter Martin, explains what it is, whether we really need it anymore, and what a change could mean for the housing market. I’m Sam Hawley on Gadigal Land in Sydney. This is ABC News Daily.

Sam Hawley: Peter, the thing with breaking election promises is it gives the opposition great fodder for attack. And so it’s been since the government changed its policy on Stage 3 tax cuts, hasn’t it?

Peter Martin: The opposition has a very, very, very powerful argument now. And their argument is that if Anthony Albanese goes to the election promising not to change tax, no-one will believe him. No-one should believe him.

Peter Dutton: I think most Australians are still shell-shocked by the fact that we have a Prime Minister who has looked the Australian public in the eye and completely told a lie to them. And I think Australians won’t reward that.

Sussan Ley: This isn’t about high incomes versus low incomes. This is about the lie that was told

James Stevens: We think it’s obviously appalling to say one thing to the people of this country in an election campaign and do the complete opposite afterwards.

Sam Hawley: It’s a pretty simple message, isn’t it, from the Coalition? You cannot trust Labor anymore.

Peter Martin: And that’s why the only way out for Albanese is to go to the election promising to change tax. That people will believe. So, oddly, by doing what is done with the Stage 3 tax cuts, he’s created the momentum, almost forced himself, just with a year before the election, to come up with a plan to put to the people. Now, this isn’t something that he would do. It’s something he would put to the people.

Sam Hawley: You’re saying if he doesn’t go to the next election saying that he will change some form of tax, then the Coalition can say that he’s lying. He has to have a tax change. That kind of does your head in a bit, I think, Peter.

Peter Martin: Yeah, it’s a bit like that Maxim in leadership contest. The only member of parliament you can believe is the one who says he won’t vote for you. So, yes, he has to come up with something now. This has really opened things up.

Sam Hawley: Okay, and the Coalition, of course, is pointing to negative gearing. That’s the tax that it says will change.

Peter Dutton: If you look at the Treasurer’s words in relation to the question he was asked about negative gearing, he uses a very cute form of words, as the Prime Minister did in parliament,…

Angus Taylor: We won’t support changes to negative gearing. That’s their intent. We know they’re considering this. Their answers in the parliament on this week were very wishy-washy.

Sussan Ley: Will the Prime Minister rule out any changes to the current tax treatment of negative gearing?

Anthony Albanese: I thank the deputy leader and the opposition for her question.

Peter Martin: …And there are reasons to think that. Now, Albanese has been lukewarm in saying he won’t change it, merely said, we are supportive of the current rules, we have not considered changes to them.

Journalist: Can you be clear about your intentions in regards to negative gearing?

Anthony Albanese: I’m being clear about the intentions that we do have.

Journalist: Can you rule out any idea around the changes to negative gearing?

Anthony Albanese: I’m telling you what we’re doing, not what we’re not doing.

Peter Martin: Labor did consider changes to them in 2016, 2019. They took them to the election.

Bill Shorten: Is it right that we spend billions of dollars to give people the ability to claim a subsidy when they invest in a property in the future? Or should we properly fund our hospitals and schools? It’s not a zero-sum game.

Peter Martin: They would have limited the scope of negative gearing to have the tax concession used only for new houses, new building, to increase supply.

Sam Hawley: And proposing changes to negative gearing went really badly for Bill Shorten. It was part of the reason why he lost that election.

Peter Martin: Well, back then, in 2016, Malcolm Turnbull said, he was the Prime Minister, this is going to cause a collapse in housing prices. And he scared people. He said, if you touch negative gearing, housing prices will collapse.

Malcolm Turnbull: See, Labor’s reckless changes will reduce property values. They’ll devalue every home, every property in Australia. And they’ll result in increased rents.

Peter Martin: I think that circumstances have changed a bit since then. I think if you say to someone today, hey, we’ve got a tax measure which might reduce upward pressure on house prices, they’d say, really?

Sam Hawley: Mm, yes, times have changed.

Peter Martin: I think things are very different. Back then, it was, you know, they’re coming after your family home, you know, it’ll go down in value by four or five per cent. These days, you know, house prices went up 10 per cent in the last year, depending on your city. These days, a lot of us would be pleased about that, pleased for our children, if not for ourselves.

Sam Hawley: Yes, because there’s so many people that can’t get into the housing market right now. Peter, before we go any further, please explain negative gearing in a simple way for me. Slowly.

Peter Martin: You need to explain negative gearing because no one from overseas really knows what it is. New Zealand has it, but, you know, the countries we compare ourselves with, the United Kingdom, the United States, doesn’t have it. It relies on you being a bad business person. It relies on you being a loser. So if you rent out a property and lose money on it, which either means you’ve made a mistake, something has turned against you, or you’re just a dud decision-maker, right? But for whatever reason, you’re allowed to use it to reduce your taxable income from other sources, in other words, your wage. So if you were a doctor, you know, a professional on a high wage, you could take yourself out of the top tax bracket into one below it by, you know, say you lost $1,000, say you lost $2,000, $3,000, $20,000, if it was an upmarket property, a year by renting it out, you could cut the tax on your wage. They’re not so much dud business people, they might in fact be quite clever, they’re deliberately losing money in order to cut the tax on their wage.

Sam Hawley: Okay, so if I was losing money on a property I was renting out, I can claim that amount as a tax deduction on my salary. That sounds really good.

Peter Martin: You can reduce your salary for taxable purposes.

Sam Hawley: All right, so how many Australians are actually doing this, Peter? And how much does it cost the government every year? Do we know that?

Peter Martin: We do know that. One million Australians, negatively gear. That’s one in nine taxpayers. $2.7 billion per year is lost to tax. So it’s a sizeable amount of revenue that’s lost. And that’s okay if there was a purpose behind it. Now, the Prime Minister says, he said on the Insiders, that the purpose was building housing supply.

Anthony Albanese: There’s a whole lot of analysis that says that they encourage investment in housing. And the key when it comes to housing is housing supply.

Peter Martin: The shocking figures are that almost all of the loans given for investor housing go to buy existing houses. And the only way you buy an existing house is pushing up the price. About 80 per cent of all the loans given for investor housing each month aren’t to build new houses, they’re to buy existing houses.

Sam Hawley: So it seems like you’re saying that negative gearing is actually making the housing crisis in this country worse.

Peter Martin: It is pushing up prices and more importantly, for sort of security and you know what it’s like to live in a place, it is turning Australians who would have been owner occupiers into renters. Since negative gearing ramped up, the proportion of households renting has climbed from 26 per cent to 30 per cent. And it’s climbed a lot more in the younger age groups. Rough math suggests that’s around 400,000 Australians. Around 400,000 Australians would be in homes they own. That’s about in terms of houses, two Canberra’s worth. So that’s an awful lot of people that Australia’s dive into being landlords, mum and dad landlords, one in nine taxpayers. That’s an awful lot of people who now don’t own a house because someone else owns two or three.

Sam Hawley: So if it wasn’t for negative gearing, 400,000 more Australians could own their own home. So the question is, should we get rid of it then? Do we need it?

Peter Martin: Well in theory, negative gearing is not such a bad thing. You know, if you lose money, you should be able to claim it against money you make, but they don’t allow it in other countries. And that’s because they think it’s a dodge to get people to lower tax. Now, we could turn it to our advantage and that’s using it to create houses. So we could say negative gearing’s available, no problem. If you lose money, you can lose it to cut your doctor’s income, so long as you build a new house. The overriding problem is not enough places to live. That would, to the extent that it increased the number of homes being built, would put downward pressure on house prices. That’s what Malcolm Turnbull meant when he said this would cause, he was exaggerating, a collapse in the housing market. It would put downward pressure on prices. Maybe 4 per cent, maybe 5 per cent. There would be fewer renters and more owners.

Sam Hawley: Peter, let’s go back to the politics of all of this because there are growing calls from the crossbenchers for change.

Journalist: The Greens will push the federal government to overhaul gearing and capital gains tax concessions.

Max Chandler-Mather: …here are millions of people getting locked out of ever being able to buy a home. And realistically now, the only way we’re going to fix that, one of the first steps is phasing out negative gearing.

Sam Hawley: They want negative gearing to be reformed in some way, including the independent David Pocock. He’s been arguing for that.

David Pocock: You know, the gall of some of these politicians who have multiple investment properties to get up there and say, we cannot touch negative gearing and capital gains tax discounts. I think they have to be on the table. If we want to turn this ship around and have housing as something that everyone in our community can afford…

Sam Hawley: But tell me, what do you think’s in the mind of Anthony Albanese when it comes to negative gearing? Do you think he will try and make some changes? Because it would be pretty risky, wouldn’t it, to break another election promise?

Peter Martin: That’s what I would have said at the end of last year about stage three. That’s what Albanese was telling people. It would be risky to break an election promise. I won’t do it. We’re no longer in that world. He has to come up with something on tax. Otherwise, people will laugh at him. They’ll say, you’re promising to change no taxes? Yeah, sure. Will negative gearing be part of it? I think it could be. I think that the politics has changed. That one fact that opponents of negative gearing, supporters of negative gearing agree on, is that if you do something to wind it back, you’ll lower pressure on house prices. I think we feel OK about less upward pressure on house prices. I know I do. Now, will it take skills to sell it? Yes. Does Albanese have those skills? We’ve just learnt that he does. Will, after it’s done, people say, hey, you know, this was really quite clever. This will actually get a few more houses built? Perhaps, because we look back now, and what Albanese did on stage three looks as if it was politically clever, although we didn’t think so before he did it.

Sam Hawley: Peter Martin is the economics editor at The Conversation and a visiting fellow at the Crawford School of Public Policy at the Australian National University. This episode was produced by Nell Whitehead and Bridget Fitzgerald. Audio production by Sam Dunn. Our supervising producer is David Coady. I’m Sam Hawley. ABC News Daily will be back again tomorrow. To get in touch with the team, please email us… Thanks for listening.