Report

Top gears: how negative gearing and the capital gains tax discount benefit the top 10 per cent and drive up house prices

28 Apr 2015
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Summary: The combination of negative gearing and the capital gains tax (CGT) discount is distorting the Australian residential property market, encouraging speculative behaviour and being used by predominately high income households as a tax shelter.

Modelling commissioned by The Australia Institute shows that these tax perks are costing tax payers $7.7 billion per year.

The modelling also shows that the majority of the benefits of negative gearing and the CGT discount are not going to middle Australia but rather to high income earners. 56 per cent goes to the top 10 per cent of income households and 67 per cent goes to the top 20 per cent. By comparison relatively little flows to low income households with just four per cent going to the bottom 20 per cent of households. The bottom half of Australian households only get 13 per cent of the benefits.

Negative gearing and the CGT discount combine together to encourage Australian investors to invest in residential property which is having the effect of pushing up house prices and lowering rates of home ownership. The proportion of housing finance that is going to investment properties is growing. These tax perks encourage investors to make a loss and to focus not on rental returns but on capital gains.

The proportion of investment loans in total housing finance has grown from 16 per cent 23 years ago to 40 per cent in 2014. A larger proportion of residential investment properties are showing up as more and more low and middle income households being forced to rent. Low and middle income households are being squeezed out of the property market.

This type of speculative investment makes the property market more susceptible to bubbles; it also makes it more difficult for the Reserve Bank (RBA) to conduct monetary policy. While the domestic economy is weak the RBA is reluctant to lower interest rates further for fear of pushing up already inflated house prices in Sydney. A focus on capital gain means that rising house prices draw in more speculators which could further inflate prices.

A good tax is efficient and equitable. Negative gearing and the CGT discount fail on both those criteria. These two tax policies are highly inefficient as they distort the residential housing market by encouraging speculation and make it more susceptible to asset bubbles. They are inequitable as they make it more difficult for lower income Australians to buy their own home. The benefits also overwhelming flow to high income households.

 

Publication Details
Published year only: 
2015
437
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