- Ross Gittins: Time to take a stand against misleading modelling
- Peter Martin: Confused by the negative gearing modelling? That's the whole idea
Negative gearing encourages excessive use of debt, lifts overseas borrowings and raises real interest rates, according to the economist whose work on the subject has been lauded by the Treasurer Scott Morrison.
Call to end misuse of economic modelling
The Australia Institute wants a code of conduct introduced for economic modelling following the BIS Shrapnel report in to negative gearing.
Kim Hawtrey, now with consultancy firm BIS Shrapnel, wrote the words more than 20 years ago when he was an academic at Macquarie University in an article in the journal Australian Tax Forum.
"Deductibility of interest payments on debt creates a tax advantage for debt over equity," he wrote. "Negative gearing ensues by way of combining debt interest deductibility with concessional tax treatment of capital gains, encouraging over-investment in property and related asset inflation sectors."
More than two decades on, Dr Hawtrey says he won't divulge his personal position on negative gearing, saying the work his firm released last week was "technical" and "dispassionate".
"I have not commented on my views and I am not going to comment on my personal views, from a policy point of view, or as a voter or whatever," he told Fairfax Media.
"We were simply given a task and we carried out that task, and no attribution or nothing should be read into that as to any policy preference."
"Any policy issue in Australia, we do reports on both sides of those issues for parties that are on both sides of the political fence, if you like, and we do that impartially and dispassionately as economists, as technicians, if you like."
Dr Hawtrey said then that negative gearing created a more highly leveraged economy than would otherwise prevail. The study he released last week at the request of an undisclosed client said measures that clamped down on negative gearing would result in higher rents, lower dwelling prices and less home building than would otherwise be the case.
After 10 years, dwelling prices would be 15 per cent higher instead of 22 per cent higher. Rents would be 41 per cent higher after 10 years instead of 34 per cent higher.
"That report is not recommending for or against negative gearing," he said. "It is an if-then report: if this happened, then this would happen. It doesn't pass any judgement about whether the policy is good or bad, about whether the results are good or bad."
On ABC radio last week Mr Morrison described the report as a damning indictment of Labor's policy. "What this report shows is that it will drag growth, it'll send growth backwards and retard grown in the economy," he said. "It has a devastating impact on property markets and people's homes."
Scott Morrison defiant on negative gearing
Labor says the Treasurer has staked his reputation on a flawed report, but Scott Morrison continues to attack ALP policy.
Dr Hawtrey said the report made no "judgement one way or the other about negative gearing".
"Our report contains no recommendations about policy, and my personal views about negative gearing as a voter may bear no relationship to the report," he said.
In a survey of 51 leading economists conducted by the McKell Institute last week 90 per cent described negative gearing and capital gains tax concessions as major tax distortions that led to an inefficient allocation of resources. More than 70 per cent thought house prices would continue to grow under Labor's proposed cutbacks.
Labor wants to limit the deduction of losses from investments to investment income and capital gains. They could no longer be deducted from wage income. Existing negative gearing arrangements would continue and would also apply to investments in newly built properties.
The Coalition is considering imposing a cap on the amount that can be deducted from wage income. Mr Morison said last week that a cap of $50,000 per year would affect only 1.6 per cent of the taxpayers who negatively geared.
Peter Martin is economics editor of The Age.