Former treasurer Paul Keating tried to end negative gearing, but was rebuffed by his cabinet colleagues. Photo: Rob Homer
No tax break has drawn quite the opprobrium of negative gearing, fingered as an egregious rort favouring the wealthy that punches a huge hole in federal finances, and drives up house prices to boot.
The assessment is not entirely without basis, but there are other concessions to home owners that cost the budget far more, and negative gearing sits well down on the list of factors affecting housing affordability.
Negative gearing allows investors to claim losses, including interest payments, associated with investments against other income. It applies to all investments, not just housing, and has been around since the 1930s.
The release by the National Archives of the cabinet papers for 1986 and 1987 revealed that former treasurer Paul Keating argued for abolishing negative gearing. He lost the argument.
According to an analysis by the Grattan Institute, the housing concession with the biggest cost to the federal budget is the exemption of owner-occupied homes from capital gains tax. It's hard to quantify, but it reckons it costs the federal budget about $15 billion a year in forgone revenue.
That compares with about $2 billion a year from abolishing negative gearing.
Scrapping the capital gains tax exemption on the family home is, of course, politically impossible. Its abolition would create uproar on the streets, cost many people hundreds of thousands of dollars, and likely lead to chaos in the housing market.
A more achievable, although still difficult, reform would be to end the exemption of the family home from the pension assets test. Some 80 per cent of seniors with assets of $1 million (including the family home) are eligible for some kind of pension, and receive an average welfare payout of $200 a week, according to Grattan's ''Balancing Budgets'' report released in November.
Almost $20 billion in pension payments are made each year to seniors with more than $500,000 in assets. The report reasons that by including at least some of the value of the family home in the assets test, $7 billion a year could be saved.
And then there's the Howard government capital gains tax discount, which halves the tax paid on profits from the sale of investments for individuals and most trusts.
Like negative gearing, it applies to all investments, not just housing. Introduced in 1999, it now costs about $5 billion a year.