In June last year, the Property Council and the Real Estate Institute of Australia (REIA) enlisted ACIL Allen Consulting to write a report arguing the case for retaining negative gearing and the 50% capital gains tax discount. This report was thoroughly debunked by MacroBusiness.
It was later revealed that in 2006, Allen Consulting Group had called for negative gearing and the CGT discount to be removed in order to “reduce effective marginal tax rates across the income spectrum, but especially at very low income levels”:
In 2005, the Allen Consulting Group was commissioned by the Victorian Government to examine how the income tax system could be remade. That report – Reforming Income Tax: Broader Base, Lower Rates, Simpler System – was co-authored by Jerome Fahrer, our speaker at the Forum. Lower taxes and a flatter structure were at the core of the proposal.
It is one thing, of course to recommend lower taxes. It is potentially quite another to work out where the compensating revenue will be found.
ACG suggests that the tax cuts should be funded by reductions in tax breaks, such as deductions for work-related expenses, capital gains concessions, negative gearing, fringe benefit concessions for vehicles, and others. They estimate that there are around $12 billion in tax breaks that could be removed, so finding $6 billion to fund the proposed reforms should in its view “not be difficult.” According to ACG, these reforms would reduce effective marginal tax rates across the income spectrum, but especially at very low income levels where the interaction of the income tax system and the social security system has particularly bad effects on incentives to participate in the workforce. ACG estimates that these reforms would lead to around 92 000 additional people entering the labour force.
Yesterday, BIS Shrapnel released highly dubious modelling undertaken for a “confidential client” in which it argued that restricting negative gearing to newly constructed dwellings would somehow simultaneously reduce house prices, reduce dwelling construction, reduce employment, reduce Budget revenues, but magically raise rents by around 10%.
Grattan Institute CEO, John Daley, was particularly scathing, calling for the sponsor of the study’s identity to be released and rubbishing the ‘modellings’ assumptions and findings, claiming they “did not pass the giggle test” and were “manifestly ridiculous” in The AFR.
Daley went further in Inside Story, completely demolishing BIS’ shoddy modelling:
The convoluted logic of the report, its manifestly ridiculous economic predictions and the fact that the consulting firm in question refuses to disclose who commissioned it were not enough to stop the report being the lead story of at least one national newspaper.
The report’s claims must not go unchallenged. But nor should the fact that a report that would flunk any first year economics course has been allowed a serious voice in the public debate.
Here are just two of its outlandish claims. First, the headline grabbing $19 billion GDP figure. The report claims that removing negative gearing for existing (but not new) properties would shrink cumulative GDP by up $190 billion over ten years.
All tax increases drag somewhat on economic growth, but some have less of an economic effect than others. Treasury estimates that the loss of economic activity from every dollar of tax collected ranges from almost nothing, for broad-based land taxes, to 50 cents for company tax and more than 70 cents for residential stamp duties (the most inefficient taxes).
The consultancy’s report suggests that the annual increase in tax collections from the change to negative gearing would be $2.1 billion. The $19 billion hit to GDP would make the loss of economic activity from each additional dollar of tax collected more than $9. That’s right, more than ten times the economic harm of stamp duty, almost universally accepted among economists as the most economically damaging tax….
The second of the more fanciful claims is that restricting negative gearing would lead to rents rising by up to 10 per cent. This assumes that the reduction in the tax concession for investors would be passed on in full through higher rents. Yet there is no basis for assuming that landlords could recoup anywhere near the full loss in tax benefit through increasing rents.
That’s because rents are ultimately determined by the balance between demand and supply for rental housing. In property markets – as in other markets – returns determine asset prices, not the other way around. Rents don’t increase just to ensure that buyers of assets get their money back.
Competition in rental markets would limit material rent rises. Because the negative gearing changes modelled in the report are grandfathered, the vast bulk of landlords wouldn’t pay higher taxes. Nor would new landlords with positive net rental income. And tenants could beat rent rises by threatening to move.
Some people may choose not to invest in property if tax concessions are less generous. This might reduce house prices, but it would have a minimal impact on rents. Every time an investor sold a property, a current renter would buy it, so there would be one less rental property and one less renter, and no change to the balance between supply and demand for rental properties. Indeed, one of the benefits of changes to negative gearing is that lower prices are likely to make housing more accessible for first home buyers.
The report claims that rents would rise because of the fall in new housing supply. But 93 per cent of all investment property lending is for existing dwellings. And as we already discussed, the assumptions in the report massively overstate any impact on new activity.
Richard Denniss, chief economist at The Australia Institute (TAI’s), is equally scathing, tweeting the following yesterday about BIS’ ludicrous report:
Today, TAI executive director, Ben Oquist, has gone further denigrating BIS’ modelling:
“On Thursday we saw modelling driven into the centre of the tax reform debate by an unknown vested interest”…
“While the startling allegations in the BIS Shrapnel report have been quickly torn apart by many economists, it has nonetheless misinformed and mongered fear among the public”.
Three are also the 51 economists surveyed by the McKell Institute including former RBA Governor Bernie Fraser that made the BIS Shrapnel report look absurd.
What the negative gearing saga shows is that there needs to be some kind of ‘code-of-conduct’ or ‘hippocratic oath’ applying to economic consultants, so they act in the national interest, not just as a ‘hired gun’ for lobbyists. It is quite possible to model the moon being made of cheese to protect the dairy lobby, if that is what a client wants, using tailored assumptions and a limited scope. This is called partial analysis both the sense that it does not take account of the entire picture and is biased.
John Daley seems to agree:
The rise of consultancies churning out “independent” reports to advance the causes of vested interests has been well documented. What is alarming is the prominence these reports receive in public debate. No matter how outlandish their claims or how obscure their provenance, the media report them and politicians quote them. The public, confused or frightened by the numbers, forms the view that policy change is simply too risky. That’s a pretty cheap way of buying policy outcomes, especially ones that help special interests but go against the long-term interests of the country.
As does TAI’s Ben Oquist:
“We call on the government to develop a code of conduct to ensure the standard of all economic modelling used to inform Government is transparent and of a high standard”…
“It’s not too much to ask for a consistent standard. There is absolutely no reason why all sides can’t at least agree on the minimum rules.”
At a minimum, BIS Shrapnel should disclose who funded their modelling so that Australians can ascertain the underlying motivations of the reported results.
