col, apologies, the curse of two finger typing.

my whole point is that our whole economy is designed for debt. our tax system skews investment behaviour to debt financing. we have a current account deficit (not to be confused with trade deficit) that is growing and growing.

countries such as Sweden, Austria have arrangements designed to encourage savings and hence have significant current account surpluses. we encourage investment through debt not equity raisings to our detriment.

our official interest rates are almost double those of other OECD nations because of this culture of investing via debt.

country 3month interest rate 10yr govt bond
australia 5.62 5.27
denmark 2.57 3.45
sweden 1.91 3.39

corporate bonds are 6.26%, yet in the Euro area they are 3.97%
in sweden they are 3.34%

australia's all ordinaries has increased by 11.6% in US$ since 31/12/04
Austria (ATX) has increased by 43.3%
Denmark (OMXCB) has increased 29.8%
Sweden (aff gen) has increased by 15.9%

gdp for Australia is 2.6%, Austria 2.1%, Sweden 3.4%, Denmark 4.8%

For those countries not following the Anglo/American liberalisation economic philosophy and who are following a genuine third way are performing better.

Growing stockmarkets, current account surpluses, lower interest rates
we need to discard our economic blinkers before it is too late.

Realist,
The average suburban Mum and Dad have no wealth to accelerate, sadly the average Mum and Dad live on below average pay. The average is proped up by C.E.O's who live on 63 times the average pay, lawyers, doctors and professional people who all recieve much more than average pay. The myth that because the average pay is $53,000 p.a. that the average family recieves at least that much is more to do with making the average family feel inadequate, thusly they work harder to try to achieve the "average" which never happens. Of all the parents in my daughter call at school only one family recieves above the average, or "the average". This is a one income family whose Dad is an underground miner on $100,000 p.a.

What a shock for that family when no choice [Workchoices] legislation is operable next month. Please don't think the average person does not realise what is happening, more and more are coming to understand their own plight.

I don't know Ms Crouch, but I have a healthy respect for the Housing Industry Association, so I don't want these comments to be construed as an attack on either her or the HIA.

That said, I profoundly disagree with her (and the HIA) about the consequences of removing 'negative gearing' from the Australian tax system.

Ms Crouch recycles the myth that the temporary abolition of negative gearing for investment properties by the Hawke Government caused a huge increase in rents. True, rents did rise sharply in Sydney and Perth during this period. But that was because rental vacancy rates in those two cities were below 2% when negative gearing was abolished. Rents would have risen sharply there in any event. In other cities, where vacancy rates were higher, the rise in rents during this period was much more modest and not out of line with movements in earlier or subsequent periods. It is thus simply not true, no matter how often spokespeople for real estate interests repeat it, that the abolition of negative gearing for investment properties caused an 'explosion in rents'.

No other income tax system in the developed world is as generous as Australia's in the benefits it confers on landlords. The scope to deduct interest and other expenses, over and above rental income, against other income for tax purposes, without limit, has no parallel in comparable countries' tax systems. Yet there is no evidence that this has resulted in a larger or cheaper private rental market in Australia than in other countries where the tax system is less generous in its treatment of investment properties.

The cost (in terms of revenue foregone) of negative gearing has been compounded by the totally unwarranted decision in 1999 to halve the rate of capital gains tax - which converted negative gearing from a device allowing people to defer tax, to one allowing people both to defer and reduce permanently the tax they would otherwise be obliged to pay.

... to be continued

... continued from previous post ..

These two loopholes in the tax system - the benefits of which accrue disproportionately to those in upper income groups - are major departures from good tax principles of equity and neutrality in the treatment of different types of income.

The interaction of negative gearing with the halving of the capital gains tax rate has contributed to an explosion in claims for deductions for interest payments in excess of gross rent, from just $174mn in 1999-2000 to $2.6bn in 2003-04 (and probably more since). It exacerbated the 'housing bubble' of the first half of this decade, which priced thousands of first-time buyers out of the owner-occupied housing market, forcing them into the private rental market and contributing to upward pressure on rents which Ms Crouch regards as a 'bad thing' when it (allegedly) results from removing tax concessions enjoyed by landlords.

Indeed, since the overwhelming majority of negatively-geared property investors by existing properties, rather than contracting with HIA members to buy new ones, it's hard to see why the HIA is so enamoured of this particular set of tax breaks from which its members derive so little benefit.

The Australian economy would benefit mightily from tax reforms which abolished negative gearing (for all investments, not just investment properties as occurred in the mid-1980s) and the half-taxing of capital gains, and using the revenue thereby generated to lower marginal tax rates.

Reform along these lines - which would amount to no more than applying to the personal income tax system the same principles of 'lowering rates and broadening the base' which the Howard Government applied to the indirect tax system and the business income tax system in 1999 and 2000 - would improve both the equity and efficiency of the Australian tax system.

In all honesty, I can't understand why the Government is so opposed to reforms of this nature.

It seems to me that the people who advocate the abolition of negative gearing, think that the Government is the principal supplier of rental housing throughout the country. If that were the case, the proposal might make some sense. Either they've done no research or they're pushing a hidden agenda.

I can't speak for other advocates of abolishing negative gearing, but I for one do not think the government either is, or should be, a major supplier of rental housing.

Rather, I argue for the abolition of negative gearing, and the 50% discount on capital gains for personal income tax purposes - loopholes which result in revenue foregone of around $2.5bn and $4.6bn, respectively - on three grounds. First, that doing so would improve the equity of the tax system, since these concessions/loopholes predominantly benefit upper income earners. Second, that it would improve the 'neutrality' of the tax system by removing the favourable treatment of capital gains income relative to income from working or from other forms of investment (and there is no economic rationale for taxing income from speculation at a lower rate than income from working). Removing this arbitrary discrimination in favour of particular types of income or structures of investment would lead to more efficient (in the economists' sense) resource allocation. Third, the gains to revenue from removing these loopholes and concessions would enable an across-the-board lowering of high marginal income tax rates which act as a discincentive to labour force participation, saving and investment.

Moreover, as I noted in an earlier post, the principal argument usually put by advocates of the retention of negative gearing - namely, that when it was 'tried' in the 1980s it resulted in an 'explosion' in rents - is simply not true. And it does not become true simply as a result of being endlessly repeated.