Tax reform Twilight Zone: Negative Gearing shock-horror!

Well either I’ve woken up in a parallel universe (no doubt related to the recent proof of the existence of gravitational waves), or the most blindingly obvious imbalances in our tax system have suddenly become imperatives for tax reform for all sides of politics. In the space of a few weeks, both major political parties have announced changes to our favourite residential property rorts: negative gearing and capital gains tax discounts, as well as superannuation tax concessions, and even more astonishing, members of both sides of politics including the Prime Minister have alluded to, or openly called for broad-based land value taxation.

They join the Greens, who admirably (although belatedly) announced concrete policies in this area shortly after their recent change of leadership, meaning that whichever party gets into power at the coming election, there will be a parliamentary majority and mandate for passing such reforms. The exact results will no doubt be very mixed, and are already subject to blatantly dishonest propaganda campaigns from our favourite property lobby rent-seekers, but their squealing protests and outright lies are the best sign that the snouts in the land speculation trough may soon be going hungry.

It’s almost as if political strategists and power brokers have actually started paying attention to 5 or more years of expert economic advice to reform the grossly inequitable, unproductive and wholly destructive tax treatment of residential property in Australia. Long ignored or naively dismissed as a ‘sacred cow’ of bipartisan policy, the tax treatment of land is at the dark heart of our failing economic structure. It seems that there is finally a critical mass of awareness about the world’s largest housing bubble and its contributing tax rorts, enough to tip the scales from political feigned ignorance to an emerging election battleground.

For months I’ve been bemoaning the complete myopia with which the crucial and long overdue subject of tax reform is viewed in the mainstream media and partisan politics. Since when was ‘GST’ a synonym for tax reform? I’ve found it absolutely astounding that the likes of the ABC have almost single-handedly run a ‘Hike the GST’ campaign on behalf of the government, without so much as a pause to consider the government’s actual stated plans, let alone the myriad reforms that offer far superior economic, social and equity gains than a GST hike, as suggested by countless independent tax experts, economists, research bodies, analysts, journalists and major government enquiries.

Where is the in-depth analysis of these urgent and preferable reforms outside of the independent economists and journalists at the fringe, who’ve been pleading for action for many years, but generally got laughed out of school as somehow not understanding the greatness of Australia real estate speculation and it’s many foundational property rorts?

Such is the idiocy and sheer bloody mindedness of the Australian politico-media circus, only ever able to distinguish issues through the lens of partisan false dichotomy: GST or not? Revenue problem or spending problem? Awesome economy or rubbish economy? Reform the tax system or just wing it with some cool iPhone apps or something? Unproductive property speculation or ‘invincible retirement strategy for the everyman so hands off you thieving politicians…’?

I once heard a senior interviewer on our national broadcaster respond to an estimate of a modest proposed land value tax on a median house – of around $500 per year – with the astoundingly destructive and irrelevant statement: “That’s a lot of money you know…?!”. I nearly threw the radio at my kitchen wall. That’s how far down the rabbit hole we’ve disappeared.

And so it is that once again our media is left to play catch up with reality and it’s complexities, necessities and inevitabilities. As I’ve detailed many times, genuine tax reform is the only way to save this country from destroying its own economy and society, and it must begin with the way that we tax (or don’t tax as it were), residential real estate. Or more correctly land.

Tax reform and the economy that we all want

Quite apart from the job of raising revenue, the nature of tax is quite simply to modify behaviour. As a general rule, the more you tax something the less of it you get relative to other economic activities. People naturally minimise activities that attract high relative rates of tax. And the inverse is true – the less you tax something the more of that activity you get. Therefore, what we tax (the ‘tax base’) is at least as important as how much we tax, because it has a huge impact on the types and mix of economic activity in our society, which in turn determines the overall level of prosperity and our living standards.

In terms of running a vibrant, dynamic and prosperous economy (what to speak of that ever elusive ‘innovation’ economy), it clearly makes sense to encourage more activity of a productive and value-added nature, as opposed to unproductive activity that actually diverts investment away from those parts of the economy that earn income by generating value: the tradeable sectors such as agriculture, manufacturing and services. You know, Kevin Rudd’s infamous desire to be a country that ‘makes stuff’. Speculating on the rising value of land is the antithesis of ‘making stuff’, and should therefore be discouraged, in favour of productive investment that does generate value in the community and economy.

But you guessed it, our tax system has been precisely engineered in the opposite way. We tax productive effort such as labour and industry, and untax financial speculation and economic rent such as the rising value of land and fixed mineral endowment. Even those with only a basic understanding of economics can see that this is a foolish way to run an economy. Whether or not you believe in high taxes or low taxes etc, handing out money for land speculation is the very definition of poor policy.

Tax concessions such as negative gearing and capital gains tax discounts are by no means the singular cause of our housing bubble, but obviously they are major incentives for the speculative debt-financed activity that drives it. If these policies actually achieved their stated aims of increasing the construction of new housing, or reducing rents, then there would be an argument for their place in a productive and prosperous economy. But in fact they stand for the very opposite sort of economic activity: unproductive rent-seeking that neither keeps rents low, nor spurs the construction of new housing. They only drive prices higher by creating artificial demand for the existing stock of housing. Indeed in Australia, as proven by Prosper Australia, there is no physical shortage of housing, only a speculative shortage, or an oversupply of debt-fuelled demand.

Negative gearing is not about investing in affordable rental accommodation. Negative gearing is only an attractive strategy if you anticipate capital gains from the eventual sale of your property (for which a handsome discount is also offered). It is a strategy that embraces a loss-making investment, in the hopes that the rising value of land can be captured for only the cost of debt finance, and no actual productive effort or investment in the economy. There is no value added when existing houses are traded to each other for profit. Such a wholesale aberration in a productive economy simply impoverishes us all in the long run.

With the help of financial deregulation and cheap debt, speculating on the rising value of land, and capturing that value as interest payments to large financial institutions, is a sickness that has infected developed economies over the last three decades or so, and it has clearly not ended well for anyone, with only a few countries such as Australia, New Zealand and Canada holding out a bit longer from their own debt deflation reckoning. It is essentially a process whereby nearly all economic surplus is converted into interest payments on debt, which is simply used to drive the price of land higher and enrich the FIRE sector (finance, insurance and real estate) through an ever-growing stream of revenue, without any need to innovate or grow businesses through investment.

Australia has recently taken the gold medal among modern speculative finance economies, having the highest household debt levels in the world, and the most expensive housing in the world compared to incomes and rents. We have become specialists in taking every bit of income earned and leveraging up into the purchase of residential property, accumulating ever more paper wealth while hollowing out the real productive sectors of our economy.

All the income growth in the last several decades has been capitalised into house prices, leaving us worse off than a generation ago, despite directly and majorly benefiting from the largest commodities boom in a century. Housing has never been less affordable, been backed by larger sums of debt compared to economic output and household incomes, and occupied a larger proportion of the economy, with the proportion of private credit going to housing completely overtaking credit going to productive business in the last 25 years.

This is not an economy we should be proud of, and nor will it last, as the internal contradictions of the housing bubble, and the natural limits of debt growth will destroy our illusory prosperity. All because we thought the rising value of land was making us rich. But where was this money coming from, and where was it going? It was going around in a fucking circle people. It did not actually produce any prosperity in aggregate terms, but instead created a terminal build up of debt and risk, as economic surplus was diverted into the hands of bankers and landowners through rising land prices, while starving the real economy of consumption and investment.

The capture of the naturally rising value of land is a long forgotten principle in classical economics. We have been brainwashed to believe that simply owning a piece of land should necessarily entitle the holder to the incremental increase in its value, when the increase in value is not the result of any productive effort on the landowner’s behalf, but is in fact the direct consequence of location. The value of land is derived from its utility to its occupier or renter. That is, the taxpayer-funded infrastructure, environmental features, employment and industrial opportunities, cultural and community amenity, population growth, government zoning and licenses, and of course the improvements to the land, or buildings/premises.

This rising land value (economic rent), was recognised by classical economists as the original source of economic surplus, and owing to its generation by the surrounding environment, economy, community, and society, should rightly belong to ‘The Commons’, and therefore be used to fund the activities of government and the social safety net, leaving labour and industry to ‘add value’ to the economy by working the land – unencumbered by taxes that work to discourage productive activity and encourage unproductive speculation on the aforementioned economic rent.

This simple idea was a foundational concept in the late 19th century reform era. The once famous Henry George explained in the 1890’s that the simplest and best way to create a fair and prosperous society, was to restore the naturally rising value of land to the people by replacing taxes on labour and industry with a single broad-based land tax, levied on the unimproved value (as opposed to the improved value of land, which has many unfavourable implications). This powerful idea was immensely popular amongst progressives and the left-wing, and was once a foundational principle of the Australian Labour Party. It’s an idea that has stood the test of time, despite many attempts to write it out of history and economics, precisely because it would work as intended.

Indeed, it may come as a surprise to many, but broad-based taxation on the unimproved value of land is nearly universally recognised as the most efficient and progressive form of taxation. It has been a top recommendation of nearly every government tax review in living memory, as well as tirelessly advocated for by all manner of expert economic and taxation think tanks, from all corners of the political sphere, but has been dismissed as too politically difficult for any major party to tackle in this debt-addicted, property obsessed neoliberal era. This despite the fact that land taxes would benefit everyone in the long-term, even the humble middle class landowner.

But it is an idea whose time has come, and surprisingly one that is gaining traction in Australia. It transcends the usual Right/Left disputes because it is not about higher or lower taxes, it is about what we tax. It is the best way to address growing inequality around the world, given that nearly all of the rising wealth gap since the 80’s financial deregulation can be attributed to rising land values, and it may be the best way to solve the major boom/bust cycles that plague modern finance-capitalism.

We are a far cry from achieving such aims as a broad-based land tax in Australia, but we may well see land taxes slowly reformed at the state level, which is a very encouraging start. And the reform or abolition of negative gearing and capital gains tax concessions are crucial moves in the right direction, because they represent the very opposite of the universally beneficial land tax – they subsidise the private capture of economic rent, which is well proven to be damaging to society and the economy. Not only do we currently give away the rising value of land for free (some $450 billion last year in Australia), but we actually subsidise this activity.

‘Here have some more money because you’re not making enough money for free’. What a bunch of short-sighted idiots we truly are, on a path to an undiversified and lazy economy, and a fractured and impoverished society, with the largest housing bubble in the world being all we have to show for our numerous tax and property rorts. All because property speculation is awesome and our dog-given right… Is this really the economy we want? No, and correct taxation is the path to getting the economy we do want.

“Nothing ever changes…” (until it does)

There are always many who claim that nothing will ever change, either as wishful thinking owing to their being beneficiaries of the existing system, or because of despair and cynicism towards the likelihood of meaningful reform – when does the right thing ever get done?

But as I’ve said all along, change is what happens when you least expect it. Grey sky thinking is what I call the propensity for humans to view a set of circumstances as permanent (for better or worse), despite the 100% proven track record of the clouds eventually clearing. And it’s particularly hard to believe anything can ever change if like many young adults, you have grown up in this long running and generation-defining housing bubble era.

Call it recency bias. We are a very pessimistic bunch, despite the pretty strong record of progress in human endeavour. They don’t call us progressives for nothing. Things eventually change when they must, usually because political careers eventually depend on doing something about the imbalance, rather than depending on ignoring it.

We seem to be at that point now with the two main egregious and specific tax advantages paid to property speculation: negative gearing and capital gains tax concessions for residential real estate, fast approaching the chopping block, or at the very least in danger of imminent changes. And with the vague possibility of increases to state land taxes, and potential removal of stamp duties to boot, all of a sudden our already shaky housing bubble seems to be on the verge of losing some of it’s most significant levers.

Indeed, shortly after the Turnbullator was enshrined as PM, I predicted the only way for the LNP to be re-elected would be to be dragged kicking and screaming towards the necessary reforms needed to avoid the worst of the coming economic downturn (in particular crucial tax reform concerning land, housing and superannuation), and to be honest in explaining the inevitability and seriousness of the economic situation facing the country. In the absence of that courage from Malcolm and his loon pond colleagues, I said there’d be a political vacuum to be filled by the first political force to take up the mantle of serious economic reform and the explanation of our broken economic structure.

In other words, the first party able to take on the real estate, finance and media lobby over our rotting economic core of housing speculation – as well as explain the hard times coming, and the steps needed to avert the worst of (recover from) a very painful restructuring away from unproductive debt-fuelled growth and Ponzi economics, towards a productive, innovative and mixed economy – can win the election.

Labor and the Greens have now made big inroads on the first step, finally taking on the powerful real estate interests and the army of ‘mum and dad investors’ holding back our once prosperous and sustainable economy. They have yet to begin the task of talking shop on the parlous state of our economy and its broken structure, but they have successfully read the tea leaves, and defied the sceptics by putting this challenge to the government and the polity. And they are to be commended, because it’s never too late to see the light and pursue genuine reform in the political sphere.

Things change fast, and Malcolm will inevitably be wedged into strong action on the favourable tax treatment of residential property. A big slap in the face to those who boast or scowl that “nothing ever changes”. All the chipping away at these glaring issues have not been for naught. (Queue the haters spouting all the reasons why proposed reforms will never get up, or not make any difference even if they do, blah blah blah. Bring on the comments doubters!).

The rent-seekers are shitting their pants

Opponents of reform to the taxation of land and property, and the tax breaks and concessions handed out during the mining boom years, are not just spitting the dummy about their toys being taken away, they are essentially arguing that we should be rather selling food out of the national fridge, starving the economy and budget instead of taking a few of the toys away. These fancy tax toys were only ever being rented out while mum and dad’s income was being juiced by that fabulous iron ore wealth. Now that it’s gone, it’s time to return the toys and get back to cardboard boxes and our imaginations. But instead, property speculators, finance, media and real estate interests would rather the economy continued to go down the toilet in order to save their sacred investment portfolios, interest payments and real estate advertising.

Right now, these rent seekers are utterly shitting their pants that the jig is finally up. They have descended into fits of apoplexy in defense of the indefensible, variously spouting long disproven myths about negative gearing keeping prices and rents down (seriously?!), boosting construction of new housing, and being the wealth-building preserve of battler mums and dads. You know, the blessed nurses and firemen that save our lives daily and deserve a nice juicy hand out from the government in order to make their unproductive loss-making investment actually viable, in order to ‘get ahead’ of those selfish and lazy lefty doomsayer blogger snobs that reckon everyone should actually invest in productive, positive yielding investments, and that if an investment loses money, well that’s just the way of the free market, and why should other hardworking taxpayers foot the bill? Sheesh… Free market? Come on, what are these whingers smoking? Get on board the land speculation ladder, or die lonely and poor.

At the same time as these thoroughly discredited myths about tax breaks for residential property are spouted ad nauseam by the industry and their patrons in parliament and media, we only need to observe the completely contradictory scare-mongering by the same lobbyists and media outlets (Fairfax) – that reforming NG will trigger prolonged price falls and destroy middle class wealth – to smell a rent-seeking rat. Think about this for a moment. Negative gearing was supposed to keep prices and rents down, yet removing it will cause price falls and destroy property wealth… *Smacks palm to forehead*.

We called your bluff specu-festers. Your sacred cow is going to help rout the housing market, which is precisely why it is the most immediate way to begin to restore real affordability. As discussed previously, wage growth is the lowest on record, and set to go into reverse, so affordability will only come with house price falls. It is categorically the case. You can’t have your cake and eat it too, but the free-lunchers down at the Property Council, REIA, HIA, LNP, Fairfax etc, want us to believe that negative gearing is a positive thing for housing affordability, but that removing it will cause price falls thereby improving affordability. *Cue head exploding, negative gearing disappearing up its own arse*.

If that rare breed, the invincible Australian housing market, was so exceptional and based on ‘fundamentals’ like supply and demand, why the internally contradicting scare campaign about price falls and price rises? Surely let’s remove government interventions like negative gearing and capital gains tax discounts, and let the famous superior Aussie housing cope on its own as a free market hey? LOL, not on your Nelly say the real estate spruik-bots, we are a state sponsored get rich quick scheme, and we plan to keep it that way. Which is precisely the red flag indicating that these tax rorts for property speculation have passed their use by date. Time to let the rest of the economy have a go. What’s left of it, that is.

It’s all very reminiscent of the tobacco lobby trying to simultaneously tell us that plain packaging laws would not work and were not worth reforming, but that their profits were at major risk from the laws, enough so that they spent hundreds of millions of dollars on advertising and legal campaigns to prevent the reforms. “It won’t work, but it’s going to ruin us!!”.

I’ve always argued that, while negative gearing did not cause the housing bubble (nor does it single-handedly prop it up), its reform or repeal will spook the horses in no uncertain terms. The housing bubble in this late stage is totally reliant on sheer confidence and greed, and combined with the many piece by piece changes to foreign investment law enforcement, rising credit costs and macro-prudential controls on housing lending, tax reform to property will complete the set of forces moving into reverse against the bubble.

Ironically, had these reforms been pursued years ago when they were recommended by the likes of uppity young campaigners like me, there’s a slim chance the bubble could have been slowly deflated. But even the slightest rumour of change at this point, and it’s down we go. Yes, it’s going to burst folks. Once the industry well and truly shits its pants, it won’t be long before the punters soil themselves.

There’s nothing like the smell of panicking rent-seekers in the morning. I’ve been ranting for so many years about our busted housing market and economy, that I feel completely justified in enjoying watching everyone squirm. Your time has finally come. As the worm eventually turned on the housing bubble before it, the burden of proof in the tax reform debate has finally flipped onto the defenders of property rorts, with those peddling myths required to explain that they have not A: Had a lobotomy, or are not B: Up to their eyeballs in property interests (Like most of our parliamentarians).

The proposed reforms to the tax treatment of land are a very small, but promising step on the road to economic Damascus, that place where rent-seekers and their free lunch Ponzi economics – their jealously guarded theft of the commons – is abolished by law, and sustainable, equitable and prosperous economies can actually exist, with enough surplus for everyone. And it doesn’t even require centralised governance, just a new way of thinking about land, finance, debt and taxation. Imagine that. A society with all the freedom of modern liberal democracy, but without the growing inequality and perennial crisis caused by the rapacious scourge of financial debt-bondage, and the privatisation of all economic surplus. Perhaps the Left is finally beginning to catch up to the progressive economic ideas they abandoned decades ago.