Sunday, April 19, 2015

‘A complete load of rubbish’: Economists hit out at negative gearing myths

Paul Keating tried to abolish it but reversed course when he saw the effects.  Without the concession, investment in rental accommodation would be much reduced -- thus slightly lowering prices for home buyers but driving up rents for the poor

IT’S a uniquely Aussie slang term up there with thongs and budgie smugglers, but it’s also the behind one of the most pervasive myths in public debate.

Economists have hit out at fresh calls to wind back negative gearing concessions in a bid to raise more tax revenue and increase housing affordability.

In a report released yesterday, peak welfare body the Australian Council of Social Services urged the government to restrict tax deductions for negatively-geared property investments.

ACOSS claimed the move could save more than $1 billion a year, arguing the current system primarily benefited the rich.

According to its report, ‘Fuel on the fire: Negative gearing, Capital Gains Tax and housing affordability’, more than half of geared housing investors were in the top 10 per cent of personal taxpayers.

It argued negative gearing encouraged over-investment in existing properties and expensive inner-city apartments, lifting housing prices and doing little to promote construction of affordable housing.

Sinclair Davidson, Professor of Institutional Economics at RMIT University, described the public debate around negative gearing as “a complete load of rubbish”.

The term itself is an Australianism, so the whole notion of having to explain negative gearing to foreigners falls into the same category as having to explain slang terms to foreigners, he argues.

“ACOSS and other people who don’t actually pay tax themselves don’t understand much about the tax system and so they think it’s being rorted,” Professor Davidson said.

“People like ACOSS, UnitingCare and Anglicare, they have an incentive for the government to take in more tax revenue because they want to spend more money. They are going for a tax grab.

“I suspect a lot of journalists don’t understand business and taxation, which is probably slightly unfair and a sad thing to say, but unfortunately too many journalists are a little sucked in by salacious arguments about tax rorts.”

According to Professor Davidson’s analysis, the main beneficiaries of the system were lower-income earners, with people earning between $45,000 and $180,000 per annum actually the most likely to be declaring a loss on rental property.

He claimed myths around negative gearing permeated public discussion, partly because Australia was the only country to have a specific term for what was considered a standard tax deduction in most other countries.

“It is standard procedure that if you earn a loss you deduct it against your income. The thing that causes excitement in Australia is we are the only country that calls it negative gearing,” he said. “You ask people in other countries, ‘Do you have negative gearing?’ and they say, ‘Gee, what’s that?’.

“But if you ask, ‘Do you have mortgage reduction or deduct loss against income?’, and they say, ‘Of course we do.’ This is not some strange or unusual quirk of our tax system.”

While some countries only allowed deductions against the same asset class, Australia has a better system, he argued.

“A loss is a loss, you should carry a loss against all income. New Zealand has it, Japan has it. In the US, individuals can’t deduct their losses against all other income, so people incorporate as companies. It’s a workaround, but effectively the same thing is happening.”

Robert Carling, senior fellow at the Centre for Independent Studies and former official with the NSW Treasury, Commonwealth Treasury, World Bank and IMF, argued groups like ACOSS only looked at the demand side of the housing equation.

“More investment in housing, other things being equal, should lead to more supply eventually,” he said. “They argue people are buying up existing housing, but they don’t have to buy new houses themselves to stimulate supply. If prices are bid up across the board then that will encourage more supply by developers, and we see that happening.”

In a report released last week, Mr Carling argued much of the “mythology” around potential revenue to be gained from abolishing tax concessions such as negative gearing came from a misinterpretation of the Tax Expenditure Statement published by Treasury.

In addition to the revenue cost of some concessions being greatly exaggerated, he pointed to the inability of the estimates to account for taxpayer behaviour in response to changes in tax concessions, and an incorrect assumption that estimates for revenue forgone were equivalent to potential revenue gain.

“If it’s the tax system that’s driving up house prices, why aren’t we seeing it happening across all cities? The tax laws are the same across the country yet we’re not seeing large price increases in other cities. Many countries have had house price booms, and all of them have had different tax arrangements,” he said.

“The main factor, according to the Reserve Bank, is the secular decline in real interest rates over the last 20-odd years, which has vastly increased people’s borrowing capacity. That’s been the common factor around the world.”

He said winding back negative gearing might raise significant revenue initially, but after investor behaviour responds net revenue gains would likely be very small.

If reductions in tax concessions were to be justified, they should form part of a broad, revenue-neutral tax reform with offsetting reductions in income tax rates, he argued.

In response, an ACOSS spokesman said countries like the US and UK do not allow people to claim unlimited deductions for investment property losses against their other income.

“We didn’t rely on Tax Expenditure Statements alone but they are a reasonable starting point,” he said. “We advocate the closure of tax shelters on a number fronts to deal with behavioural responses.

“There are considerable lags between higher property prices and more construction, due to well-known problems on the supply side.

“In any event the main problem is that prices are too high by Australian and international standards. This means, for example, that institutional investors are reluctant to invest because their rates of return from rents alone are too low.”


Cambodia is proof that most illegals are economic immigrants

It offers refuge but not riches -- so they would rather remain in detention

Gently wringing his hands, Iraqi teenager Emad Hashim Abid Farhan looks down as his eyes begin to well with tears.

"Most of my friends died from my hometown," the 18-year-old says. "I don't think about it because I'll cry if I think about that."

One year ago Emad and his family, including his four brothers, mother and father fled violence in Iraq, west of Baghdad. Scores of his neighbours, friends and family members were killed when militia invaded their town of Fallujah.  .

"It was sad to lose my best friends. They were friends that I had for more than 10 years," Emad says.

But Emad does not tell his story from a refugee camp. He is sitting in his family's small Middle Eastern restaurant in one of the busiest roads of Cambodia's capital of Phnom Penh. Motorbikes weave in and out of the traffic as tourists and locals come to eat their exotic food.

In one sense, Emad is a poster boy for Australia's controversial $40 million deal to send refugees from Nauru to Cambodia – a demonstration that one of Asia's poorest countries can safely resettle asylum seekers.

This week the Abbott government renewed its push to get asylum seekers on Nauru to agree to be settled on Cambodia, issuing a fact sheet spruiking it as a safe and harmonious country. A chartered plane is reportedly scheduled to transfer some asylum seekers from Nauru to Cambodia on Monday.

But it is not that simple. Emad's family are not considered as refugees by the Cambodian government. Their claim for protection is still being considered by the United Nations refugee agency in Malaysia and they live in the country on a temporary business visa that costs money that many of those on Nauru do not have.

But Emad's family are actually better off than the fewer than 100 refugees in Cambodia whose claims have been recognised but  who have not been provided with documents giving them permanency and who struggle to secure anything more than the most menial, part-time jobs.

This helps explain why refugees on Nauru have been so reluctant to move to Cambodia under the deal that was sealed over the clinking of champagne glasses back in September between then Australian immigration minister Scott Morrison and Cambodian Interior Minister Sar Kheng.

Canberra's novel approach – to try to outsource refugee resettlement to a poor developing country like Cambodia – is being closely watched by European countries such as Britain, Italy and Germany that are all experiencing a high influx of asylum seekers.

Australia argues that Cambodia is a country on the rise – with significant economic growth of 7.7 per cent and that it has almost halved the rate of poverty in just seven years. Nearly 40 per cent of Cambodians own mobile phones and the growing garment industry alone is worth $5 billion.

But aid organisations say the resettlement idea is  inappropriate for a country that has been accused of human rights abuses and has no refugee resettlement experience. About a fifth of the nation lives below the poverty line and  another 20 per cent live just above it, leaving the country vulnerable to an economic collapse.

In February the Hun Sen government forcibly deported 36 Vietnamese ethnic minority refugees who had claimed asylum  citing religious persecution. NGOs point to this as a timely reminder of why Cambodia is the wrong country to partner with.

More importantly, getting volunteers to leave Nauru for Cambodiais proving difficult. When the deal was struck in September Morrison predicted that "four or five" refugees would be living in the country by either late 2014 or early this year. Not one refugee has volunteered to move, despite both governments trying their hardest to convince them to do so.

The Cambodian national director of World Vision, Jason Evans, says that the NGO, along with the "vast majority of international NGOs" were of the strong opinion that the deal was not in the interests of Cambodian citizens and may add "additional strains on a country still experiencing high degrees of poverty".

"We do trust that the Australian government is doing its due diligence, however, we are concerned about the precedent that this sets, as this type of deal is not something that the development community would support," Evans says.

In February the International Organisation of Migration agreed to resettle the refugees. The offer would also extend to the small number of refugees already in Cambodia, who until now have had little to no assistance from the Cambodian government.

It is understood that local NGOs are now being approached to assist the resettlement phase including housing and access to education, which the Australia government will pay for, and are likely to agree to be involved.

But who on Nauru will agree to the deal remains the key problem.

"There will be a great opportunity for people, in particular with an entrepreneurial spirit, that are on Nauru at the moment that may have come from a small business background to go to Cambodia because there is opportunity for them there to make a new start," Morrison's successor as immigration minister, Peter Dutton, said in March.

Dutton could have been thinking of a family like Emad's. But the Farhan family appear to be the exception to the rule.

Sister Denise Coghlan, an Australia nun who runs the Jesuit Refugee Service, in Cambodia says employment and the lack of documents remain the biggest issues for refugees.

In many instances legitimate refugees have been turned away from work because employers are afraid they are hiring illegal migrants, Coghlan says.

Of the few refugees who do live in Cambodia, not many want to stay, she says. "The young ones say there is no chance for education. They don't have proper documentation which doesn't give them the right to work."

When one male refugee on Nauru is asked whether he is likely to take up the deal, he replies on Facebook: "No and never. If they do that, I will kill myself."

These types of replies are common from the people living on Nauru. They desperately want to get to Australia, but cannot under the Abbott government's harsh immigration policies, which is drilled into them at any opportune moment.

 "I repeat this very strong message that people on Nauru will not be coming to Australia," Dutton said at a recent press conference. "They will not be coming to Australia under any circumstance."

But for Cambodia, the opportunity to partner with Australia has finally given the country long-awaited legitimacy in Asia.

On the fifth floor of the government's expansive grey Ministry Building, the Secretary of State spokesman Phay Siphan says that the refugees will be welcomed in the country, adding that if they work hard, they will be able to "get rich".

He also says it's time Cambodia stepped up to help Australia shoulder the responsibility of the global movement of refugees but then says they will not accept political refugees from Vietnam or China, only those with a "humanitarian claim".

"We don't allow political refugees to springboard into our country," the spokesman says. "That is our national security. Those people are not refugees, they are just getting away from the government."


Nearly one in four leaving Britain are heading to Australia

Brits fit in easily in Oz because Oz is about as different from England as English regions are different from one another.  There is even a considerable overlap in the slang

The lure of a life Down Under attracted more than 200,000 Britons in the last five years – almost a quarter of the total number who moved overseas

Australia continues to be the destination of choice for British expats, with 207,000 of them moving Down Under in the last five years. The figure amounts to almost one in four of the 851,000 Britons who moved overseas during that period.

The news was revealed in research from Lloyds Bank Private Banking, based on figures from the Office of National Statistics’ International Passenger Survey.

Information revealed in another research project – the InterNations Expat Insider Survey 2014, gave an insight into why the country is so popular. It came in top place globally for the friendliness of its people and the leisure options available.

Australia was also ranked second by expats assessing their levels of health and wellbeing and fourth for a good work/life balance.

Geoffrey Conaghan, the agent general for the government of Victoria, whose job it is to persuade Britons to move there, commented: “Australian cities consistently rank in the top ten of global liveability indices.

"Melbourne is at the top of this trend having been named the world's most liveable city for the fourth year in a row by the Economist Intelligence Unit's Liveability Index 2014. This index assesses stability, health care, culture, education and infrastructure – areas in which Australian cities rank highly due to a strong economy with over 23 years of continual growth and sustained government investment."

The Lloyds research suggests there are 4.7 million British citizens living abroad, representing 7.5 per cent of the national population.

Two thirds of British citizens emigrating since 2009 have indicated they intend to live abroad for more than four years – but almost half of those moving to Oz plan to stay for at least that length of time.


Driving Victoria on the road to nowhere

The Daniel Andrews government is the worst in modern Australia. It will do immense damage to the Victorian economy and to the Australian economy as well.

Its decision to spend something between half a billion and a billion dollars in order not to build a road represents a kind of grandeur of folly unseen for decades in Australia.

There is a sheer, unrelenting stupidity to this decision, a kind of epic imbecility that combines Monty Python with Karl Marx in a distinctively Melbourne ­disharmony.

In repudiating contracts signed by the previous Victorian government, the Andrews government says it will spend $339 million in money the consortium that was going to build the East West Link has already spent. And none of this is compensation, so we are told. If we are to take this at face value, it suggests the project was a very long way under way already.

The Victorian opposition says it had already spent $400m of government money on the project. Federal Assistant Infrastructure Minister Jamie Briggs says there are at least another $200m in costs in getting out of all the financial arrangements.

The Victorian government says there are $80m of financial arrangements costs but these can be used to finance future infrastructure projects, though no such projects currently exist.

The reason this issue attracts the attention of a foreign editor is because it is a crippling blow to Australia’s reputation as a place to do business.

It is a savage blow to Victoria but it also reinforces the growing international perception of Australia as an extremely high cost, uncompetitive, difficult place to do business, just as we used to be before the reforms of the 1980s and 90s. One of our great traditional strengths, political stability and legal and contractual reliability, is now under question.

Jennifer Westacott, chief executive of the Business Council of Australia, concludes: “The level of sovereign risk and uncertainty created by the decision not to proceed with the East West Link project is simply unacceptable.”

That is a very big call. The BCA wants to attract foreign businesses to Australia. But it is forced to warn them that doing business with the Andrews government carries unacceptable sovereign risk, the two most toxic words international investors can hear.

Depressing Victorian politics seem to represent a new paradigm for Australia.

A Liberal-Nationals government gets elected to the intense hostility of the chattering classes. In policy terms it governs reasonably well but totally mismanages the politics, with internal instability and much harum-scarum nonsense. This leads to its replacement by a Labor government that broadly has the support of the chattering classes, manages the politics much better, but utterly monsters and ruins the economy.

It is worth pausing for a moment to consider the scale of the East West decision in its own terms. Traffic congestion is getting worse in Melbourne every day. It is not on the level of Sydney but it is a significant inconvenience and a growing break on ­productivity. The East West link is obvious common sense. No one thinks it smart to have a freeway running straight into the CBD, forcing traffic to pass through congested central Melbourne when it could be linked up to the freeway system on the other side of the city. The benefit is so obvious that it takes a kind of deep-green ideological hatred of all development to oppose it.

The entire Victorian government contribution was supposed to be about $2bn. The rest of the money would have come from the federal government and the private sector.

One day — God knows when — the Andrews government may have another infrastructure project to put to the feds. But that is years away. Federal money delayed is the same as federal money forgone.

The Andrews government has thus spent nearly half of the money it would have spent to get the road, in order to get nothing. Most of our state politicians are unsophisticated and little travelled, especially in Asia. Does Andrews have the faintest idea of how this madness looks to Asia?

The other critical aspect of the policy is the way, sadly, it confirms the ideological, anti-business pattern of the early decisions by the Andrews government.

This is a deep green/parlour pink anti-development government. Its worst decisions have been taken to appease the worst elements in the trade union movement, especially the CFMEU. The Andrews government abolished the construction code and the related compliance unit. It abolished compulsory drug and alcohol tests on building sites only to find that the union itself had changed its mind and decided these tests weren’t a bad thing after all.

Building costs in Victoria are higher than anywhere else in Australia and a crippling enemy to jobs. The criminal element in the building industry in Victoria ought to be the subject of inquiry by some speck of the ABC’s vast editorial budget.

In a nation reeling from uncompetitiveness, with the prices of our main exports in free fall, the Andrews government decided that we needed a new public holiday, on the Friday before AFL grand final day.

In an act of ideological spite, the government vetoed a private floor for the new Victorian ­Comprehensive Cancer Centre, what would have been a 42-bed “Peter Mac Private” hospital. This overturned existing plans and overruled the independent gov­­ernance structure of the hospital. Peter Mac board chairwoman Wendy Harris resigned in disgust.

The private hospital was meant to subsidise the public hospital. However, as Harris pointed out, the late decision also meant the hospital lost tens of millions of dollars of philanthropic funding that had been promised to the old model. The taxpayer must make that up and the philanthropic dollars may well leave Victoria.

This is all incredible. Andrews says he will introduce new legislation to stop governments from signing contracts near to elections. This just extends the caretaker period. Will Labor in future feel free to repudiate contracts signed just before the new legis­lated period before the caretaker period?

This is appalling government and will cost Australia dear.


Abbott Government sticking to gas development

The federal government has aligned itself with the unconventional gas industry, releasing a ‘Domestic Gas Plan’ that argues industries like coal seam gas will be key economic drivers carrying Australia into the future.

The strategy builds on the Abbott Government’s Energy White Paper, released last week, and presents coal seam, tight and shale gas as the way to “cement our position as an energy superpower and remain competitive”.

Welcomed by an industry, which has been blamed for massive swings against the National party in the recent New South Wales election, it’s a strategy that’s unlikely to allay the fears of rural and regional communities already up in arms.

Drew Hutton, the founder of the ‘Lock The Gate’ movement, says the plan continues the “complete lack of vision on the part of the Abbott government and of [Industry] Minister Ian Macfarlane, who has already shown he’s a creature of the gas industry”.

Earlier this week, it emerged that the government appears to have abandoned the key goal of the Paris climate talks, scheduled for later this year, to keep global temperature rises below two degrees.

“The Abbott government has put all of its hopes in fossil fuels at just the moment in history when they have come under serious challenge,” Hutton told New Matilda.

Macfarlane, though, maintains that “Australia is an energy superpower and some of our most significant opportunities for growth will come from our onshore gas assets”.

The broad-ranging gas plan acknowledges the often virulent community opposition to unconventional gas, but makes it clear the federal government is committed to a significant expansion.

It also identifies shale and tight gas resources as “the next focus for onshore unconventional gas development,” and flags the need for research in advance of their rollout.

Critics of the coal seam gas industry often point to the hasty rollout in Queensland as the harbinger of bigger problems to come. The coal seam gas boom swept the state from around 2006 on and, at least in the early days, was characterised by rushed and inadequate environmental approvals processes.


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