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Where did all the money go?

April 29th, 2017

That’s the title of a podcast I did recently. University of Melbourne Vice-Chancellor Glyn Davis has a regular podcast called The Policy Shop, and he was talking to me and Judith Sloan. That might have been a recipe for a slanging match, given that we don’t agree on much, but it actually worked pretty well.

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  1. BilB
    April 30th, 2017 at 14:25 | #1

    I put this comment in the wrong thread I see, so here is the move. I hope this does not incur a relocation tax.

    That was a good discussion. I don’t think I learned anything other than Judith Sloan talks differently to how she writes. To test that I googled her and the first article in macrobusiness was slamming her for proposing the elimination of negative gearing on investment properties. Thinking about the negative gearing, which is really just a fancy term for how industry manages investments in capital (lease financed productive machinery) this mechanism is uniform throughout the economy, the real issue is the 50 capital gains discount at the other end. I don’t believe that I get a capital gains discount if I sell my machinery or sell my business, so why should one privileged group get an advantage on property whose investment mechanism is really only possible for those with high incomes. That fact is demonstrated in the participation statistics 10% for the general public and 50% for politicians, ie negative gearing is a fat cat feast frenzi funded by everyone else (and then the politicians have the gall to argue that deficits are pushing debt onto future generations).
    Let’s face it the dual mechanism of negative gearing and a capital gains discount is purely a tax dodge for those with surplus incomes in a high tax bracket. The anyone can do it is false in the long term, it is only true while property values are rising at a rate that supports rapid turnover of property holdings where profit exceeds the losses in a very short time frame ie a ponzi boom. I now understand why I had to fend off nearly daily invitations to negative gearing seminars, the “boom” was largely artificially manufactured.
    So whereas I applaud Judith Sloan’s rationale to solve the budget deficit by culling negative gearing, I think she was grabbing the beast from the wrong end. I think the approach should be to tax capital gains on non personally occupied properties both private and business. The so doing would cause a measured release of properties without causing a crash, IMHO.

  2. Jj
    April 30th, 2017 at 15:40 | #2

    Yes- it was excellent. I remember being surprised by the thanks to the researchers at the end. It could have been a disaster. Most interesting for me was your agreement with Judith S (for different reasons that it’s time to move on from the focus on the reform period of the 80s and 90s. Thanks it was a great listen.

  3. Jj
    April 30th, 2017 at 15:43 | #3

    Sorry to be clear above-,I meant that the preparation was likely to have been a significant factor in its success (hard to write on the iPhone)

  4. Collin Street
    April 30th, 2017 at 19:29 | #4

    Let’s face it the dual mechanism of negative gearing and a capital gains discount is purely a tax dodge for those with surplus incomes in a high tax bracket.

    Eh, kinda. There are two reasons for the capital gains discount:
    + To counteract the effects of inflation, the basis of taxable capital gains being nominal rather than real
    + Because the income attributable to capital gains is calculated as accruing in the year of the disposal, rather than being realised in the year of disposal and accruing over years previous [which means has impacts on brackets]

    These aren’t outstanding reasons, but they’re non-pretextual and made an awful lot more sense in the higher-inflation less bracket-creep riddled environment that CGT was originally devised in. Particularly since back in those days taxes had to be straightforwardly hand-calculable.

    Same with negative gearing: netting out multiple income sources isn’t inherently/indisputably the Wrong Thing.

  5. BilB
    April 30th, 2017 at 20:15 | #5

    Colin, I think the long term participation rates prove that the mechanism is an advantage enjoyed only by some. If this were a proposal of, say, installing insulation in the roofs of houses at the public’s expense to save energy and reduce CO2 emissions and only 10% of the public took up the offer, then the proposal would be dropped after a time. The same test could well be applied here. The tax advantage is a failure as so few have taken it up even after an extended period, so it should be dropped for that reason alone.

    My argument is that the cost offsets are a mechanism that is consistent with industry practices so could be argued for on that basis, but the 50% capital gains tax discount is not a standard practice so should be dropped on the basis of conformity alone, regardless of how one wants to calculate it. I don’t believe the inflation argument holds water unless the properties are subject to rent control over extended periods, and I doubt that many negative gearers would be too thrilled with that prospect.

    However, I don’t know whether you noticed that I suggest dropping capital gains on the primary business residence (along with the primary residential asset) to encourage entrepreneurship at the personal owner operator new start up level. Everyone gets one free kick.

  6. Ikonoclast
    May 1st, 2017 at 06:43 | #6

    Listened to this. J.Q. was clear, concise and logical. It’s a pity that logic based on empirically demonstrable facts does not seem to carry the day in national economic debates. I think the answer is this. Labor needs to moves a least a bit back to the left, recruit J.Q. to a safe seat and make him Shadow Treasurer, make J.Q. Treasurer, stay in for four terms and fix things up. 🙂

    If only.

    Notes:

    1. There is no implied slight here towards Judith Sloane, I am simply being brief focusing on J.Q.’s performance and ideas.

    2. J.Q. would probably say to the politician / Treasurer idea, “I wouldn’t wish that on my worst enemy, so please don’t wish it on me.”

  7. Greg McKenzie
    May 1st, 2017 at 08:35 | #7

    If you follow any money trail for long enough it always go back to the rich. An economists once stated that if all money, in a market based economy, was evenly distributed then, over time, most of that money would find its way back to large wealth owners. Eventually all market based systems defend and maintain an unequal distribution of money. Only certain mixed market economies seem to be able to overcome, to varying degrees depending on political will, this hyper inequality regime.

  8. Ikonoclast
    May 1st, 2017 at 10:38 | #8

    @Greg McKenzie

    “If you follow any money trail for long enough it always go back to the rich.”

    Marx posited this as a theorem of capitalism. Piketty proved it. It’s the system called capitalism which ensures this outcome.

  9. May 1st, 2017 at 19:58 | #9

    A lot of it has gone to rich retirees and big earners in the form of tax concessions for super and although lately there have been some tinkering with it, but as whole it has been kept rather quite.
    The media, including the ABC and the elite of Australia are keen to keep this legal tax dodge from becoming public knowledge.
    I,am amazed how little do the average citizens know about the great Australian super fraud.

  10. Nicholas
    May 2nd, 2017 at 22:53 | #10

    I think that if we had Bill Mitchell, John Quiggin, and Steve Keen shaping public perceptions of economy policy and recruiting the people we need to implement progressive policies we would be a much healthier and safer society.

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