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Capital Gains Tax Myths and Realities

The CIS have released my Policy Monograph on Reforming Capital Gains Tax: The Myths and Realities Behind Australia’s Most Misunderstood Tax.  There is an op-ed version in today’s Australian.

The 2004 Productivity Commission inquiry into first home ownership noted that ‘changes to the capital gains tax regime coupled with longstanding negative-gearing arrangements were seen to have contributed to higher prices through encouraging greater investment in housing’, but the commission did not model the effects of the tax changes. If increased investment is putting upward pressure on prices, this is an argument for easing supply-side constraints, not for discouraging investment with a CGT. CGT is a tax on transactions that would reduce turnover in owner-occupied housing and lead to a less efficient allocation of that stock.

Some mistakenly see a CGT on the family home as a way of soaking the rich. Yet a CGT on owner-occupied housing would most likely be accompanied by tax deductibility for mortgage interest payments, as in the US, offsetting any increase in revenue from a CGT.

In conjunction with negative gearing, the Ralph reforms were blamed for the housing boom in Australia in the early part of this decade. In reality, the boom was caused by the inability of housing supply to respond flexibly to the increased debt-servicing capacity of households in a low inflation, low interest rate environment.

The boom in house prices also occurred in the context of a bear market in equities between 2001 and 2003. It is not surprising demand for housing increased when prices of a competing asset class were declining. House price inflation was a global phenomenon, arguing against country-specific factors as the main cause.

Rather than increasing the tax burden on housing, policymakers need to tackle the impediments to new housing supply to improve affordability.

 

posted on 11 November 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, House Prices

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The US may do it, but why allow deductibility of mortgage interest for principal residences just because CGT is imposed upon their sale? Expenses are normally deductible if they are incurred in producing assessing income. If the income is imputed and hence not assessible, there is no need to allow deductibility.

Posted by .(JavaScript must be enabled to view this email address)  on  11/13  at  02:12 AM


Capital gains are also assessable income, so deductability arguably should apply.  Should investors be denied deductability on the leveraged acquisition of gold, just because it has zero yield?

Posted by skirchner  on  11/14  at  06:26 AM


It’s true that capital gains are assessable income. But unlike gold, a large share of the benefits of owning a home lie in the imputed rental income. Perhaps a compromise solution where half the interest costs are deductible makes sense? More generally, I agree that CGT on the sale of shares or investment properties is double taxation because companies pay tax on their income and landlords pay tax on rent and one could reasonably expect that the asset’s price reflects the present value of its future (post-tax) income stream. But I’m not so sure about zero-yielding assets where the only expected gain comes can come from capital appreciation - CGT (allowing full deductibility of interest and capital losses) seems more justifiable in this case.

Posted by .(JavaScript must be enabled to view this email address)  on  11/14  at  11:48 PM


Is there somewhere I can read and learn about the ” the impediments to new housing supply” in Australia?

Posted by .(JavaScript must be enabled to view this email address)  on  11/16  at  02:09 AM


The issues are disussed here:

http://www.pc.gov.au/projects/inquiry/housing

See also recent speeches by the RBA’s Tony Richards.

Posted by skirchner  on  11/16  at  03:26 AM



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