The McKell Institute survey of Australian economists on negative gearing is hopelessly biased and of little value, according to the Centre for Independent Studies economist Michael Potter.
“The survey has asked a set of one-sided questions inviting respondents to disagree with very unlikely proposals, and received entirely unsurprising answers,” Mr Potter said.
“For example, it asks whether house prices will continue to grow over the long term if negative gearing is restricted. This is the wrong question. The right question is whether house prices will be lower than they would be if negative gearing is kept.
“If house prices are set to increase by 15% over the next decade, but instead go up by only 1% after negative gearing is restricted, then the negative gearing change has caused a price decline of 14%. But this wouldn’t show up in the survey. The survey would count this as a price increase — even though negative gearing caused an enormous price fall.
“The survey also asks whether investors will still continue to purchase housing stock with the removal of negative gearing. Again this is a completely one-sided question. It is unlikely that there will be no investors at all if negative gearing is curtailed; the correct question is whether restrictions on negative gearing will lead to a reduction in investor purchase of housing, rather than an elimination of investment, which is what the survey asks.
“The survey asked a similar question: would all investors in the housing market disappear if negative gearing was removed for existing housing. The Prime Minister has (unhelpfully) made a statement along these lines, but all the survey did was confirm that this situation is very implausible. Again, what is important is any reduction in investor demand, not the elimination of this demand.
“What is more, the survey asks whether negative gearing benefits the rich more than the poor. But this shouldn’t be a deciding factor in tax policy. The GST exemption for food benefits the rich more than the poor in dollar terms — but we have not seen the McKell Institute promoting the removal of this exemption.
“The McKell Institute survey results don’t assist in improving the quality of debate over negative gearing. When surveys are used, they should present reasonable alternatives that don’t ensure answers that the report writer wants,” Mr Potter said.
Michael Potter is a Research Fellow in the Economics Program at the Centre for Independent Studies. He has written an analysis of the ALP’s proposal on negative gearing.