The Housing Industry Association (HIA) has released an excellent report from the consulting firm of top Australian economist Chris Murphy on The Economic Impacts of Negative Gearing of Residential Property (see the news report Don’t slash negative gearing, says HIA). The report makes the important point that any tightening of negative gearing rules (e.g. discounting the amount that can be deducted) would have an adverse impact on the supply of rental properties, leading to higher rents. It also argues attention should move from negative gearing to a bigger issue affecting the housing market: stamp duty. As I’ve noted before on this blog, stamp duty is a highly inefficient tax and should be abolished (see Grattan joins fight against stamp duty).
Independent Economics has estimated that stamp duty costs the economy 71 cents for every dollar of revenue it raises. This loss results from investment in housing being discouraged, and from families being discouraged from moving, which reduces the efficiency of the labour market. Very large economic benefits – of several billions of dollars – would be achieved if stamp duty were replaced with more efficient taxes such as the GST or ideally a land tax (see the chart I’ve copied and pasted from the report below).