Assessing the policy risks of changing housing taxation

A policy proposal put forward by the Australian Labor Party (ALP) was initially aimed at addressing housing affordability for first home buyers through two key mechanisms: limit negative gearing provisions to new housing (with grandfathering for existing investment properties); and halve the capital gains tax (CGT) discount for assets held longer than 12 months from 50 per cent to 25 per cent (with grandfathering existing investment properties).

While at some level a revenue raising measure, with respect to housing affordability, the policy proposal is a demand side measure aimed at discouraging investors from the housing market to the benefit of owner-occupiers (particularly first home buyers).

Our report considers the policy risks of such an intervention. The starting point of the analysis is that while there are some studies of proposed changes to the taxation regime for housing, any quantification is particularly challenging given its nature and scope.

What is known is that the policy will raise the effective tax on investing in housing. Those investing in existing homes will face higher increases in taxes than those investing in new homes as they will lose both negative gearing provisions and face a halving of the CGT discount. Those investing in new homes will experience a halving of the CGT discount.

Given the uncertainties, the approach undertaken in this assessment is to consider the proposed ALP policy change by considering estimates of the marginal excess burden implied by the increased tax burden on housing. Marginal excess burden considers the economic cost of raising taxation. The most recent estimation of marginal excess burden of a range of Australian taxes was undertaken in the Henry Tax Review.

The key questions in this context is whether the proposed changes to the tax regime on housing is an efficient or inefficient form of taxation.

Using the Henry Review as the base, we considered the impacts using the same kind of modelling technique adopted in the Henry Review (computable general equilibrium (CGE) modelling), and to explore the economic impacts on the construction sector of raising taxes.

Under a 'More Efficient' taxation scenario we adopt the marginal excess burden from the relatively efficiency Land tax, calculated at 8 cents per dollar raised. Nationally, under the More Efficient scenario, the output of the construction sector is estimated to fall by $425 million dollars in real terms (2017 dollars), and construction sector employment by just over 1,100 full time equivalent (FTE) employees five years after the policy is introduced.

Under a 'Less Efficient' scenario we adopt the figure for Conveyancing stamp duties, calculated at 34 cents per dollar raised. Nationally, under the Less Efficient scenario, the output of the construction sector is estimated to fall by just over $1.8 billion dollars in real terms (2017 dollars), and construction sector employment by just over 4,800 full time equivalent (FTE) employees five years after the policy is introduced.

The differences between these two scenarios highlights the policy risk associated with the change in the taxation regime for housing. The bottom line for policy makers is that raising any kind of tax will impose a cost on the economy (with few exceptions) but some taxes are more costly than others. If these proposed changes are an inefficient form of taxation, the flow on effects to the economy will be significant.

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