Why does negative gearing get a bad rap?

Want proof? Contrary to basic tax design principles, expenses incurred in earning assessable income are often denied, quarantined or delayed rather than being allowed – as they should be – as comprehensive deductions up-front. Governments never share income risk in proportion to income tax rates imposed. (The treatment of losses under the poorly designed, and ultimately ill-fated, RSPT was another example.)

Beyond CGT and super tax concessions, current concerns about housing and other asset 'bubbles' reflect much wider forces associated with quantitative easing and near-zero interest rates overseas (and, as a result, low interest rates in Australia). Globally, low interest rates are driving the search for higher yields via investment in other assets. This drives asset prices up, reduces their yields, and increases asset valuation risk (ie, generates asset price 'bubbles').

Increasing housing loan valuation ratios, plus state restrictions and levies on new land supply, don't help.

So banning negative gearing as a knee-jerk response to a feared housing bubble is really bad tax policy.

Sensible tax reforms should be dealt with holistically in the Government's forthcoming tax review.

There are two obvious options.

First, eliminate all (properly defined) income tax concessions, using the revenue to lower income tax rates across the board. This promotes comprehensive, consistent, and simpler income tax.

Much better than that option, shift revenue reliance away from income, towards comprehensive tax on expenditure and consumption. An expenditure tax base is discussed in the Treasury's Tax Expenditures Statement as an appropriate benchmark for taxing saving generally.

Both options reduce or eliminate incentives to negatively gear investments to exploit CGT and other concessions. The second also removes the double taxation of income from saving under income taxes.

Sure, each involves significant transition issues. They would need to be 'sold' effectively to voters, too.

What about negative gearing?

To the extent we retain income tax, don't ban it. Insofar as we move to a consumption or expenditure tax, it becomes irrelevant.