Labor should steer clear of negative gearing in its quest to raise taxes

The tax advantage, because of the CGT exemption, lies with the homeowner, who also saves on rent.

Government revenues are probably enhanced.

Leverage allows for the building of more houses overall. This increases the taxes paid to governments in stamp duty, land tax, GST, and the company and personal taxes paid by the builders and professionals involved in the process.

It doesn't actually change the income from the asset in any way, it just allocates it differently. If there are no borrowings, the owner takes all the income and pays a larger amount of tax.

When the investment is leveraged, the income is shared with the lender, who must pay tax on its interest income. It is quite likely that the deduction against the owner's other income is matched by the tax paid by the financier.

A couple walks past a real estate agent's window advertising houses for sale and auction in Melbourne, Australia, on May 1, 2019. (William West/AFP via Getty Images)

Labor's last plan to abolish negative gearing, taken to the electorate by Bill Shorten in 2019, still allowed for a deduction for interest costs, but it had to be grandfathered against future income from the asset.

This meant that the gain to the government was really only in the money value of the timing difference as to when the tax benefit accrued to the investor, which is a much smaller deal for the government than the loss of the immediate benefit to the taxpayer.

The negative gearing deduction, which has been around since 1922, can also be said to be equalising the ground between small and large investors.

Corporate entities can easily structure themselves so as to twin income-producing businesses and assets with less profitable ones and cross-subsidise. Why shouldn't the individual who buys in their own name be able to make the same arrangements without incorporating?

Unless Labor reassures the market, it is wedged between its own key constituents, who will face higher rents and housing shortages as a result, and aspirational voters who are investing to get ahead.

Current treasurer Jim Chalmers wrote his PhD thesis on Paul Keating, who described himself as the "Placido Domingo" of treasurers. Chalmers needs to quickly learn to sing in tune, or Keating's biographer will never reach Keating's heights.