Tax Reform vs Clown College

 To my best ability to discern a fact, without watching any news, the Australian government released the 2026-2027 Budget with some tax reforms that will kick into effect July 1st, 2027 so the financial year after next.

In my opinion the reforms are good, some tax relief for the productive economic activity known as work, and grandfathering out of a capital gainst tax discount on the unproductive economic activity of speculating on the asset prices of housing stock, as well as grandfathering out negative gearing.

I've been side eyeing some op-ed headlines trying to beat the war drums of furore against any touching of the obscene tax incentives to "invest" in property. Without reading the words that were said, these people are clowns and I thought I'd commit a few words to this proposition.

How Are Houses Capital?

Yes, capital gains tax is levied against the proceeds that arise from the change in price when someone sells the house and land package if it's positive. So if you bought it for $100,000 and sold it for $1,000,000 you would have to pay CGT on $900,000 margin, which if that was your primary residence (I believe for 6 months) in Australia you pay nothing and by the way, this post shouldn't be in any way construed as advice based on the Australian Tax Code I'm pulling these numbers out of my arse and the discounts out of memories of a subject I've had very little interest in historically.

But, okay, "shares" are capital because they are a means by which a company can raise funds for productive investment (in theory) and in return the investor gets a stake, or a share, of any future profits paid out as a dividend, or this capital, this stake in the company can be sold on an exchange and the price theoretically, is some reflection of the net present value of the expected future earnings of the company. (This doesn't necessarily work in practice.)

Less abstractly, a tractor is capital because while technically you could buy one for fun to get you from A to B in your private diversions, mostly tractors are bought by farmers to massively increase the productivity of their farm labour, allowing them to move hay bails for the heard in a matter of minutes instead of hours when they had a horse drawn cart (also capital) the can tow a plough and get a field ploughed in an hour instead of a day or week. 

An espresso machine is capital because it enables a cafe worker to make coffees for a dozen customers in 10 minutes with all their tediously specific orders. A pizza oven is capital because it cooks pizzas. A deep fryer is capital because it fries chips. Suction cups are capital because they enable glaziers to fit glass into its frame. A crane is capital because it can lift construction materials up to the top stories. A ship is capital because it transports goods across the ocean.

Now how is a house capital?

There are legitimate answers to this question, but in reality the more accurate answer is that houses are not capital. In some pedantic manner, they may help people do work by providing them a space in which they can keep office attire in a condition that allows them to keep their jobs, it prevents them from getting diseases and viruses that would impact their productivity if they were homeless, it gives them a fighting chance of keeping mental ill-health in check to the point they can function at work etc.

Also as of very recent times it can be asserted that there's like a 30% chance now that a house will have the dual function of residence and office with the post covid work-from-home revolution of video conferencing and internet connection.

But tax deductions for a home office are I believe, already provided for, and yes, entreprenuers have operated businesses out of the house for centuries, but relatively few people become work from home shoe cobblers in the 19th and 20th centuries. It's really at the 20% elapsed point of the 21st century that work-from-home approaches normal, and for most workers while they will need a whole room for privacy, their home work stations are gonna be like 2m^2. 

Housing is traditionally unproductive in economic terms. It's the least productive piece of acreage on a farm in the frontier days of Australia, Canada, the United States, Mexico, Brazil, Argentina etc. and in your Russian and British period novels involving some young chap struggling to make it in the city and having to contend with a widower landlord and her charming daughter, we can infer that home ownership rates are incredibly low, with a few rich families owning pretty much everything and everyone else renting.

And as I like to point out whenever I can, the clue is in the term of art "landlord" this is a feudal occupation and the landlords no longer saddle up and ride out against the pillaging would be landlord from the next fief over to protect their peasants. We just have this cultural artefact where through "home ownership" a "landlord" effectively buys the right to levy a private income tax.

Right. The way a "house" is an investment is functionally that it can ostensibly be used as housing by a worker. That worker who does productive work can pay this private income tax in a number of different ways, and Gary of Gary's Economics has a great video explaining that the differences don't really matter. A worker can pay the private income tax in exchange for housing either as rent, profit or interest. 

I am assuming that how paying rent to a landlord functions as a private income tax, but anticipate, rightly or wrongly, that the average aussie bogan might not see how borrowing money to buy the house is also a private income tax.

So I'll introduce another question: How much would you sell a goose that lays golden eggs for? The naive answer would be that you wouldn't. You'd be a fool to give up $53k per egg for the rest of that goose's life. Wrong, let's say the goose averages an egg a day, I don't know shit about geese productivity, that's $19M a year. You would calculate the Net Present Value by basically dividing the expected earnings by 1 plus the going interest rate on typically treasury bills or something and compounded for a time period, in this case the life of the goose. That will come up with some astronomical figure yes, but from the perspective of the goose holder they are getting paid out something close to the lifetime earnings of golden goose eggs right now, they don't have to wait for the eggs to be lain. 

This is what a landlord does when they sell you a house, at least in theory, Australian's I believe are objectively insane, but not irrational in what they pay for housing. When aspiring first home owners buy a house off the landlord, what is often lost is the process taking place where the landlord is saying "I could rent this to you or someone like you for 10 years and collect 60% of your wages for those ten years, I'm only going to sell it to you if you pay me, now 11x your annual salary." 

So Australian first home buyers are functionally tennents who pay a lump sum premium private income tax to avoid the ongoing private income tax paid in monthly instalments. In exchange they get some not insignificant perks, but they also borrow money to pay this private income tax for those perks and the interest repayments are also yet another private income tax, and the hope that thus far has been fulfilled in Australia, is that you can persuade the next person to borrow even more to pay you back, to bail you out effectively.

Now bringing it back, housing isn't really capital. It's not like a tractor or an espresso maker or an e-bike. It just houses people, some of whom are workers and many of whom are children. We also know through real estate maxims like "Location, Location, Location" that very little of the worth of a property comes from the housing structure itself, it is a positional good meaning that most of the wealth comes from the amenities around the land like infrastructure, parks, hospitals, schools, even the other houses such that an ugly house lowers the price of the beautiful heritage cottage across the street that's view it spoils and the beautiful house raises the price of the ugly house that has a great view of it.

There are cases like mining barracks where a company houses its workforce and that housing can be considered capital. And yeah commercial property can be considered capital because you aren't supposed to live in it.

It shouldn't have been called capital gains tax in the first place though, because land is a positional good, a different factor of production to capital, and this has been present from Adam Smith's start and then obscured to keep the landed gentry in the money for centuries.

Orthodox economists are clowns too often treated seriously particularly by the news media. 

Negative Gearing

Negative gearing is overdetermined to be awful. Nobody should be apologizing for it, at best they should express be expressing trepedation at the cost of removing it, but that it inevitably must be removed or Australia will continue backwards as an economy.

I don't want to do my full spiel, but a lot of young people don't understand what negative gearing is in principle, they just think it's a tax discount they would be smart to take advantage of or something.

Basically, imagine you are rich, you pay a lot of income tax. Then you go out and you make a bad investment that loses money. Negative gearing is the means by which the government says "well done, we'll go broke, not you." and let's you the rich person, deduct the losses incurred from your bad investment from your income tax.

So it encourages, let's be blunt, dentists, to bid up properties to inflated prices instead of paying income tax that would finance law & order, education, national defence, the national disability insurance scheme, healthcare etc.

Like our government literally pays the richest people to make housing less affordable.

They are fucking clowns too often treated seriously particularly by the news media..