Why The Holes In Bowen's Numbers Matter

Spare a thought for Chris Bowen.  It turns out a number he has been quoting for some time is bogus.  To be fair there is no reason to doubt that he relied on that number in good faith.  Yet he has a history of relying on numbers and analysis that turn out to be problematic.

In 2008 Bowen relied on dodgy ACCC econometrics to advocate for the Fuelwatch scheme.  Then he suggested the taxation of employee share schemes lacked fairness and integrity.  After questioning he was able to reveal two instances of tax rorting involving employee share schemes.  Later he declared that novated leases were rorts for fat cats.  Many of those fat cats turned out to be nurses, police and school teachers.

Again there is no reason to doubt that Bowen, in good faith, relied on information being fed to him.  But here is the point:  He didn't know enough or find out enough about each of those topics to question the data being fed to him.  Peter Costello and Paul Keating didn't make mistakes like that.

There is more to the negative gearing kerfuffle than an opposition having a black hole in its costings weeks out from an election.  It relates to an attitude and understanding of how the tax system works.

Bowen has been arguing that negative gearing as policy doesn't perform because it doesn't encourage the construction of new housing.  Irrespective of whether the number is 7 per cent or any other number the problem with his argument is negative gearing is not intended to promote the construction of new housing.  That is not the policy objective.  It never was.

Negative gearing relates to the well-known, and uncontroversial, principle that expenditure incurred in the production of taxable income is itself deductible.

Another way of thinking about the issue is Adam Smith's ability to pay principle.  Imagine the government taxed revenue not income — every business with a return on sales less than the tax rate would go broke.  There is a good, practical, reason to allow tax deductions.  The notion that deductions are somehow either rorts or special privilege that has driven a lot of confusion over the past few years.

What is somewhat unusual about negative gearing in Australia is landlords — individual taxpayers — can offset their property investment losses against other income.  Many jurisdiction don't allow that.  The loss must be carried forward and off-set against future investment income.  This simply adds complexity to the tax system and undermines the notion that a dollar is a dollar and all dollars should be taxed equally.

This hasn't stopped some large (incorporated) property investors from suggesting that negative gearing be curtailed for unincorporated landlords.  This proposal is simply rent-seeking.  This would place smaller unincorporated businesses at a competitive disadvantage to larger incorporated property investors.  This would also introduce distortions into the economy — investment should be independent of ownership structure.

The fact is for a lot of middle income Australians property investment is their only opportunity to have their own small business.  This is a mechanism for retirement savings outside superannuation and an opportunity to top-up their income.  Even if the opposition don't want to thank and congratulate them for being less of a burden on the welfare system and age-pension, there is no good reason to discriminate against landlords by treating them differently to every other business or investor in Australia.

Bowen is highly ambitious.  He very clearly wants to be a reforming Treasurer.  That, however, means he is going to have to change his ways.  Be less trusting of tax-rort stories and dodgy numbers — especially tax-rort stories that generate big numbers.  Big picture reforms require attention to micro-detail.  Remember in 2010 the Rudd government thought that mining companies only paid 13 per cent tax?  A lot of political pain could have been avoided if the government had paid attention to detail then.

So it somewhat embarrassing for Bowen that he has a hole in his budget numbers.  Forecasts are always rubbery.  That isn't his real problem.  An inability or unwillingness to get to grips with the gory detail of policy will be his undoing.  He should start by talking to people affected by his proposed policies and having an open mind about what they say.