Thursday, May 25, 2006

Inter-generational equity – boomers start to see the light

Nicholas Gruen did it a couple of weeks ago.

Today, Julian Disney does it, admittedly without using explicitly generational phrasing:

The excessively generous exemptions of owner-occupied homes from capital gains tax and land tax inflate the price of land far beyond what might arise from other factors . . . They divert investment from export-producing and job-creating enterprises . . .

Similar consequences flow from excessively generous tax concessions that induce massive borrowing for overinvestment in high-cost rental property — "negative gearing" — especially when allied with the major tax preference for profits from asset sales compared with other forms of income . . .

Another key deficiency in the taxation system is its treatment of savings, especially superannuation. Like the housing tax regime, the current superannuation tax regime is upside down because it provides richer people with much more assistance than poorer people, both in gross terms and per dollar contributed.

I am particularly interested in a double whammy causation between unproductive, real-estate speculation by the masses (well, boomer masses, anyway) and high (which is to say, any) unemployment among educated men my age, thanks to the destruction of the mandarinate. Blind Freddie could see the link here, but no one seems to be overtly saying it.

So what is to be done? As far as throttling real-estate speculation goes, simply removing negative gearing won’t go far enough, and removing the main-residence exemption from CGT will claw-back almost nothing from boomers (and older), because presumably it would not apply to currently-owned properties. A better idea is, one I suggested a few months ago, is to implement a modified version of NSW’s short-lived vendor tax – this time on all property sales. That is, if you make a profit (after CPI indexing and expenses) on selling any property (including one’s own home) then you pay tax (at a minimum 50% rate, I’d suggest) on the real profit. Unlike capital gains tax, this tax (which would have to be state-based, for constitutional reasons) could be “retrospective”, in the sense that date of acquisition would be irrelevant.

Such a change would also assist in heading off two other, problematic reforms that Disney suggests: the reintroduction of gift/inheritance tax, and removal of the owner-occupied home exemption from the aged-pension assets test. While the former tax is famously “fair”; it is easily avoidable at/by the big end of town (“big end of the cemetery”?); while a tax based on real-estate transfers (whether by will, gift or sale) is hard to avoid. Re the latter, my personal view is that all social security recipients should be required to use up, within reason, any home equity before being eligible for benefits. By “within reason”, I suggest that the test should be looser for aged-pensioners: with, say the minimum threshold for equity divesture being set at 130% of average house value in the applicable city/region. (For working-age benefit recipients, any equity should first be consumed.) But again, a better way of largely avoiding these sorts of measures is simply to negate the likelihood of home-owners having windfall equity build-up in the first place, per my above proposal.

The stakes here are high, and getting higher. One thing I missed in the recent Boomer Bonanza Budget was the premium it places on retirees with large amounts of super to dispose of it inter vivos – if they give it away (presumably, to their kids) while they are alive, it is tax free, but if it is inherited as super, it is taxable (albeit at a relatively modest rate) in the hands of the recipient.

Translated, this means that GenY have just been handed a major “in” to the inflated property market. Chances are that their boomer parents will have a spare mill or so in super, that in the longer term would be burning a hole in the old coffin. Giving most of this to the kids will be triply-efficacious: the Yer kids get in to the property market, Xers remain locked out of it (i.e. it stays artificially inflated), and the taxman goes away empty-handed (i.e. no chance of universities (etc) getting properly funded, because *that* might mean (shock horror) jobs for Xers).

Oh, and by making such a gift, mum and dad boomer should be able to line up for the old age pension at 65, too.

You'll be pleased to know that when I was in HK the government there actually admitted that years of real-estate speculation actually did bad long term things for the economy by detracting from investment in productive industries. I very much doubt the Australian government is likely to be so honest.

I'm glad you think that owner occupied housing should be added to an assets test for pensions -- I wish more people did. The situation now is crazy -- its like Robinhood in reverse, where asset poor people subsidize all the rich old farts living in their mansions.
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