NetNews Usenet Archive 1992 #27/NN_1992_27.iso/spool/aus/politics/1863

Text File | 1992-11-21 | 3.4 KB | 70 lines

Newsgroups: aus.politics
Path: sparky!uunet!munnari.oz.au!titan!root
From: [e-mail] (Chris O'Neill)
Subject: Re: Negative Gearing
Message-ID: <[e-mail]>
Sender: [e-mail] (System PRIVILEGED Account)
Organization: Telecom Australia Research Laboratories
References: <[e-mail]> <[e-mail]> <[e-mail]> <[e-mail]> <[e-mail]> <[e-mail]. <[e-mail]>
Date: Sun, 22 Nov 1992 03:36:44 GMT
Lines: 58

In article <[e-mail]> [e-mail] (Chris Maltby)
writes:
>In <[e-mail]> [e-mail] (Chris O'Neill)
writes:
>>
>>Suppose you borrow $100,000 and invest it all under the conditions of the
above
>>example (18% interest, 8% inflation, 6% rate of return on investment, 48.25%
>>tax rate).  Suppose you sell if after 1 year for $108,000, i.e. you get a
>>capital gain equal to inflation.  Now the rental return was $6,000, the
>>interest was $18,000, so the tax deductable loss was $12,000.  The reduction
in
>>tax reduces this loss to $12,000 (1-0.4825) = $6210.  The net gain is the
>>capital gain minus the loss resulting from rent, interest, and tax reduction,
>>i.e. $8000 - $6210 = $1790.
>>
>>So, you make $1790 and the tax office loses $5790.
>
>But the bank who lent you the money has earned $18,000 interest on which it
>pays tax at 39%. It may have had to offer 12% interest to borrow the money
>which it lent you, and that will be taxed at someone's marginal rate - for
>simplicity also 39%. That's $7020 in tax collected. The tax man has also
>made a net gain of $1230. That is principally at the expense of the nitwits
>who save their money in banks which pay negative real-after-tax rates of
>interest.
>
>Negative gearing is a transfer of wealth from savers to speculators.
>When the merry-go-round stops it's the savers who are worse off.
>And society as a whole loses.

Another way you can think of this is that the lender puts up $100,000 and this
ends up earning 6% real.  So we have a tax system that encourages property-type
investments that only earn 6% real while at the same time investment in
manufacturing equipment (that depreciates) that generates 10% real just isn't
worth doing.

For example say that the interest rate, the inflation rate and the tax rate are
as above (18%, 8%, 48.25%).  Now supposing you can invest in machinery that
depreciates at the same rate as inflation (and hence its dollar value stays the
same) and that it produces a rate of return of 10% after its depreciation has
been allowed for (this means that it has to produce 18% before depreciation is
taken out).

Now the tax laws as they stand do not allow any (net) depreciation to be
claimed on this asset because its dollar value doesn't change.  This means that
the gross return on this asset is 18% -18% = 0, which is not going to make
anyone interested in this investment.

So what we have in our tax system is something that encourages investment in
non-depreciating assets (property, shares) even though they may have a
relatively low rate of return and discourages investment in assets that
depreciate, even though they have a much higher rate of return.

This is what is meant when it is said that Australia has an
investment-distorting tax system (when inflation is significant).

Chris O'Neill
Telecom Research