Gerard Jackson
BrookesNews.Com
Monday 3 May 2004

Premier Bob Carr's new transaction tax on sale of investment properties has met with understandable resistance. Nevertheless, it has its defenders, as do all taxes. One argument in favour of the tax is that it will help slow the housing boom. The problem with this argument is that it completely misses the reason for the boom.

One need look no further than the Reserve Bank of Australia as the cause of the problem Part of the bank's charter is to maintain the integrity of the currency. Now that you've finished laughing, let's look at its record for the period January 1996 to January 1994 during which M1 grew at an average rate of 12.5 per cent, a rate that doubled the country's money supply. Needless to say, the consequences of this reckless monetary growth seem to have completely eluded our economic commentariat.

Anyway, how does Carr's grab for more money counter the bank's loose monetary policy? It doesn't, of course. To err on the side of charity, we'll assume that Carr's fiscal grab stops the housing market. What then?

Firstly, being a politician Carr will only spend these tax gains. The means that parts of this new government spending will still disappear into the current account deficit while the rest continues to exert inflationary pressure elsewhere in the economy.

Secondly, if the housing market was stopped dead revenue from the new tax would quickly dry up. If the market merely slows, then so will the revenue flow, meaning that Carr will still have to raise money elsewhere. So imagine his situation if the Reserve were to suddenly rein in the housing market, and the economy, by slapping on the monetary brakes. Moreover, should this happen it's possible that his clever little transaction tax could actually reduce the state's revenue flow even further.

This economic reasoning is apparently too complicated for Peter Martin, economics correspondent for SBS Television, aka the Socialist Broadcasting Service. In Outrage over Carr taxes is misplaced (Sydney Morning Herald, 21 April) Mr Martin was full of praise for Carr's new tax.

Unfortunately, nowhere in his article did Martin give the slightest indication that he was aware of the link between housing booms and booming money supply. Instead, we were told that the boom was brought on by capping capital gains taxes at 30 per cent while the top marginal rate stayed at 48.5 per cent.

This cap led to "an avalanche of funds pouring into investment real estate" instead of the "share market". What escaped Martin's attention is that money would never have sought out capital gains in real estate unless capital gains were already being made there.

In English so plain that even he can understand it: the Reserve's loose monetary policy sparked off the housing boom which then generated capital gains, i.e., profits, meaning maladjustments between the supply and demand for properties. In the absence of this boom savings would have sought out investments elsewhere.

Martin's argument seems to be a favourite with leftist commentators. Colebatch used the same on in Should going Dutch be the Australian way? (The Age, 23 March). According to his analysis:

"Our tax system subsidises landlords whereas theirs subsidises owner-occupiers, by allowing them to write off their mortgage bills against tax. But it has had the same effect of driving up prices, making it difficult for young people to buy into the market, and driving up debt, making the economy top-heavy".

For their argument to hold, this pair would have to show that favourable tax treatment of the housing market is always followed by a housing boom. It follows from this that they would have to show that countries that refused to give their housing markets favoured tax treatment never experienced housing booms. In addition, they would also have to explain the mechanism by which tax advantages for the housing market brings about credit expansion.

Even if all countries gave favoured tax treatment to the housing market, we would have to deduce from the above argument that the more favoured the treatment the greater the following housing boom.

None of this is likely to wash with a man like Martin who thinks that Carr's 39 per cent transaction tax is "too low" because the top marginal income tax rate is 48.5 per cent. That the 48.5 per cent might be too high is question he evidently never asked himself. Perhaps he would care to tell us by what means he determines whether a tax is too low or too high.

That this profound economic thinker gives little thought to tax rates and their effects on economic growth was shown by his smug comment that about "half of us pay those rates [43.5 per cent 48.5 per cent] on every additional dollar we earn at work, as well as on every single dollar we earn in interest on our savings".

Gerard Jackson is Brookes' economics editor