Be More Emotional With Negative Gearing

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People get frustrated in political debates. Especially when your argument is evidence-based and the other person’s isn’t. As it becomes more obvious that their argument lacks reason, the debate only becomes more heated, and they only become more steadfast in their opposition. You walk away realising that the discussion probably did more harm than good.

There’s been a surge in discussion lately of negative gearing. It started with Joe Hockey on ABC’s Q&A, then Greg Jericho in The Guardian followed up with economic insights, then it continued with Waleed Aly’s pithy clip on The Project, and then a comedian on SBS gave us some light relief. And then just this week, a federal government discussion paper has called for debate on negative gearing.

Supporters of negative gearing put forward mythology and conjecture. And as has happened many times before, economists and journalists disagree using facts and evidence. But they’re doing it wrong—you don’t fight emotional positions with reasoned arguments. You respond with equal emotion.

What is Negative Gearing

Ross Gittins explains what negative gearing is: “A negatively geared property investment is one where you borrow such a high proportion of the cost of the property that your interest payments and other expenses exceed the rent you earn. You then deduct this operating loss against taxable income from other sources”.

The question is, like with all government assistance, is there a social or economic benefit?

Nope. Not even slightly. Economists have been arguing for a long time that it costs government, it costs society, and it directs money to a non-productive part of the economy.

It’s not bad that supporters of negative gearing are emotional

Our political conclusions, while they may end-up being evidence-based, started with an emotion.

But that’s okay, because emotions are essential for decision-making. People who have lost the emotional part of their brain have difficulty making decisions because they don’t have feelings like frustration to lubricate and spark the machinations of the mind. Radio National’s psychology hour covered the ‘political brain’, finding that political decisions are often emotional.

Gut reactions can be based on complex subconscious conclusions. Here’s some of the research presented by The New York Times and the BBC.

Understanding the emotional genesis to people’s political decisions is key to persuading them. While that’s fairly well-known, we still have economists putting forth reasoned arguments against negative gearing.

Supporters of Negative Gearing

A small proportion of people who benefit from negative gearing aren’t wealthy. And their aspirational attitude is used to justify keeping NG, both by themselves and by lobbyists on their behalf.

It’s difficult to know the wealth of people who benefit from negative gearing, except to say the obvious: really wealthy people benefit from it a lot and not so wealthy people don’t benefit from it much. That’s according to facts which you can read here.

These Australian ‘battlers’, hoping to achieve some social mobility, support negative gearing because it helps them break into the market. For them, NG is a pathway to home-ownership—renting out their primary property while they live in a rented home.

So what are the emotional underpinnings of these aspirationals who are used to justify negative gearing? Here’s a non-exhaustive list, and how we could respond:

Emotional Issue #1: Housing is personal, and attacking negative gearing attacks their eventual, entitled goal to entirely own a property.

Response: Any discussion of negative gearing needs to be prefaced with support for people owning their own home through hard work. That’s what people like about negative gearing: it’s only accessible to people who have saved enough to get a loan.

 

Emotional Issue #2: Validation of having done the hard yards.

Response: It needs to be genuinely acknowledged that people have made sacrifices. Buying property is hard, so the fact they managed to do it, when all the chips were stacked against them, is impressive. Saying that negative gearing is government assistance cheapens their hard work. Reframing the problem with negative gearing as solely its distortion of the market, and ignoring the help it gives to people, will be more palatable.

 

Emotional Issue #3: Anger from any suggestion that negative gearing is ‘middle class welfare’

Response: This, while obviously true, is inflammatory. Because it associates them with something they have worked very hard to disassociate with. They define themselves by not being welfare recipients. Instead, it’s an ‘industry subsidy’ that we no longer need.

 

Emotional Issue #4: Disconcertion from the game’s rules changing while they’re mid-game.

Response: While the solution here seems like a phased reduction in the benefit, caps on deductions is unhelpful. It reminds them that it’s middle class welfare (see above); means tests happen for welfare, not for grown-up, adult things like property investment.

But the scaling back of negative gearing could be seen as limiting it to people wanting to break into the market. Relating to point 1, negative gearing is then a measure to reward initial investment.

 

Emotional Issue #5: Misery loves company. People’s own experience of misery is buying property is lessened if everyone experiences it.

Response: Empathic understanding, not explaining how things could’ve been better, is the best way to meet misery. People had to leave social circles, leave where they grew up, forsake friends, possibly even relationships, in order to save money and live in a cheap area.

Instead of arguing against it, remind them of their own argument: that removing negative gearing won’t fix anything. People will still have hardship, people will still be required to suffer like they did. Because while house prices may drop, rents could rise, bringing more income to hard-working people like themselves. So there’ll be no net change in hardship, just more revenue for Government to provide tax cuts (there’s a slim chance this is true).

 

Emotional Issue #6: Egotistical benefit of owning property; property is tangible and easily associated with status.

Response: Negative gearing preferences investment in housing above investment in shares, distorting the economy. The message we need to start dropping is that owning businesses is more meaningful, and a better reflection of status.

If we can approach negative gearing emotionally, we may be able to improve the economy, reduce government expenses, and improve housing affordability. Because we can’t keep putting our money into pretty things rather than productive things.


Showing 3 reactions

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  • commented 2016-02-07 17:47:01 +1100
    I agree the 12-mth/50% capital gains discount must go. But the nature of the income tax system is that if you incur an expense during the course of obtaining income then you can claim it as a deduction.

    But the real issue is housing supply, if you increase the supply then house prices come down. But this isnt popular with the electorate because most people own houses. Homeowners are the majority.
  • commented 2015-03-31 10:25:49 +1100
    Thanks David. You’re right, the CGT discount is a bigger distortion.
  • commented 2015-03-31 09:44:52 +1100
    Clinton is right that we should not shy away from the emotional factors involved, but like many he focuses on only one of the issues. Negative gearing a property is attractive because of the expected capital gain from real estate investment, not future rental income. The gain is valuable because of the capital gains tax concession (50%) introduced in 1999. As the Tax Review Discussion Paper notes it is the capital gains tax concession that creates the distortion that makes negative gearing of residential property investment effective. Eliminating the capital gains tax concession is also an easier case to argue – why should real estate investment be advantaged over others?