Shorten tax policy targets the middle class again

Leader of the Opposition Bill Shorten.

As the layers of Labor’s tax hike proposals begin to pile up, it is worth asking the question: why does Labor have it in for the middle class? We know Labor dislikes big businesses and high-income earners; but the middle class?

As you will see, most of Labor’s proposals to raise taxes and alter various tax rules mainly will affect middle-income earners rather than hit the wealthy in any meaningful way.

Of course, the middle is the middle and that is where most households are. It’s where some of the money, at least, is located that Labor wants to grab and then redirect.

But when you think about who is the middle class, you think of households made up of a police detective, a nurse and a couple of kids; of two public servants and one kid; of a bank middle manager, a stay-at-home mum and three kids; a single practice manager — they are all potential Labor voters.

So let’s go through some of Labor’s proposals. Take the plan to remove negative gearing for all assets apart from new residential real estate. It’s grandfathered, but this will not completely protect investors in negatively geared properties because the change will have an impact on property prices. An aim of Labor’s policy is to make housing more affordable.

Seventy per cent of investors own one property and the most common occupations among investors are company chief executives, senior managers, teachers, IT workers, engineers, nurses, retail workers, office managers, advertising workers and clerks.

More than 60 per cent of those who record a net rental loss on properties have taxable incomes of less than $80,000 a year (which is inclusive of the deduction for the rental loss), putting these folk clearly in the category of middle class.

Claims by Labor that using income data after tax deductions is unreliable are essentially false since we know the value of these tax deductions. In fact, according to Labor’s own figures, the net rental loss deductions are less than $5000 a year on average. Most negatively geared investors are still firmly middle class.

The left-leaning Grattan Institute will make the point that the largest value of net rental losses is attributable to very high-income individuals who often own multiple properties.

But here’s the thing: Labor’s policy won’t affect them to the same extent as a teacher, say, with one negatively geared property. These multiple property owners will be able to offset net negative rents against net positive rents as well as other investment income before calculating their taxable incomes, an option unavailable to our teacher.

You may say that, under Labor, middle-income earners will turn their attention to investing in negatively geared new properties and that’s a good thing. But when an investor goes to sell that property, it no longer will be new and so the next purchaser or investor will factor in the loss of the benefit of negative gearing and offer a lower price. This will diminish the potential attraction of the investment in the first place.

Then we have the change to the capital gains tax, the discount of which Labor is proposing to reduce from 50 per cent to 25 per cent. This plan is also grandfathered.

Again, Labor is not worried about the distributional consequences of this change: in fact, it brags that it will hit the wealthiest. Interestingly, the information Labor uses to make this claim is the same taxable income data that it claims is flawed.

The fact many people are pushed into the highest income decile when a capital gain is realised is not surprising, but this doesn’t mean the person is always a high earner.

Consider the teacher who sells their rental property which they have held for seven years. The capital gain is $200,000, which would not be uncommon in the major capital cities.

That will put the teacher well into the top tax bracket for that year, so they will pay the capital gains tax at the rate of 49 per cent (the higher rate is also part of Labor’s plans) on $150,000 rather than $100,000. In other words, the teacher will have to pay more than another $24,000 in tax.

Labor’s elimination of negative gearing for all assets other than new properties and the change to the capital gains tax mean there will be little incentive for middle-class folk to make the investments that may lead to self-sufficient retirements.

The very wealthy needn’t worry; sophisticated investors generally will have capital losses to carry forward and there are options including in relation to offshore investments and exotic investment vehicles. Some even may move offshore altogether as Australia’s capital gains tax gets among the highest in the world. It’s the middle class that will be hit.

The same can be said of Labor’s odd proposal to eliminate cash refunds for excess imputation credits save for people on the Age Pension and those in a self-managed superannuation scheme as at the end of March this year but not after that date.

Take a couple in their late 60s with $1 million in superannuation who are due to retire at the end of next year. They won’t receive an Age Pension. Compare this with a couple with $500,000 in superannuation. They will qualify for the pension and continue to receive cash refunds for franking credits. So, the net income of the first couple may be lower than the net income of the second as they’ll lose the benefit of the cash refunds of the franking credits. They could be more than $6000 a year worse off than the second couple even though they have saved twice as much in superannuation.

But what about someone with a very large amount of superannuation — say $1.6m in a pension account and another $1.6m in an accumulation account? They needn’t worry — there should be sufficient tax paid in the accumulation account to make use of the franking credits. Again, Labor punishes the modestly well-off while protecting the very well-off.

As the election draws nearer, these inequitable features of Labor’s tax grab will become more widely apparent.

The analyses on which opposition treasury spokesman Chris Bowen has based these radical changes — negative gearing has been a feature of the tax code since 1917, for instance — are thin and inadequate.

It will be up to Bill Shorten, to explain why Labor so dislikes the middle class. For the Coalition, it’s an opportunity to point out the potential financial damage that a future Labor government could inflict on middle-income earners and the economy.