Taking Trump at his word, what winding back negative gearing would do, my pick for the first RBA rate cut, and higher taxes for Coles and Woolworths
My semi-regular newsletter
Hi, it’s been another long while. I’ve been busy, but now that I’ve got a chance…
Trump hates trade. And seems to hate people, or at least hate having so many of them in the United States.
The three policies Australia’s Warwick McKibbin and a team from the Peterson Institute for International Economics have modelled in a bid to work out what a Trump presidency would do are
the deportation of millions of US residents
steep restrictions on imports, especially from China
presidential influence over interest rates.
I wrote about their findings for The Conversation, but the assumption of mass deportations is interesting in its own right. Here’s an extract from the Mckibbin document:
Trump has repeatedly vowed to carry out the “largest domestic deportation operation in American history,” targeting what he says are the 15 million to 20 million unauthorized immigrants in the United States, approximately 8.3 million of whom are thought to be in the workforce. The goal is also endorsed in the Republican Party platform. Trump plans to model this mass deportation after “Operation Wetback”—a 1956 campaign under the Eisenhower administration that deported 1.3 million people. The campaign used “military-style tactics” to round up and remove Mexican immigrants from the United States.
Trump has indicated that he envisions using local law enforcement, the National Guard, and the standing army to implement this plan, “moving thousands of troops currently stationed overseas” to the US-Mexico border and invoking the Insurrection Act of 1807 to permit the military to arrest unauthorized immigrants.6 To speed up the pace of deportations, Trump plans to change ICE deportation procedures, permitting ICE agents to conduct workplace raids rather than exclusively arrest individual people. Similarly, Trump plans to deny due process to unauthorized immigrants and suspected members of drug cartels and criminal gangs.7To alleviate the burden placed on existing ICE detention facilities, Trump plans to build enormous detention facilities along the border to hold migrants while they await deportation.
Some have questioned whether Trump could achieve these goals. It is worth noting that Trump similarly vowed to carry out mass deportations when running for office in 2016, but only managed several thousand deportations each year, less relative to the preceding Obama and succeeding Biden administrations.
This time, what appears to be different is much greater attention to the logistics of large-scale operations. With respect to the low-end goal of 1.3 million deportations, it is hard to imagine that the US government today could not achieve at least what was done under the Eisenhower administration seven decades earlier. The goal of expelling all unauthorized workers in the labor force is obviously ambitious, perhaps unrealistically so. It is possible that if the deportation operations were sufficiently brutal and publicized, it might induce voluntary departures.
While this latter distinction might have political or diplomatic relevance, it would not matter from a modeling standpoint. Similarly, some countries such as Venezuela might refuse to accept the deportees, leaving them in limbo. Again, these actions might matter for diplomatic or humanitarian reasons, as long as the deportees are removed from the US labor force, it would not affect the modeling.
I conclude my account of the results of the modelling (awful for the US, especially for the manufacturing workers Trump says he wants to help, and not good for Australia) by saying
It is entirely possible that in office Trump wouldn’t do everything he proposed while campaigning, and it’s entirely possible that he would change course if what was doing damaged the US in the way the modelling suggests.
But there’s something to be said for taking people at their word, at least to get an idea of what we could be in store for after a knife-edge election.
I also wrote about negative gearing this month.
At its heart lies a fiction: that the landlord bought and rented out a property in order to earn income, but failed, perhaps temporarily or perhaps for a long time. As a result, she or he needs to be compensated for losses incurred in the pursuit of an income.
It’s an argument that won’t wash in the United Kingdom or the United States.
There, landlords are allowed to lose money – no crime in that. But they are not allowed to offset those losses against their wage to reduce the amount of it that is taxed (although they can offset those losses against income from other investments).
I know… some people will say they will be eventually taxed on the profit they make when they sell the property. But if they only pay tax on half that eventual profit (that’s how the capital gains discount works) but they can write off all of the losses used to make that profit….
Champion tax dodgers?
Australian-style negative gearing might not even be legal in the view of UNSW tax lawyer Dale Boccabella who writes that
if challenged in court, Australia’s system of negative gearing might not survive.
Dale also writes that 9 in 10 landlord tax returns are wrong, asking whether this makes landlords champion tax dodgers.
Maybe the two are linked. If the whole point of your landlording is a tax ruse (and I realise this isn’t the case for many landlords) you are no longer using honesty as the frame for your interactions with the Tax Office – you have crossed the Rubicon.
What if Labor took action?
What would happen if negative gearing was limited to new housing and the capital gains tax discount was made 25% instead of 50% as proposed by Labor in 2019?
The modelling Deloitte carried out for the Property Council in 1999 found
the effect on home prices would be small, 3-5% below baseline after many years
the effect on rents would be small, +0.5% in total, after many years
there would be fewer commencements: 4.1% relative to a baseline by 2030; but that would have only a tiny effect on the stock of dwellings: 0.4% after many years
But one effect would be big: Labor’s policy was “estimated to increase the proportion of total properties owned by owner-occupiers by 2.5 percentage points”
Hundreds of thousands more owned homes
There you have it – a small effect on most things, but a big effect on the number of homes owned by the people who live in them. Right now 66.3% of homes are owned by the people who live in them. That’s 430,000 homes down on the 70.3% of homes owned by residents in 2001.
If Deloitte is right, and cutting back on negative gearing and the capital gains tax concession lifted homeownership 2.5 percentage points back to 68.8%, that’d mean an extra 270,000 homes in the hands of the people who live in them.
One day those people would be grateful to the leaders who wound back negative gearing and the capital gains tax concession. But would they be grateful today, ahead of time?
I spoke about it on the ANU’s Democracy Sausage podcast with Mark Kenny and Brendan Coates this week. It’s 45 minutes, but if you are keen…
What else have I been up to?
I wrote about this just after the September board meeting. The next board meeting, on November 5, will be after a very low inflation number for the September quarter due on October 30. How low? In the year August inflation measured monthly was already back within the RBA 2-3% target band.
When the more-complete, longer-established and more-official quarterly figures for the September quarter are in they are also likely to show inflation back within the target band over the year to September and likely to show underlying inflation is low.
The (cheaper and quicker) Melbourne Institute results for the year to September are already in. They show headline inflation of 2.6%, and underlying (trimmed mean) inflation of 2.6%. The trimmed mean excludes the temporary measures to cut electricity prices, which the Coalition says are a trick (but that didn’t stop it from introducing its own temporary measures to reduce petrol prices in 2022) which is a way of saying low inflation is real.
Excluding volatile items, the Melbourne Institute measure of core inflation in the year to September is 3.3 %, almost back to the band and falling. So the RBA ought to cut rates in November when it has the official figures.
It is indicating it won’t, so it might wait until its following meeting on December 10, one week after receiving what is likely to be bleak news on economic growth. The last set of figures was the bleakest outside of a recession. This set, for the year to September, will be about as weak. I reckon it’ll cut in December.
Finally for now, we really ought to tax company profits very lightly, except for super-profits. Hear me out.
Last month in The Conversation I pointed out that the greens idea of an extra tax on superprofits (the really big ones, way over the normal return) was once of interest to the Business Council and the Labor Party.
The thinking behind the idea is that in a hypothetical perfectly competitive market, high returns on equity wouldn’t endure.
As soon as one firm worked out how to earn a good deal more than the cost of borrowing, other firms would borrow to enter the market and undercut it, whittling away the excess profit.
For most businesses, especially most small businesses, that’s exactly what happens. Continuing large profits are rare.
But for some businesses in some industries, outsized returns are the norm. Among them are the big four banks, where the returns on equity exceed 10%.
For big mining companies such as Rio and BHP, those returns on equity approach 20%. With Coles and Woolworths, they exceed 25%.
In each, the profits aren’t whittled away by new entrants because it’s hard for new entrants to gain a foothold.
Australians are weirdly reluctant to move away from the big four banks. As for Coles and Woolworths, they have invested so much in distribution at scale they are almost impossible to challenge.
And as for mining companies, they get continuing access to the good sites without having to periodically rebid for them.
So why not tax away just some of the well-above-normal profits that they’re earning in the absence of proper competition?
If Labor really wanted to take on the supermarkets, it could tax their superprofits and use the revenue to cut taxes for companies barely eking out profits.
In my piece for The Saturday Paper, I pointed out that Coles and Woolworths charge much higher margins than their counterparts overseas because they can – they control two-thirds of Australia’s market and their customers either have nowhere else to go or are rusted on.
Craig Woolford, retail analyst at MST Marquee, says Woolworths’ margin on food is 5.4 per cent and Coles’ is 4.4 per cent. This compares with 4 per cent for Tesco in the UK, and 2 per cent for Kroger in the US, though both are calculated on a slightly different basis to margins in Australia.
By comparison, Loblaws in Canada has 6 per cent. In Canada, Loblaws and Sobeys control close to two-thirds of the market.
I spoke about it with Ruby Jones on 7am.
Speaking of The Saturday Paper, it’s Saturday. Go out and buy one.
And keep reading The Conversation and for that matter keep reading Inside Story, John Menadue’s Blog, and Post, a free early morning email about what’s happening.
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Until next time.