PM Malcolm Turnbull insists Labor hasn't thought through their negative gearing policy, as he responds to Labor's Jenny Macklin.

THE Turnbull Government has reportedly dropped its plans to reform negative gearing, as a new report it would kill 175,000 jobs and push about 70,000 households into rental stress.

New modelling to be released today will reveal that one potential model of negative gearing would push up average rents by $2600 a year and cut $19 billion from the national economy.

It would also strip 175,000 jobs over the next 10 years, shrink new home construction by 7200 dwellings a year and push an estimated 70,000 households into rental stress.

The damning assessment comes as the government begins its retreat from a negative gearing policy of its own.

Fairfax is reporting that the Turnbull Government has now dumped plans to target negative gearing, with a source saying “we’re not going to touch it”, clearing the way for an attack on Labor’s tax plans ahead of the next election.

While the government had been looking at capping deductions at $20,000 a year, it decided to shelve this even though it would have raised $1 billion a year, partly because it would have been retrospective and applied to existing investors with multiple properties.

Last month Dr Nicholas Economou of Monash University told news.com.au that the opportunity to attack Labor over its negative gearing proposal would just be too tempting.

“Labor will probably lose the election on the basis of what they are proposing,” Dr Economou said, adding that the smart political move for Prime Minister Malcolm Turnbull would be drop any reform to negative gearing and capital gains tax.

Meanwhile modelling by BIS Shrapnel of a potential negative gearing policy, commissioned by a confidential client, contradicts earlier modelling that suggested it would only affect wealthy investors.

“The policy intervention would raise rents. Developers will find that the expected return from developing new dwellings is now lower, relative to cost, diminishing their ability to build new homes,” the report said.

“Lower rental stock means higher rents. Over time, rents are projected to be between 1.7 per cent and 10 per cent higher across the capital cities by 2026.

“At the end of a 10-year horizon the market would find a new normal but the legacy will be a ‘lost decade’. Rents will sit 2 to 10 per cent higher depending on the city. The dwelling stock deficiency will be 60,000 homes (instead of 20,000). GDP growth and tax revenue will track lower.

“And more people will have been pushed over the threshold into housing unaffordability, resulting in a welfare loss predominantly borne by those in lower ­income brackets.

“In other words, the ­impact would go well beyond any saving of the income tax concession, to a multitude of unintended consequences.”

Former prime minister Tony Abbott this week made a controversial intervention into the debate when he ­addressed the Liberal Party room and warned against touching negative gearing. It followed a warning from former PM John Howard about “tinkering” with the policy.

Labor has deflected criticism of negative gearing by attacking the government for not having a policy. Opposition Leader Bill Shorten defended his plans to eventually claw back $3.9 billion in revenue.

“No one has given any evidence that it’ll decrease prices and our modelling shows that it won’t,” he said.