"I have a great deal of respect for John Daley and the Grattan Institute, but on this occasion they have it wrong." All eyes will be on Scott Morrison on Tuesday night. Credit:Alex Ellinghausen Specifically, the Prime Minister argued that: Contrary to the report's claims, negative gearing was part of the "generally accepted principle" that interest and other losses can be deducted from personal income for tax purposes.

It cannot be simultaneously true that negative gearing and the CGT discount significantly distort the housing market, but that changing them would have little impact on prices.

While the paper contends negative gearing benefits higher income earners, its recommendations (and Labor's policy) would continue to allow investors to deduct rental losses from investment income - an option typically only available to the wealthy The government confirmed at the weekend it would not make any changes to negative gearing or capital gains tax in the May 3 budget - establishing a key election battleground with Labor, who would restrict the practice to new homes and halve the CGT discount to 25 per cent.

The Grattan Institute report, lobbed into the start of the election campaign, showed high income earners such as financial managers, surgeons and anaesthetists drew the biggest tax benefits from negative gearing. It also found that negative gearing and the CGT discount distorted the housing market and cost the budget $11 billion a year. Mr Turnbull's wife Lucy, a businesswoman and former lord mayor of Sydney, sits on the Grattan Institute's board, as does Howard government minister David Kemp. "They have it wrong": Prime Minister Malcolm Turnbull. Credit:Michele Mossop Despite their criticisms of the report, both Mr Turnbull and Mr Morrison said it supported their claim that Labor's policies would discourage investors and lower residential property prices. While Labor leaped on the report as "a compelling argument for reform", Mr Morrison said he did not accept its analysis, because it looked at the value of people's tax deductions rather than the number of people in each occupation who used negative gearing.

"I know that's the popular consensus among some ... that this is some big rort for big high income earners. That's a complete and utter myth," he told ABC Radio National on Tuesday. "The sheer numbers are this: two thirds of those who actually use it, by the number of people who actually engage in negative gearing, are mum and dad investors. They're nurses, they're teachers, they're police officers." Mr Morrison cited Australian Tax Office data showing there were 57,000 teachers who used negative gearing, 39,500 nurses and midwives and 17,500 electricians - in contrast to just 7500 finance managers. "These are the people who are doing it," he said. "The only thing that Labor's policy will do is further lock them out." The Treasurer also rejected the characterisation of those measures as tax concessions, insisting it was only fair for investors to deduct their losses against income.

"They're not concessions, they're a simple application of tax principles that have been around for hundreds of years," he said. It came as reports indicated the country's highest earners will pay less tax following next week's federal budget, with the government set to grant them two separate tax cuts. Those earning more than $180,001 a year will no longer pay the 2 per cent "deficit levy", which was introduced under Tony Abbott in the 2014 to aid budget repair, and is now due to lapse. And the government wil address bracket creep by lifting the $80,001 income tax threshold, above which each dollar of income is taxed at 37 cents, the Australian Financial Review reported. The increase was "likely to be modest", according to the report. Speaking outside Treasury headquarters in Canberra on Tuesday, Mr Morrison said the budget's key objectives would be reducing the deficit, stimulating growth and "ensuring we don't penalise Australians for doing better in this economy".

"We need to ensure that our tax system is sustainable and we make sustainable changes to the tax system ... that are well-targeted, that deals with the loopholes, that deals with those who seek to take a lend of the system," Mr Morrison said. Grattan Institute responds Grattan Institute chief and the report's principal author, John Daley, welcomed the Prime Minister's contribution but mostly disagreed with his analysis. He conceded it had long been a principle of Australian tax law that people could deduct investment losses from personal income, but said that was an Australian anachronism. "It's a principle that has long disappeared from pretty much anywhere else," he said. "Australia is the only country we have been able to find, apart from New Zealand, where you can deduct interest costs on investment from your wage and salary income." Mr Daley accused the PM of cherry-picking the bits he liked from the report - the impact on home values - while still arguing the paper was riddled with mistakes and contradictions. He said negative gearing was "not going to make a massive change" to property values - probably about 2 per cent - but the bigger impact would be on who does the buying.

"We will see a shift from investors in housing toward owner occupiers," Mr Daley said. "We don't estimate how much, but it will by definition be more than 2 per cent." He estimated the after-tax impact of both changes on investors' returns would be about 7 per cent. But he rejected the PM's assertion investors would be deterred from entering the market, outlining several reasons: Prices would still go up

Investors would still be able to deduct their losses against the capital gains they made when they eventually sell the property

They could accept lower returns

They could buy property at a lower price Despite the disagreements, he welcomed the Prime Minister's engagement with the substance of the issue. Loading

"We need more policy debate in which people don't just yell slogans at each other," he said. "That is a real positive." Follow us on Twitter