Who, where and how much: It's time to get the facts about negative gearing, starting with the fact the people of Malcolm Turnbull's own electorate are the biggest negative gearers in the country, writes Matt Grudnoff.

They say all politics is local. This might help explain the Prime Minister's attack on any attempt to rein in the excesses of negative gearing. According to research by The Australia Institute, the people of his electorate are the biggest negative gearers in the country.

Almost everyone who has looked at negative gearing and the capital gains tax (CGT) discount agree that it needs to be curbed. Even the Treasurer said he was planning to target the excesses of negative gearing only a few months ago.

Now the Government has gone in the opposite direction claiming, without any modelling, that modest changes will take a "sledgehammer" to house prices and push up rents.

The Treasurer has continued to push the line that negative gearing is mainly the domain of those on moderate incomes. Those he has dubbed "mum and dad investors". He cites as evidence that two thirds of those who are negatively geared have an income of less than $80,000.

Or more precisely, after they make all their tax deductions they have taxable incomes of less than $80,000. This is evidence of the effectiveness of negative gearing in reducing taxable income rather than evidence that negative gearing is used mainly by those on moderate incomes.

But if the Government is truly trying to suggest that negative gearing is mostly about helping middle income earners then that is an easy claim to check. All we need to do is look at the income distribution of the benefit. That is, how much of it is going to high income households, and how much of it is going to middle income households.

Benefits of negative gearing by quintile

Source: The Australia Institute's Top Gears report.

According to research by The Australia Institute, the biggest beneficiaries of negative gearing are the top fifth of households, who get half of the benefit. If you add in the benefits of the capital gains tax discount, which halves the amount of tax payable on any capital gain when an investor sells their rental property, then the benefit of the top fifth increases to 66 per cent.

Benefits of negative gearing and CGT discount by quintile

Source: The Australia Institute's Top Gears report.

So what does this all mean? It means that most of the benefit of negative gearing is going to high income households.

Negative gearing and the CGT discount are going to be big political issues this election. There may be two points of view on keeping these tax breaks in place, but the facts are the facts. The data shows who benefits, and where - and those facts tell a story.

If we chart the size of the average net rental loss (which is the size of the negative gearing deduction that's being claimed) by the average income of the electorate we see that the larger the average income the larger the average net rental loss. So the more the electorate earns, the more they claim on negative gearing.

Average net rental loss versus average taxable income by electorate



Source: ATO (2014) and NATSEM

A quick glance at the top 10 electorates by net rental loss sheds more light on why the Liberal Party may not be keen on changes.

Largest 10 average net rental loss by electorate

Electorate Net Rental Loss Party Representative Wentworth -$20,248 Liberal Malcolm Turnbull Curtin -$19,216 Liberal Julie Bishop Kooyong -$17,169 Liberal Josh Frydenberg Bradfield -$16,969 Liberal Paul Fletcher Higgins -$16,659 Liberal Kelly O'Dwyer Warringah -$16,423 Liberal Tony Abbott North Sydney -$15,895 Liberal Trent Zimmerman Brisbane -$15,666 Liberal Teresa Gambaro Goldstein -$15,068 Liberal Andrew Robb Ryan -$14,857 Liberal Jane Prentice

This list contains quite a number of Liberal Party heavy hitters, including Prime Minister Malcolm Turnbull, Deputy Leader of the Liberal Party and Foreign Minister Julie Bishop, and the former prime minister Tony Abbott. It also includes a number of other ministers.

It is perfectly reasonable that politicians represent their electorates; it is after all the basis of our political system. But there is a big difference between representing your electorate and claiming that your real concern is middle income households.

The Government's claims run counter to all reputable, independent analysis. Negative gearing is reducing housing affordability as 94 per cent of those who are taking out loans to buy investment properties are buying established properties, not new dwellings. If you push up demand, without creating new supply, you push up prices.

Excessive demand in the share market only affects those with the disposable income to invest in the share market. But people don't live in shares. Negative gearing contributes to locking people out of the housing market. That has real economic and social consequences.

Even though Australia has had negative gearing for a long time, and capital gains discount for a number of years now too, we shouldn't consider the situation as "normal". This is, after all, a very big tax break.

The Government has decided to forgo billions of dollars to prioritise assisting property investors, and is putting their interests ahead of housing affordability.

Matt Grudnoff is the senior economist at The Australia Institute. Follow him on Twitter @MattGrudnoff.