The Welfare of Ownership

The Australian federal government’s proposal to modify negative gearing and capital gains tax concessions arrived in the political conversation framed as a housing access problem.

Younger Australians cannot afford to buy homes. The tax arrangements that allow property investors to offset rental losses against income, and to pay reduced tax on capital gains from property sales, have contributed to the demand-side pressure that has driven prices beyond the reach of people entering the market without inherited equity or parental assistance.

The reform is presented as correcting an unfairness—returning to younger Australians the access to home ownership that their parents’ generation had, and that the current tax architecture has progressively transferred from first-home buyers to existing investors.

This framing is not inaccurate. The relationships it describes are real. The tax arrangements do contribute to the conditions they are being asked to address. The problem is not that the framing is wrong. The problem is what the framing leaves outside the conversation.

What it leaves outside is the broader architecture—the set of arrangements through which the Australian state transfers resources to asset holders through the tax system, and the relationship between that architecture and the visible welfare system that transfers resources to people without assets through the payment system.

The reform that adjusts negative gearing and capital gains concessions to enable more younger people to enter the property market is a reform of the asset-based welfare architecture, not a reform of the poverty framework that leaves the people who cannot participate in any version of the asset market in the same position they were in before the reform.

 

The tax concessions that negative gearing and the capital gains discount provide are, in functional terms, welfare transfers. They are public resources—foregone tax revenue—directed to private individuals whose financial position is improved by receiving them. The improvement is not small. The total cost to public revenue of the capital gains tax discount alone has been estimated at tens of billions of dollars annually in Australia. Negative gearing adds further billions. The people who receive these transfers are not means-tested. They are not required to demonstrate need. They are not subject to compliance conditions, documentation requirements, or periodic reassessment of their eligibility. They receive the transfer automatically, through the tax system, as the predictable consequence of investment decisions the system was designed to encourage.

The people who receive these transfers are not described as welfare recipients. They are described as investors. The language matters because it shapes the political conversation about the transfers’ legitimacy.

The welfare recipient whose payment is set below the poverty line is subject to political pressure to demonstrate deservingness. The investor whose tax concession costs the public revenue far more than the welfare payment is subject to political pressure about investment confidence and housing supply.

The conversations occur in different registers and are not compared against each other in the political mainstream, because the comparison would require acknowledging that both are welfare in the functional sense, and that the distributive question applies to both.

 

The property-owning composition of the Australian parliamentary class is not a secret, and it is relevant to the analysis not because it establishes hypocrisy but because it establishes structural positioning. Members of parliament who own multiple properties and who benefit from the negative gearing and capital gains arrangements they are being asked to reform are not primarily hypocrites. They are people whose financial architecture is embedded in the system they are adjusting.

The reform pressure operates against both their ideological framework—many genuinely believe that the current arrangements support investment and housing supply—and their personal financial position. These two factors reinforce each other in ways that make it difficult to determine where one ends and the other begins, which is what makes the structural positioning significant rather than the individual character of the politicians involved.

The reform that results from this positioning tends to be incremental. Not because the politicians are uniquely venal—the same structural positioning affects legislators in most democracies where property ownership is a primary wealth accumulation mechanism—but because the incentive architecture consistently rewards partial reform.

Partial reform addresses the pressure point that has become electorally salient—the exclusion of younger voters from home ownership—without dismantling the broader architecture that benefits the existing ownership class. It expands access to the asset ladder without questioning whether the ladder should be the primary mechanism through which housing security and retirement security are delivered.

 

The younger voters whose housing insecurity has become electorally significant are not, in the main, advocating for a redesign of the welfare architecture. They are advocating for access to the existing architecture. They want to own homes. They want to participate in the asset accumulation that their parents’ generation participated in. Their political demand is for entry to a system that they have been excluded from, not for the replacement of the system with something whose logic is different. This is understandable. The system they want entry to is the system that has delivered security to the people who managed to enter it. The evidence that the system has delivered security is visible in the financial positions of their parents’ generation. The demand for entry is rational.

The reform that responds to this demand is access reform. It moves the eligibility threshold. It adjusts the arrangements that have made the threshold difficult to reach. It may succeed, partially, in enabling more younger people to enter the property market.

What it does not do is address the position of the people who will not enter the property market under any plausible version of the tax reform—the people whose income, housing history, or geographic location places the ownership threshold beyond reach regardless of where the investment tax arrangements are set. These people are not the politically salient group whose pressure is driving the reform. Their situation is not what the reform was designed to address.

 

The poverty framework that surrounds all of this has not been proposed for revision in the current policy conversation. The payment level at which the Australian government supports people who cannot support themselves through the labour market has not been described as requiring redesign in the same political breath as the negative gearing reform. The two conversations—the asset-based welfare conversation and the payment-based welfare conversation—occur separately, in different policy domains, addressed to different political constituencies, measured against different standards of adequacy.

The hidden welfare state and the visible welfare state are not discussed as components of the same architecture, because discussing them as components of the same architecture would require acknowledging that the question of who receives public resources and under what conditions applies to both, and that the asymmetry between the conditions attached to one and the conditions attached to the other is a distributive choice rather than a natural feature of the landscape.

The person whose negative gearing claim is processed automatically through their tax return has not been asked to demonstrate that they are using the subsidy in ways the government approves of. The person whose welfare payment is conditioned on compliance activities has been asked to demonstrate exactly this, repeatedly, under conditions designed to produce visible oversight.

The architecture that produces this asymmetry was not designed by people who intended to create a system in which asset holders receive unconditional public support while payment recipients receive conditional public support. It accumulated, over time, through a series of decisions each of which was individually defensible within its own framing, and whose combination produced the current structure.

 

The reform conversation that would engage with the full architecture would need to ask a different set of questions from the ones currently being asked. Not merely: how do we help younger people into the housing market? But: what is housing for, and how should a society organise the provision of it?

Not merely: what is the appropriate tax treatment of investment property? But: what is the relationship between the tax system’s transfers to asset holders and the payment system’s transfers to people without assets, and what does that relationship reveal about who the state considers to be deserving of unconditional support?

These questions are not on the current legislative agenda. They are not on the current legislative agenda for the same reasons that incremental reform is more available than systemic reform in any domain: the incentive architecture rewards pressure management rather than comprehensive redesign, the people with the most influence over the agenda have the most invested in the existing structure, and the political conversation is conducted within a framing that treats the current architecture as the background condition and the specific reform as the foreground intervention.

The reform may proceed. The negative gearing arrangements may be modified. Some younger Australians may find the threshold more reachable. The architecture that determines who receives unconditional public support and who receives conditional public support, and at what level each group is supported, will remain largely intact.

The welfare of ownership will continue.

The welfare of need will continue alongside it, in a different register, subject to different conditions, measured against different standards.

The two conversations will continue not to compare themselves to each other.

The architecture will continue to produce what it was designed to produce.

What it was designed to produce is the continuing question.