Super idea for home owners
Forty-five years ago, the US National Tax Journal published my article analysing the theory of the tax-deductibility of interest payments from the personal income tax base. Our two tax arrangements are like chalk and cheese.
The US system is biased in favour of home owners, allowing an interest deduction even though the ownership of the home generates no taxable income other than capital gains tax on larger realised gains. But US investors are only allowed to deduct interest payments and other expenses up to the level of total investment income. They can carry forward their losses to future tax years but, overall, the tax system encourages positively or neutrally geared investments.
The Australian approach is totally different. Home owners receive no subsidy to help them achieve home ownership, while investors can access unlimited tax deductions for heavily geared borrowings. Our system encourages home owners to devote all of their savings to paying off their mortgages, while borrowing on a tax-deductible basis to fund investments. The total exemption of the family home from capital gains tax, moreover, encourages overinvestment in the family home, which can then be used as collateral for fully geared, interest-only loans.
In this process, the people who end up paying the most personal income tax are those without capital, including many first-home buyers competing with investors to acquire their home. As well as facing higher property prices because of the competition from investors, they have to finance their purchases out of wages income subject to high marginal tax rates. Their situation is not helped by being forced to pay a significant part of their income into compulsory superannuation, which is tied up, untouchable, until at least the age of 60.
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