If Prime Minister Albanese does not outright reject Adam Bandt’s demand to Grandfather negative gearing and scrap 50 per cent capital gains tax discount, it will be a tacit admission that a re-elected Labor government will succumb to the Greens.

It’s in the ALP’s DNA to want to ditch negative gearing and double capital gains tax. Jim Chalmers even asked Treasury in September last year to model removing negative gearing, while taxing capital at all was a Labor idea.

Bandt is offering Labor a ‘cheap’ deal that they could easily afford, and in the event of a hung Parliament, Albanese would take it. Even if there is a Labor government with a small majority, he’d still be tempted to take it to break a Senate deadlock.

While it might be a cheap deal for Labor, with these being policies they already favour, it will be expensive for renters in particular.

Negative gearing provides for more housing by helping investors to borrow. More leverage means a larger investment pool, more houses, and lower rents.

Capital gains makes investing in real estate worthwhile, because the income returns are generally derisory.

Gross rental yields are currently 3.7 per cent according to CoreLogic, out of which the landlord needs to pay tax, management fees, rates, maintenance, insurance, and allow for depreciation. Compare this to the average yield of a company on the ASX, which also pays 3.7 per cent, but this is after tax, management, depreciation, other costs incurred in earning the income, and with maybe another 3.7 per cent put aside for investment in expanding the business.

Abolishing one and doubling tax on the other will drive investors out of the housing market and into riskier proposition like shares or topping up their superannuation (most of which is controlled by the Labor Party’s allies in the trade union movement).

Last time Labor abolished negative gearing, under Paul Keating in 1985, the ban lasted for only two years before it was abandoned as rents began rising.

Abolishing negative gearing would overturn centuries of taxation practice. It has always been the case that the owner of a business or investment is entitled to deduct expenses from income before tax is assessed on their income.

While negative gearing is portrayed as a tax lurk, in fact all that happens is that at the end of each tax year the taxpayer pools all their income together from employment, investment, consultancies etc and if the ATO has taken more in income tax than required over the total, the taxpayer receives a refund of that tax, not of his expenses.

There are also very good reasons to tax an increase in the capital value of an asset at a different rate to normal income.

When an asset increases in value some significant proportion of that increase is due to inflation and is therefore not a real increase. So the tax system needs to account for that.

Sometimes the increase is due to the income from the asset increasing, but then that extra income will be taxed. A CGT would represent double taxation as the value of an asset is the discounted value of its future cash flows.

Sometimes it is just a valuation effect, but then there is a risk element that has to be taken into account as valuation effects can go in both directions, as we are seeing in the current stock market.

Charging tax at the taxpayer’s full marginal rate on 50 per cent of the capital gains is a reasonable compromise that is simple for the taxpayer and the ATO.

It also encourages investment, and investment is necessary to increase productivity. Without higher productivity higher wages and living standards will also be a mirage, along with affordable rents.