Lowering Australia's income tax rate would significantly reduce the reliance on negative gearing, a leading economist has argued.
AMP Capital chief economist Shane Oliver pointed to Australia's top marginal tax rate, which he says kicks in at a relatively low level of income compared to the US or UK, as the main reason for Australians using negative gearing.
"A sensible reform would be if you were to get the reliance down on income tax and reduce the top marginal tax rate, or push it out a lot further, relative to income," Mr Oliver said.
"Then you would find that less money would be pushed through these tax breaks in the first place," he said.
Mr Oliver's comments come after leading economist Saul Eslake called for negative gearing to be "grandfathered" – banned for everyone other than for those presently utilising it – to cool the overheated investor lending market.
While Mr Oliver opposes the removal of negative gearing, lowering the top marginal tax rate would ease the reliance on the popular incentive, he said.
"Removing the tax breaks without doing anything about the key drivers of why people use them just results in less incentive to work in the economy and more inclination for people to relocate overseas," he said. "So there is that aspect to it as well."
Another issue with removing negative gearing for residential property is that it would most likely stay in place for other assets, Mr Oliver said.
"You can negatively gear into shares at the moment and in commercial property, but no one is proposing to curtail that," he said.
"You would unfairly disadvantage residential property relative to other assets."