Labor's backflip on negative gearing and tax cuts is more optics than economic reform

Its new pledge to not shirtfront the federal government over its planned overhaul of the progressive income taxation system is an attempt by Anthony Albanese and his shadow cabinet to neutralise the economy as a key political issue at the next election.

This is also highlighted by the opposition's retreat on changes to capital gains tax and negative gearing, which were both unpopular policy reforms among voters at the last election.

Politically, Labor is likely concerned about potential voter fallout if it is seen to oppose a tax policy which puts money back in the hands of Australian taxpayers, amid a pandemic which sparked the nation's first recession in 30 years.

However, not all are pleased with Labor's decision to mute economic reform at the next election, with The Australia Institute labelling the tax cuts as a further divide between the rich and the poor.

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Senior economist at The Australia Institute, Matt Grudnoff says Labor's u-turn would heighten inequality as "the stage three tax cuts are mostly skewed to the top end".

Mr Grudnoff flagged Labor not being able to properly explain its "big reform agenda" on its proposed changes to the imputation tax and franking credits system was at the crux of it failings at the last election, but noted its stance on tax cuts and negative gearing were reforms easily understood by the general public.

"Things like the stage three tax cuts and negative gearing are understood enough to neutralise a scare campaign," he said.

"I think you could mount a political defence fairly easily ... because they are mostly going to the top end."

The Housing Industries Association welcomed Labor's stance on retaining negative gearing settings, believing residential property investors would have more certainty about the ongoing supply of housing.

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Chief executive of the Grattan Institute, Danielle Wood believes Labor should be pushing for negative gearing reform, especially when housing values continue to skyrocket.

"I think the negative gearing and capital gains tax policy was sound policy, it makes sense in a world where house prices are going gangbusters," she said.

Westpac chief economist, Bill Evans says negative gearing reform would play little benefit to the economy while the cash rate imposed by the Reserve Bank of Australia sits at 0.1 per cent until at least 2023.

"The benefits of negative gearing are very limited now," he said. "The whole benefit to get a tax deduction on the difference between your funding cost and your rental yield is out the door because of the very low interest rates."

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