Ken Henry is a radical. What will be in his tax review?
He’s not afraid to stand by his principle of Keep it Simple, Stupid. When Henry reformed superannuation tax, the result was simple : no more tax on superannuation.
This quote from a recent speech “Tax reform is always difficult – even the things that are most obvious” makes me think he is preparing the ground for an unpopular battle.
So, as we turn to this Colebatch article arguing against negative gearing – we ask: Is it a stab in the dark, or a tracer round for the barrage that will follow?
Ken Henry has form in using the media to influence outcomes. The famous pre-empting leak of 2007’s election campaign “there is a greater than usual risk of the development of policy proposals that are, frankly, bad” is most likely to have come from his office.
Assume the Henry report proposes an end to negative gearing.
Will K-Rudd implement? He is a political beast. He won’t put making reform above maintaining power. But neither will he be afraid to spend surplus political capital on serious, lasting, legacy-making reform.
The Henry review will be released on Budget day. Ninety-five percent of it will be simple, obvious, beneficial and the Government will commit. For example, apiarists won’t be the only ones supporting removal of a 10 cent tax on the export of Queen Bees, (which raised just 8 grand in one recent year).
Debate will centre around one or two proposals. For example, this recent Australian article flags a proposal that tax rates should be different for different age brackets. There could also be a proposal to get rid of deductions for work expenses.
But the big cheese (I’m betting) will be negative gearing. ‘Negative gearing‘ is a rule that allows people to buy a house, rent it out, and claim the shortfall between the rent and the mortgage payments as a loss they deduct from the rest of their taxable income. It gives a tax advantage to a lot of people. 1.2 million taxpayers take advantage of the rule, which has propped up the demand that has pushed housing prices to record highs.
So how will the Henry tax review be released? Not as policy. As something the government broadly supports? As something they intend to pick and choose from? If Rudd and Swan don’t immediately commit to ruling out negative gearing, it will become a major political issue. Remember that this is an election year. How they handle the release of the Henry review is a big political decision.
If they are a chance of losing the election, negative gearing reform will be last priority. So it all depends on how they view their political chances in the week before Budget day, (May 11th). That is to say, if the polls show a narrowing gap with Mr Abbott, Dr Henry won’t be able to squeeze in. If Mr Abbott blunders and gaffes before then, the door will be ajar.
What impact will it have? While I endorse bold policy, I suspect negative gearing is a scapegoat for high prices. Melbourne and Sydney prices are high, but not higher than New York and San Francisco. Meanwhile, housing prices in rural areas are stagnating. I doubt the change will herald a new era of affordability.