Bizarre love triangle: Can Henry squeeze in between Tony & Kevin?

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.

There’s historical precedent for making unpopular but sensible tax reform a legacy measure.  Remember this guy? –>

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.

Thoughts?

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

3 thoughts on “Bizarre love triangle: Can Henry squeeze in between Tony & Kevin?”

  1. I wonder if negative gearing could be available for newly constructed properties only, that way there would be no downside to supply and maybe only for the first ten years. Another tactic could be to phase it out over a number of years.

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    1. I think the phase-out will definitely be the only way to do it. Or at least ‘grandfathering’ (i.e. allowing existing negative gearers to continue to do so.)

      I like the suggestion of negative gearing only on newly-built properties. Could be a fillip for supply. Although you’d want to rigorously police your urban growth boundary at the same time, cause I bet the investor-builders would not be so keen on developing in urban infill…

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  2. As far as the politics of negative gearing go, the consequences aren’t necessarily severe for Labour. Most investors are neither young (potential green voters) or “aspirationals” living on the city fringe in marginal electorates.

    But the phase out is a problem. Removing it now, at the height of a bubble could cause a massive drop in prices, if not take down the banking sector. Henry, I think, made the point somewhere that radical reform is best done during the boom years, where you can use a surplus to offset the losers, and create quite a few winners. In which case, maybe now is not the time. If house prices were to stagnate, then investors will leave anyway, but delaying in the event of a further bubble makes things worse. So, much depends on whether house prices are inflated or not (and if not, does it matter if negative gearing exists?).

    Like Henry, I think tax policy should reflect desirable social policy. From a housing perspective, that means new dwellings (as Michael said), affordable housing in appropriate places (adjacent to public transport or near the inner city for example) and actually having the property occupied. Put those into metrics and multiply them out, and you’d get a factor that says how much you can claim.

    Having said that, you’d still be funding speculation, and negative gearing would remain flawed even as a theoretical policy instrument. (It posits, essentially, that if house prices are increasing you should buy up housing at a running loss, in order to take advantage of additional losses. If negative gearing was doing its job – stabilising or reducing house prices – it wouldn’t actually work). But at least, at some level, a speculative housing bubble might be leveraged to improve things a little.

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