We'll do so with a summary of what it had to say about (1) the taxation of owner-occupied housing, (2) the taxation of rental housing, and (3) the provision of housing assistance in the forms of Rent Assistance and social housing.
In relation to each, we'll also note the response of the Government, and add a few words of our own.
1. Taxation of owner-occupied housing.
Henry says: let's keep the preferential tax treatment of owner-occupied housing. In particular, let's keep exemption of owner-occupied housing from capital gains tax. (And let's not even consider the taxation of imputed rents – that is to say, the value of the housing services that owner-occupied housing produces and that is consumed directly by the owner.)
But, let's include owner-occupied housing in a reformed land tax regime.
And let's think about a bequest tax.
The Government said: we 'will not... at any stage... introduce land tax on the family home – this is a state tax and thus an issue for the States.' (And it goes without saying that we agree with Henry on keeping the exemption from capital gains tax.)
And we will not introduce a bequest tax at any stage, either.
The Brown Couch says: first of all, a general note: this was, literally, the Government's response to so much of the Henry Review's recommendations. Its press release of 2 May reads: 'In the interests of business and community certainty, the Government advises that it will not implement the following policies at any stage.' Thereafter follows nineteen dot points, of which land tax and the bequest tax are just two. We'll encounter a few more of these 'not at any stage' dot points.
As for the substance of the recommendations and the response: the preferential tax treatment of owner-occupied housing is a core component in the Australian house price bubble-making machine.
Now, this machine runs on a volatile blend of animal spirits and debt. It seems that at the moment, supplies of this fuel amongst Australian households may have been tapped dry: housing credit growth has stopped, and prices are flat and falling. We've heard from respectable commentators – that is to say, commentators who have long argued for reform of the taxation of housing to improve affordability – that including owner-occupied housing in the capital gains tax regime at this stage may be revenue-negative, because the gains aren't there at the moment and, as a necessary corollary, you'd also have to allow deductions for owner-occupiers' interest payments. And the latter aspect could well give a fillip to borrowing – at this stage. But, at some stage, there must come a time to start dismantling the house price bubble-making machine, including the tax-preferencing of owner-occupied housing.
Land tax reform, however, is something we could proceed on now – and the fact that it is a tax levied by the States does not mean that the Commonwealth cannot act on it. In particular, the Commonwealth should look at how it distributes, through the Grants Commission, its tax revenues to the States, and calculate the distribution on the basis that each States' own tax base will include a reformed land tax.
And the bequest tax – or unearned wealth tax, as we like to call it – let's do it!
2. Taxation of rental housing.
Henry says: investing in rental housing, shares, putting money in the bank – it's all saving, isn't it, so let's tax these different ways of saving more consistently. Let's tax the income from savings (whether it's rent, dividends, interest or capital gain) at a 40 per cent discount. In relation to rental housing, this means slightly more tax on capital gains, reduced tax for landlords who have a positive net rental income, and reduced losses deducted against other forms of income for landlords who have a negative net rental income – thus watering down the encouragement that Australia's unique negative gearing provisions give to big-borrowing landlords.
The Government said: we will not reduce the capital gains discount, or apply a discount to negative gearing deductions.
The Brown Couch says: negative gearing is financial alchemy, and when it's conducted in the crucible of the housing market, which is already subject to the tax preferencing of owner-occupation, you get a very volatile, bubbly brew. The reforms Henry recommends are mild; for a stronger reform, try quarantining rental losses from being deducted against other forms of income at all.
3. Housing assistance.
Henry says: as a form of housing assistance, Rent Assistance ticks a lot of an economist's boxes. We just need to lift the thresholds at which Rent Assistance maxes out.
Social housing, on the other hand, presents problems – but many of them are fixable, if you extend market rents and Rent Assistance to social housing tenants. For tenants with very high needs, there should also be a new additional payment, that goes to their landlord.
The Government said: we will not ask the States to charge market rents [subject to Rent Assistance] to social housing tenants.
The Brown Couch says: Like Henry says, lift the caps on Rent Assistance. And Henry makes some strong arguments about the problems with social housing's income-related rents. There's a number of forces converging on social housing rent policy that will change its shape – what do tenants and their advocates want to make of this?
Thus ends our review of the Review. We look forward to the National Tax Forum on 4-5 October this year, and recommend you keep an eye on TaxWatch in preparation.
A final couple of observations: all those 'not at any stage' dot points happened not just one year ago now, but one prime minister ago, one hung parliament ago. And, having retired from the Treasury, Dr Ken Henry has recently taken up a part time job in the office of the Prime Minister. He won't be doing the photocopying and making the coffee.