This episode was recorded on the land of the Wurundjeri people of the Kulin Nation. We pay our respects to their elders, past, present and future.
Richard: Hello and welcome to another episode of Precisely Property. I’m your host Richard Temlett, I’m excited to have you with us today. If you’re here for the first time, thank you for joining us. I encourage you to listen to our previous episodes where we discuss all things property, with a focus on dynamic discussions with industry leaders. In this episode we’ll be talking about Tax Reform and what is required to solve the housing crisis with Dr Ken Henry. So, sit back, relax and let’s get started.
Dr Henry is one of Australia’s most influential economic policy leaders. He has served as Secretary to the Treasury from 2001-2011and chaired several landmark reviews including the 1997-1998 Howard Government Tax Review, the 2010 Rudd Government Tax Review, and the Gillard Government’s Australia and the Asian Century White Paper. He has held senior roles across both the public and private sectors, including chair of National Australia Bank (NAB), and has been a non-executive director of ASX Limited. Today, Dr Henry chairs the Australian Climate and Biodiversity Foundation and serves on multiple boards focused on climate, finance and biodiversity. Dr Henry holds a PhD in Economics from the University of Canterbury and is a Companion of the Order of Australia. Welcome Dr Henry.
Dr Henry: It’s good to be with you.
Richard: In today’s episode, as we were discussing before the session started, we’re going to talk about the housing crisis and the role that Tax Reform can play to start to address this major generational issue. I wanted to acknowledge that you’re certainly one of the most important people that I’ve had on the podcast. I’m incredibly grateful that you’ve come on. I’ve read a lot of your work, a lot of your articles. And as I said to you before we started recording this session, I actually think a lot of your insights are ahead of their time. My personal view, and obviously we’ll get into yours in a few minutes time, my personal view is we do need a tax system that’s fit for purpose for the next 30, 40, 50 years. And certainly, as it applies to housing, I feel that a number of your recommendations actually will prevent the market from being as distorted as it has been historically. I think that now is the time with the rise of the millennial voter base and also even though the baby boomers are still an important voter base, but the fact that a number of them are, the millennials are being locked out of the housing market. It’s a good time to talk about this Tax Reform to make sure that we can still get people into the housing markets and make Australia as liveable as it has historically been.
So, what I’d like to do today is talk to you about the report that you prepared, I believe it was in December 2009. We’ll put a link to that report. As I said, I think the analysis is absolutely fantastic. We’ll talk about the reports. I’m also keen to then explore with you if any of your views have changed since then in terms of some of the taxation reforms that you think could be changed now. And then we’re going to conclude with some suggested steps for both the Federal and State Governments to consider, again, to address this generational issue.
Let’s get into the first part of the session. You prepared reports, it was entitled Australia’s Future Tax System Final – Report to the Treasurer, in December 2009. Are you able to let the listeners know, and myself, why the report was prepared?
Dr Henry: Yeah, okay. That’s quite an introduction. There is quite a lot for us to talk about. That particular report was commissioned by the Rudd Government early in 2008 and in fact, I think it was announced in the budget in 2008. If we go back to that time, the circumstances were quite unusual. The Government had been elected in November 2007 with quite a significant majority, and it came into Government with a budget in extraordinarily good health, unbelievably good health really, surpluses as far as the eye could see. And in the incoming Government brief that we in treasury prepared for the incoming Rudd Government, we said we are, as you would imagine, pretty cautious when it comes to putting together fiscal projections. But our view is that we’ve been very cautious on this occasion, and you should expect further revenue surprises on the upside as the former Government did that, as the Howard Government did. And so, one of the things that you might want to think about is the sort of opportunities that that presents for you. But Prime Minister Rudd decided that he was going to have a 2020 Summit, you might recall that. At the 2020 Summit, there were a number of groups that were assembled and they each had particular areas to focus on in the business group. It quickly identified Tax Reform as the most important thing that could be done to secure Australia’s future and that group took note of the fact that the budget was in really good shape. And some of the people in that group had experience in previous episodes of Tax Reform. In fact, David Morgan, who had been the CEO of Westpac before that, he was a treasury officer himself. As a matter of fact, he recruited me to the treasury way back in 1984. And he was at the centre of the Tax Reform exercise that former Treasurer, Paul Keating ran into the June 1985 Tax Summit. So, David was a member of that business group, in fact, I think he might’ve chaired that particular business group at the 2020 Summit. He had history in Tax Reform and Andy had a history with the treasury and he saw this as an extraordinary opportunity. And that was our view as well within the treasury. That was certainly our view.
And when Prime Minister Rudd decided, okay, we are going to have a major Tax Reform and announced it in March 2008, we actually thought that our task would be to work very closely with the Government in the design of a landmark tax package. That’s what we thought. And we thought we’d spend a couple of years on it. And then of course, the global financial crisis (GFC) hit and the fiscal response to the global financial crisis meant that all those budget surpluses just disappeared, and they haven’t come back by the way. So, we recast the exercise and instead of putting together a particular landmark tax package, we decided to be a little more, I guess, reflective in our approach and to consider the issues that Australia was going to have to deal with over the coming decades and what those issues might tell us about the ideal structure of the tax system going forward.
The report, if you read it and you have, what it sets out as pathways to reform right across the tax system and also the spending system because it’s not just a report about the structure of the tax system. It’s also a report about the structure of the payment system, payments that are made to individuals and families and so on. And of course, the report looks at both Commonwealth taxes and State and territory taxes and to some extent also taxes levied by Local Government. So, it is quite a comprehensive piece of work. But it started with those questions. What are the challenges and opportunities that Australia is going to have to deal with over the next several decades? And what can the tax and transfer system at Commonwealth and State and territory levels do to position Australia best to be able to cope with those challenges? And look, it contains quite a number of recommendations, well over 130 recommendations. But if you dig into the report, you find a lot more than that. They’re not called recommendations. They’re called findings or observations or whatever, but there’s a lot in the report that I guess we were not quite confident enough to crystallise in the form of a recommendation, but we’re sufficiently confident to be able to say this is something that we need to think about. And going back to your introduction, in some of those things that we identified then as things that we need to think more deeply about, I would say right now it’s time to get on and do it. But also, with respect to the recommendations, many of the recommendations, the easiest ones have probably been implemented to some extent. The big ones, the big game shifters have not really been implemented. And I guess the last thing I’d say, and it’s quite an important point, is that there have been other contextual changes as well that are quite significant. So, when we were putting that report together, the Australian Government was committed to the introduction of an economy wide price on carbon through…
Richard: I remember actually, yes.
Dr Henry: Yeah, an emissions trading scheme, the carbon pollution reduction scheme. And in fact, the report contains a whole chapter on carbon pricing and why it makes sense to have an economy wide price, an approach that’s not sector specific, not technology specific, but is economy wide. And the fact that we no longer have that means that other things have to be explored and this Government and the former Government have been moving, I would say slowly and cautiously toward a way of dealing with carbon emissions. But the fact that there are big holes in the system in carbon pricing means that some of the recommendations that we made, including with respect to road user charging, need to be interpreted slightly differently. That’s a big contextual change.
But the other big things that feature in public discourse today, I don’t think we missed many of them. Demographic change and the implications that would have for budget financing, but also for the distribution of income and wealth, including the intergenerational distribution of income and wealth, was certainly something that we identified. Globalisation, the rise of China and Australia’s trading relationship with China and with the rest of the world. That was another issue that we identified. And of course, climate change, which I’ve already mentioned, but also the degradation of nature and what to do. What can the tax system do about environmental damage? And there’s quite a lot in the report on that topic. It may be a bit academic for some people’s tastes, but nevertheless, it’s there, it sets out at least some thinking on the contribution that tax system can make in that area as well. But look, housing affordability, we certainly mentioned it. It’s in there, right? And we saw it as a risk, not something that would necessarily become a first order issue, but a risk and something which needed to be attended to. And here we are 15 years later, and you’d have to say that really is first order and that has not been attended to. And there’s a lot of work that has to be done.
Richard: Before we get into the housing affordability and the taxation reform that could potentially apply to that, I did have the question about how many of those recommendations there were and how many had been adopted. And you’ve effectively answered that in the sense that you’ve said that more of the easier ones have been adopted. Do you think that some of the harder ones have not been adopted because of the financial position that the Government is in or is it because of how politically unpopular some of those changes might be? What are your views on that?
Dr Henry: It’s not the former. Certainly when we started our work, we thought it’s fantastic to have a very strong budget surplus. And the reason we thought that was because the orthodoxy amongst Tax Reformers is that in order to deal with the politics of Tax Reform, the electorate really has to be bribed. That’s putting it in somewhat colourful terms, but that is the thinking. The thinking is that the electorate has to be overcompensated for the change that’s being proposed. And one way to think about that is that economists like me, we spend most of our time thinking about economic efficiency, right? How to make the system more efficient so that you have higher productivity, living standards on average are higher. And what’s motivating you there is that you’re providing the circumstances for real income growth of the present generation, but that’s only part of it. The other part of it is, you are creating a legacy for future generations. An economy that’s functioning better with higher real incomes, higher real wealth provides a legacy for future generations. But when a Tax Reform is announced, the public discourse is all about the fairness as it impacts the present generation. Who gets what? That’s understandable, right? But it does present something of an obstacle to those who are focused on the living standards of future generations. And so, in order to deal with that obstacle, the most obvious thing to do is to say to all those who are worried in the present generation, worried about what’s going to happen to them, “look, it’s all right. We’ll look after you in financial terms. You’ll get income tax cuts, or you’ll get an increase in family payments, or you’ll get a top up, an extra top up in the pension or something else, right?” Or one-off grants and so on. And so, if the budget is tight, running that sort of Tax Reform is hard, it was probably impossible, right? And where we are now, you would have to say, or at least I say, not everybody wants to accept this, but I do say that the next big Tax Reform in Australia will have to be revenue positive. It will have to improve the budget bottom line. Maybe not in year one, but over time it’s going to have to do that. And Australia doesn’t have a good record of, and few countries do really, New Zealand does, but few countries have a good record of being able to implement Tax Reform that is honest with the electorate and says, you know what, we’ve got to raise revenue in order to restore integrity to the budget.
But that is what is going to have to happen. It doesn’t have to happen all in one big exercise, although I think it would make sense to do it that way. But the politics is partly about perceptions of fairness. But there’s another element, and that’s understandable, and there’s nothing wrong with that. In fact, it’s as it should be. People should be worried about the fairness of what it is that Government’s doing. But there’s a darker side to political debate and political consideration of reform options in Australia, which is the scare campaign. And the scare campaign is about perceptions and not necessarily having anything at all to do with reality. And so, for example, when the Rudd Government released that tax review early in 2010, they announced that they were going to apply a so-called resources super profits tax to the mining industry.
Richard: I remember that, yes.
Dr Henry: And the reaction of leaders of the mining industry to that was frankly disgraceful. That’s my view. But they were on a winner because they were able to run a highly effective scare campaign. And in that, Australia lost a great opportunity. It would have been very much to the benefit of the vast majority of Australians, like I would say more than 98% of Australians. The simple numbers are these, are that the mining industry of course is a significant industry, but it employs less than 2% of the Australian labour force. And it’s largely foreign owned, foreign shareholders. And if you reflect on that, you’ve got to wonder why it wouldn’t make sense for Australia to extract revenue from those foreign shareholders and distribute it to the other 98%+ of Australian workers, right? It’s pretty basic stuff.
If you go back to the equity arguments for and against Tax Reform, on its merits, it should have been easy. As a matter of fact, I recall that the major newspapers in Australia on reporting Prime Minister Rudd and Treasurer Swan’s response to the tax review, all their front-page stories and commentary were, “oh they’re only doing the easy stuff, slugging mining. That’s just trivially easy. Why don’t they do something hard?” That’s really interesting. And yet within a few weeks almost all the newspapers were writing that this is disgraceful tax. This tax is going to kill the goose that’s laying the golden eggs and all that sort of rubbish. The politics is not all about fairness, sometimes it’s about scare campaigns that have no base in reality at all. And those who propose Tax Reform therefore have to think through how to deal with those scare campaigns that will come because there is no reform proposal and certainly no reform proposal that raises revenue overall that’s not going to disadvantage somebody. There will be somebody who will have a very strong interest in blocking the reform, in defeating it.
Richard: I can already see that in some of the planning reforms, particularly in New South Wales. Obviously, that’s where I live and breathe in terms of the residential markets and some of the things that I’m seeing happening in, for example, Mossman and taking the council to court and suing the Government and things like that, not the council. So, I agree with you. A lot of it is misinformed.
Let’s park that for a second though, because I want to swing into housing now. And obviously we’ve got a housing crisis and, in my mind, when I read the report and I am very close to the housing part of it rather than some of the other parts, but I reckon that all of them were ahead of their time and certainly the risks that you identified with respect to housing and the fact that certain taxes or charges distort the market or disincentivise people from moving. That was absolutely hitting the nail on the head. And you had some very good recommendations as to what should change to give a more reliable revenue base or a more fair tax system. I’m keen to talk to you about what those were. For example, replacing Stamp Duty with an annual land tax. Negative gearing, capital gains tax, so I’m in your hands in terms of what some of your views were on those changes.
Dr Henry: There’s a lot to discuss, but look, when we, as I said earlier, we looked at the tax system in its entirety. So, Commonwealth taxes and State and territory taxes, and we rank taxes according to their economic quality, let me call it that. And stamp duties were identified as I think the absolute worst tax, we couldn’t find a worse tax than a Stamp Duty. Let me first say that when we were designing or assisting the Howard Government in the design of its big Tax Reform package back in 1997, 1998, out of which came the GST of course, that commenced on 1 July 2000, we were very keen and that Government was very keen to get rid of as many of those stamp duties as it possibly could. Back in those days, stamp duties applied to mortgage rates, right? Everything seemed to attract a Stamp Duty with the money principally going to State Governments, stamp duties being a historical tax levied by State Governments well before Federation. And we tried in putting that Tax Reform package together, we tried to get enough revenue from the GST to be able to, and of course all of that revenue goes to the States, we try to get enough revenue from the GST to be able to abolish all stamp duties on everything.
Today, the principal Stamp Duty that people are aware of is that applying to property, but there’s also stamp duties on cars and there’s also stamp duties on insurance for goodness sake. Including housing insurance, flood insurance, Government applies a Stamp Duty to it. There’s no economic rationale for that that makes any sense whatsoever. It’s a complete nonsense. As it happened in securing Senate passage of that big Tax Reform package back in 2000 or 1999, 2000, the GST ended up being not quite as broad as we had designed it to be. And we didn’t end up with as much revenue therefore we thought that or hoped that we were going to be able to get.
So, stamp duties have remained unfinished business. That is the removal of stamp duties has remained unfinished business now for 25 years in Australia. And so, we were obviously more than well aware of all of that history because most of us involved in writing the tax or many of us involved in writing the tax review and certainly the leadership team in writing the tax review 2009, we had been involved in that earlier exercise with the Howard Government. And so we thought it was obvious to propose that stamp duties had to go and we had to find alternative sources of revenue. In the case of property, real property, the most obvious alternative source of revenue is an annual property tax. And State Governments by and large have been very interested in that proposal and behind closed doors, I’ve never met a State Treasurer or State Premier who didn’t say to me, yeah, I wish we could do that. And some are like the ACT Government, New South Wales Government under Dominic Perrottet had a go and they’re finding it pretty difficult, ACT is finding it pretty difficult. In New South Wales, it became politically too hard, there are huge economic costs associated with the present system.
So, the first is pretty obviously that coming up with Stamp Duties payable on properties in Sydney and Melbourne in particular, in Brisbane as well, coming up with that sort of money is quite a significant hurdle that you’ve got to jump if you’re thinking about moving. It must do something to deter people from securing a job that makes more sense to them, or property closer to where they work involving lower commuting time and less fuel costs or a property closer to a school that they’d like to send their kids to with intergenerational consequence. And even people in retirement looking to downsize, with the possibility of freeing up a fairly large house that would suit a large family close to where they work, close to where schools are available and so on. It’s just a blocker for many people.
Now, the other side of it, of course, is that as you would know, the Australian property market is quite volatile, cyclical, that we don’t have busts. But we do have booms and you can see when house prices start to move up in Australia, they tend to accelerate for quite a while and they continue to move up for quite a while and then they stagnate. And then some years later they take off again and then they stagnate. This is what typically happens. What’s driving the price increases is of course people buying property. And of course, there are others who are selling the property and every one of those property transactions generate Stamp Duty revenue. That Stamp Duty revenue goes into State Government budgets. And for many State Governments, it’s a principal source of revenue, maybe apart from GST, but in some cases even higher than the GST revenue they get. And it’s volatile, having State Government budgets reliant upon a source of revenue that’s as volatile as that makes no sense, no sense at all. How does the Government plan sensibly for infrastructure needs, for schools, for hospitals and so on when it’s so reliant upon such a volatile revenue base? That just makes no sense. And that has to go and we’ve got to find out a way. We’ve got to figure out a way of dealing with that one, politically.
There is also a genuine fiscal challenge in dealing with something like that. Because when you introduce an annual property tax rather than a Stamp Duty, it could put a hole in the budget for some years, and you make up that over time. I guess you should think of it in investment terms, right? So, there’s that short term cost for longer term gain for the budget. There may be, and a lot of people have suggested this, it may be that this can only sensibly be done in a compact between the Commonwealth and the States, which takes me to a point that I should make, which is that I don’t think we are going to have a significant Tax Reform in Australia unless it comes in the form of compact between the Commonwealth and States.
Richard: Ok, alright, yep.
Dr Henry: I really think that’s true. In terms of dealing with the issues that affect housing affordability and the property sector in general, every level of Government’s got their finger in the pie. And just one layer of Government doing something on its own is not going to do it. It’s not going to fix the problem. It is going to require the three levels of Government to work together, at least to some extent, to be able to solve the problem.
So that’s Stamp Duty. But of course, as you said, we looked at a number of other issues as well. I remember, I’m old enough to have personal experience. I was involved in the policy design of the Hawke-Keating Government’s short-lived attempt to quarantine negative gearing deductions that is to quarantine them to housing and not allow excess interest deductions to be offset against other income. And that only lasted six months. That was a near miss really. Sorry, no, it was almost achieved. It was achieved, but the reason that it was reversed was because of concerns in New South Wales. I thought at the time, and I think the evidence is now overwhelming that the concerns that were raised at that time were ill founded. Anyway, we had that historical experience in our minds, but we were also thinking about the question another way, which is I think about the impact that the tax system has on the allocation of capital or the allocation of investment or where the investment occurs in the economy. Think of it in those terms. If you think of it in those terms, you’ve got to think about the way that we tax all forms of capital income, interest, rent, dividends, capital gains, trust distributions. And if you look at the way that those things are taxed, what you discover in Australia is that the rate of tax on the underlying income is radically different depending upon the form in which the income is generated. And that doesn’t make sense from an economic perspective. That makes no sense at all.
And housing is taxed in very special ways, and of course it’s not all taxed the same. Owner-occupier housing is input taxed effectively and capital gains on owner-occupier housing are completely exempt from tax there. You can’t touch that. It’s taboo to even talk about it, no matter what the value of the house is and no matter how big the capital gains have been. And rental housing, which gets all the focus and that’s understandable, you do have a capital gains tax system, but 50% of the capital gain, of the realised capital gain. So, that is when the property is eventually sold, 50% of that goes into taxable income. But of course, full nominal interest expense is deductible, not only against rental income, but also against any other income that the taxpayer might have from wages and salaries or whatever. But at the same time, you have land taxes levied by State Government that have to go into the mix. There’s property rights levied by Local Governments that have to go into the mix. And there is of course the Stamp Duty that we were talking about earlier. It’s an incredibly complicated system, but nevertheless, most Australians seem to have worked out that it’s not a bad vehicle for building wealth. If you’ve got the cash from a good salary, you can take advantage of this tax system…
Richard: Absolutely!
Dr Henry: …to build quite a strong property portfolio in a tax preferred environment. And my wife and I helped both of our children, they’re in their 40s now, so this is a while ago, but we helped both of them into the property market. At every auction we attended, every one, it was clear that you were bidding against people who saw this as an investment opportunity, something to add to their property portfolio as a landlord. And the first home buyers who were standing there in the auction were routinely, like our kids, routinely being outbid. And that’s some years ago now. And so now I think a lot of them have just given up.
Richard: I agree with you. Yep.
Dr Henry: Yeah. And consigned themselves to the view that, or reconciled themselves to the view somehow that they’re just going to be tenants for the rest of their lives. Now, actually, that may be no bad thing, people being tenants for all their lives, but here’s the thing, at least on my observation, and I’m sure anybody who looks at the pattern of residential accommodation development in our capital cities would say, “how on earth”, if you look at those apartments that are going up in the centre of Sydney in particular, but also in Brisbane and in Melbourne, if you look at those apartments, you ask yourself, “for how many years would you expect somebody to want to live in that apartment as a tenant?” And we don’t have the sort of apartments that you find in large cities overseas, certainly the sorts of apartments that find in New York where people understanding that they’re going to be renters taking out very long-term leases on apartments in which it’s quite possible to imagine raising a family of three or four children. So, there are big issues that we’ve got to confront here. But given our starting point that what we were thinking about was, how do we have a more, the word the economist use is neutral. How do we have a more neutral taxation system impacting investment? And we came up with the idea that, this was not our idea, there is a case in the academic literature for taxing capital income at a lower rate than labour income. And this has to do with the disincentive to saving that’s created by taxing income as it’s earned, say from wages and salaries, and then taxing the return on those savings as they’re invested in whatever form. And given that we at the time, and still do, we already had a capital gains tax discount. We thought we should apply a common discount to all forms of capital income. And in applying a common discount to all forms of capital income, you’ve got to apply the same discount to all forms of capital expense. For example, that means that if you’re going to have a 50% discount on capital gains, and you’re only going to include 50% of interest received by a saver as income. If you going do that, then at the same time, you’re only going to allow 50% of interest as a deduction for a rental property investor.
Some countries have gone further than that, Scandinavian countries in particular, and we were very aware of what they were doing. And to go back to one of your earlier questions, I think you raised it in the introduction to this interview. If I were writing the report now, I would propose a Scandinavian style treatment. And sometimes some people call it a scheduler capital income tax system. And the idea would be to say, we’re going to recognise that labour income and capital income are different. Of course, you do have to spend some time in describing the difference in legislative terms and legislation. But nevertheless, they’re different. And we’re to tax all capital income the same. Just imagine that all your capital income and capital expense goes into a big pot, including capital gains, dividend, interest, rent, trust distributions. And it’s all added up and it’s all taxed at a flat rate. Could be 20%. I don’t know. You might want to have a threshold there. So for the benefit of lower income, people who rely upon capital income, that’s fine. And then you’ve got the labour income over here, which is subject to taxation at the normal rates. And that’s another way of doing it. And effectively that is a quarantining of excess interest expense because, you’re… the interest deduction that’s available, if your tax rates only 20%, you’re only getting the 20% interest deduction effectively, but it’s, I think a neat way of dealing with some of these issues. The alternative of just targeting property is hard and it’s difficult, notwithstanding that housing affordability is a headline issue worthy of policy focus for its own sake. Notwithstanding that, you’ve got to ask the question, why would you allow people to negatively gear a share portfolio or any other income producing asset and not allow them to negatively gear a rental property asset? Right. You’ve got to have an answer to that question. Right. And so I think it would be better just to have a firm principle that says that no capital income is different, but we are going to apply a strict scheduler approach to the taxation of capital income and capital expense. And that would, I think, deal with a lot of the excess that we see. And particularly if you then combine that with a reform of Stamp Duty and have an annual property tax. And especially if you could combine it with another of the recommendations that we had in the tax review, which is comprehensive road user charging. Comprehensive road user charging allows Governments at any of the three levels, because it would have to be done as a cooperative piece of work between the three levels of Government, but it allows Governments to impose a number of charges on the use of the road network that are not presently levied in Australia, including, for example, congestion charging. And that has been tried in other places in the world. People who travel to London would be aware of it, see it in Singapore and various places around the world now where congestion charging is applied. You would also, of course, given that we don’t have a price on carbon, you would also have to include in the road user charge, you’d have to include an element for greenhouse gas emissions. And by the way, and this really is a by the way, that alone deals with all of the angst that policymakers have had in recent years and trying to figure out how they should deal with electric vehicles. And in particular, the impact that electric vehicles are having on fuel excise collections, because you just say there is a road user charge. It might include a congestion charge. It’s paid by all vehicles, whether they’re petrol, diesel or electric. But of course, there’s also this fossil fuel charge that is paid only by those that are petrol or diesel. And that provides the tax benefit for electric vehicles. And problem solved and had comprehensive road user charging been introduced 15 years ago, we wouldn’t have had any of this kerfuffle that we’ve had in every state now in trying to figure out how to restructure charging for access to the road network, given the presence of electric vehicles… anyway, but that’s a by the by, but it would have significant implications for where people choose to live. And by the way, that might allow Governments to think about the approach they take to developer charges in new property subdivisions because what they’re trying to do – and it’s having an impact on costs and driving property to levels that make it really unaffordable for young people – but what they’re trying to do is at least in part, recover the costs of the infrastructure that they are having to provide. There are other ways of charging for that infrastructure and you don’t have to do it through developer charges. But anyway.
Richard: No, well, thank you for that. Look, I know we are running a bit short of time and my final question, which you’ve actually really answered is in terms of some of the recommendations or next steps for Federal and State Governments in terms of some of the things that they potentially should think about. I think your idea of looking further at what Scandinavia is doing as it applies to some of the taxing or taxation of income is very interesting. Certainly I’ll be looking into it. Just the final point before we close out is what final advice, I suppose, do you have for the Government as a 2025 given we’ve come out of the pandemic, given the State of the Federal and various State budgets. Obviously you’ve said for a while now that some of those reforms should have been adopted 15 years ago. Is your view still the same? Or I suppose my real question is what advice do you have the Government’s and now in terms of what needs to be done and how it potentially could be done?
Dr Henry: I think the second part of your question is actually the more important.
Richard: Okay.
Dr Henry: I really think the process is important here. I think there is a fair amount of understanding of what needs to be done. Now, of course, if you think about the politics of it or political positioning of the various parties here, there will be some who will say, spending is rising. Government spending is rising. That’s just a fact. We’ve been trying very hard to make sure that it doesn’t rise too quickly, but it is rising. And therefore revenue is going to have to rise. So that’s one view.
There’s another view which says we should not surrender on spending. We shouldn’t give up. You’re not trying hard enough and we should be doing more to cut spending and cut the increase in Government spending. And that means that we shouldn’t, we shouldn’t have in our minds that we necessarily have to raise revenue. Okay. So there are those two, two camps, but what they do agree on is that the tax system should be so efficient that if you do need to raise additional revenue, you can raise it from tax bases that do not damage economic activity. That’s where they agree. The problem is that although they agree on that, we don’t have a political process that allows for a Tax Reform package to be developed that both could reach agreement on. It’s the process that’s lacking. They might actually agree on the tax design principles quite quickly, quite readily, but there will always be the temptation without a solid process that has the buy-in of relevant parties, there will always be the temptation from one side to blow it up. Right. So it’s the process that’s needed. And I reckon, as I said earlier, the process therefore has to be Commonwealth State. State Governments are of various political complexions, right? They’re not all Labour State Governments. If you can get State Governments that are not Labour State Governments to be active participants in the federal reform process, you’ve got a chance of holding it together.
Richard: Gotcha. Fantastic. I know we’re almost out of time today. I wanted to thank you so much for coming on the show. You’re certainly a wealth of knowledge and no doubt there’s going to be a lot of people listening and certainly hope a lot of the Government clients that listen to this. You can obviously hear the experience that Dr. Henry has and certainly I genuinely feel we’re at a point now where a lot of these reforms do need to be pushed through, certainly as it applies to housing. But the more I learn about some of the other sectors of the economy, agrees actually in those sectors too.
Anyway, I’ll call it a close for today. Thank you very much for coming on Dr. Henry.
Dr Henry: Been a pleasure.
Richard: Thank you very much.
Hi everyone. I hope that you enjoyed that fantastic episode with Dr. Henry. I did let it run a little bit longer than I normally would just because I thought a lot of the information was just incredibly valuable. And it gives context to not just the housing market and the changes from a Tax Reform perspective that need to be made, but just more generally in terms of the Tax Reform for the wider economy or the wider Australia that do need to be made because whilst the housing market is an important component of the economy decisions do need to be made that are actually much broader and wider than just the housing market. In terms of the three takeouts that I’d like everyone to really go away with today, they are as follows.
The first one is, and I’ve said this a number of times and the research certainly shows it, Stamp Duty is being one of the most inefficient and anti-competitive and unfair taxes levied, not just on real property as Ken highlighted, but also on other asset classes. But as it applies to real property and particularly housing, I’m absolutely convinced that a much more fit for purpose way of raising revenue is to replace Stamp Duty with a broad-based annual land tax. And Ken, I thought very well articulated why that is, but particularly if Governments are relying on volumes of sales and transactions to actually generate Stamp Duty, that’s incredibly unreliable given that the property market is cyclical, as is the economy. And having a broad-based, much more standardised, more fair land tax system, I think is actually just a much more fit for purpose system.
The second point he made, and I actually certainly not thought of it, but that’s the whole point of getting people like himself on the show, is the fact that there’s likely going to be, or be the requirement for an arrangement, either a compact or a cooperative between the Commonwealth, State, and perhaps even Local Government, get everyone to buy in and to help each other out with this Tax Reform. Because certainly I do a lot of work for either Federal, State or Local Governments and often they do have their own policies, procedures that are not necessarily aligned with other levels of Government. So having them aligned I think is absolutely critical. And I’m convinced that there is a role for the Federal Government and then also the States to play. Because I must admit I’m a little bit sick and tired of all the finger pointing where basically they turn around and they say, oh, well, this is not our problem. We can’t actually handle this. It’s someone else’s responsibility. Having a single point of accountability, everyone rowing the boat in the right direction generally feels the way to go.
Finally, Ken made a comment about scare campaigns and particularly the mining scare campaign that came out. And I hadn’t thought of it as a bit of a blast from the past, but I do remember it and I’m not very close to mining, so I don’t know all the details, but I do remember reading the papers and just how it was very, very intense. And I’m already seeing the same sort of thing happen with scare campaigns in both New South Wales, particularly and then also in Victoria and people fear what they don’t know. And I’m not really convinced that the loudest voices in the room represents the wider community. And I don’t think it’s particularly fair if there are going to be very big scare campaigns that are already starting that are going to try and sway public opinion because people do fear what they don’t understand or what they don’t know. There’s a lot of misinformation going out there, unfortunately, is driven by the media. It’s not necessarily reflective of market reality. And I just think that that’s something that the Government and I suppose all of us as residents in Australia do need to be aware of. There will be these scare campaigns and by the very nature, they will scare us. They will alarm us and then we will have to resist the urge of going, well, we don’t want change because it’s scary when that’s not actually necessarily the case. And I suppose also then the challenge for Government is to be able to overcome the scare campaigns by having proper education sessions, hopefully using policy, sorry, data and evidence to inform their policies. And then we can have a mature, educated discussion about what needs to change and why, rather than having these scare campaigns that just will undermine very good and well-intentioned policies.
Anyway, that’s what I wanted to say for today. I hope you have a great day. Thanks very much.
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