Federal Treasurer Wayne Swan has responded to the Henry tax review by saying Labor would never reduce the existing concessions on negative gearing and capital gains tax.

The latest official estimates show house prices jumping by 20 per cent over the past year and critics say that reinforces the need to wind back tax breaks that inflate house prices.

Former New South Wales auditor-general Tony Harris says Mr Swan's response to the recommendation is the wrong attitude for lifting Australia into the next league.

"It doesn't do Australia any good to have a government which when they see these rational arguments from a very well experienced team, they give it three minutes' thought and then just ditch it," Mr Harris said.

Treasury Secretary Ken Henry's panel proposed an innovative solution: replacing a raft of investment tax breaks with one - a 40 per cent discount on your marginal tax rate.

It would have meant that low to middle-income earners would not pay tax on the interest they get from money in the bank.

Mr Harris says not only would that help the less well-off, it would benefit the economy.

"One of the things it does is help the banks reduce their reliance on foreign borrowings. The biggest problem Australia faces is the fact we've got $700 billion or $800 billion worth of net debt to overseas lenders," he said.

"Some of that would have been replaced by Australian lenders because the Australians would have found investing in bank deposits, bank bonds and the like significantly better."

The Henry plan would also have cut back the ability of high-income earners to avoid paying income tax by investing in loss-making property, while upping the bill on their capital gains a little.

And that, says Saul Eslake, formerly the chief economist at ANZ and now a fellow of the Grattan Institute at Melbourne University, is good policy.

"Broadly I thought these were sensible recommendations that addressed what has been glaring anomalies between the tax treatment of different forms of saving," he said.

"Anomalies that for the most part work to the advantage of higher-income earners and to the disadvantage of those lower down the income scale."

Mr Eslake says it is not surprising the Government rejected any change to negative gearing or capital gains tax concessions.

"I was disappointed, although I wouldn't have expected them to have taken up such controversial recommendations immediately before an election," he said.

"It was rather disappointing that they were put in the never-ever category rather than in the category of measures that might be on the agenda for a second term of the present government if it's re-elected later this year."

Disadvantaged

Housing commentator and the NSW general manager for property valuers Herron Todd White, Michael McNamara, says it makes sense to dilute the attractiveness of negative gearing.

"Negative gearing inevitably puts house prices up because what happens is you get investors competing with first homebuyers who are also being incited to enter the property market and those investors and first homebuyers compete with mums and dads in the very same property market," he said.

"This inevitably puts pressure on property prices, disadvantaging those people in the middle which are generally regarded as your mum and dad property owners."

Mr Swan said the Government rejected recommendations from the Henry review that did not fit with Labor values and philosophy.

Mr McNamara says subsidising the high-income earners who invest in property at the expense of low and middle-income families is a strange reflection on Labor values.

"Essentially what happens today is that taxpayers subsidise investors. We subsidise them when interest rates go up by the tune of their marginal tax rate, which might be as much as 48 cents in the dollar," Mr McNamara said.

"It's a regime that encourages investors to make losses which is inevitably picked up by the taxpayer."

Then taxpayers subsidise the capital gains.

Mr Harris says the rejection of the Henry review's recommendations on property taxes and other reforms smacks of political cowardice and ranks this Government one of the most timid and ineffective in modern times.

"I mean you contrast this with the Hawke/Keating government where they actually introduced capital gains tax and they did that knowing it might hurt a little but knowing that Australians would benefit in the long run," he said.

"I think this Government - well it's certainly got less courage than the Hawke/Keating. It's got less courage than the Howard/Costello government. It probably has even less courage than the Whitlam government.

"One wonders why they're in government if they're not going to do anything."