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Key rules out land tax, CGT, RFRM, but still considering income tax cut and GST hike (Update 5)
By Bernard Hickey
Prime Minister John Key has announced in his opening speech to Parliament that a land tax, a Capital Gains Tax and a tax on equity in residential property investments would not be considered in the May 2010 budget and had been ruled out by the Government.
It was however looking at unspecified measures suggested by the Tax Working Group to tax property more to help pay for an unspecified reduction in the top personal tax rate.
(Updates with My view that Key exposed himself today as a timid follower, not a leader. Update 3 includes reaction link. Update 4 includes link to video of Key's tax comments. Update 5 includes link to full speech)
"Some of the options discussed by the Tax Working Group are not favoured by the Government, for a variety of reasons, and will not be progressed," Key said in speech notes prepared for the address and obtained under embargo by Interest.co.nz in Wellington.
"In particular, we will not be developing any proposals for a land tax, a comprehensive capital gains tax, or a risk-free return method (RFRM) for taxing residential investment properties," Key said.
However, Key said there was a hole in the tax system around investment in residential property that the government wanted to address and it would consider other options suggested by the Tax Working Group, although he did not identify specific preferred policies.
"The government does believe there is a gap in the current tax system around property investments where income is being derived but, in aggregate, no tax is being paid - in fact the government is actually losing revenue in this sector," he said.
"We will therefore be making changes to the way property is taxed, which will result in increased Government revenue and more fairness for the taxpayers. These changes will be announced in the budget."
Also, Key said the government was still considering an increase in the GST rate to no more than 15% with compensation.
"No decisions have yet been made about raising GST and Government has asked for more work to be done on this," Key said.
Justifications put forward
Key said a land tax appealed to economists as an efficient way to raise revenue. "However, a land tax is effectively a lump-sum tax on people who own land at the time the tax is introduced, would only fall on people who hold their wealth in one particular form, and would create cashflow problems for many landowners, especially those with lower incomes," Key said.
"An RFRM is another tax that, while having some conceptual appeal, would also create cashflow problems for taxpayers. A property owner could have a very sizeable tax bill each year under an RFRM, but little or no ability to pay it, except by putting up rents," he said.
"A comprehensive capital gains tax extends the tax net and is highly progressive. However in the government's view it would make the tax system more complex to administer and comply with, and may encourage taxpayers to hold on to assets simply to avoid tax."
"These new taxes are therefore off the table," he said.
Need for tax reform
Key however introduced his comments on ruling out changes by arguing there was a strong need for tax reform.
"The Government agrees with the Tax Working Group that New Zealand relies heavily on the taxes most harmful to growth, particularly corporate and personal income taxes; that there is a hole in the tax base around the taxation of property; that the tax system lacks integrity and fairness because of differences in the treatment of entities; and that there are significant risks to the sustainability of the tax base," Key said.
"We have a tax system that taxes Labour and investment income at relatively high rates, taxes consumption at a relatively low rate and generally gives money back to people when they invest in residential property," he said.
"Is it any wonder that our economy is tilted towards consumption and property investment, that we have a shortage of savings, and that a high proportion of graduates live overseas?," he said.
"Tinkering over recent years has made the tax system more complicated, led to poor incentives in the economy and created a raft of different ways for people to minimise their tax payments."
John Key has just sent Generations X and Y a clear message. Leave the country now.
He may as well have directed those younger taxpayers who are stupid/poor/unlucky enough not to own property to the websites for AirNZ, PacificBlue and Jetstar and suggested they buy one way tickets to Australia.
He had a chance to follow up all the talk of real reform to create a 'step change'.
He had all the experts under the sun from inside and outside of government telling him he needed to do something. He commissioned reports. He talked a good game. Today he did nothing. He did worse than nothing. He shut down the debate.
He decided not to challenge a generation of voters who are now rich because of the property boom and don't want to give it up.
He is cementing in place the biggest transfer of wealth between generations in New Zealand's history.
He is saying to a generation unlucky enough not to own property in 2002 that they can give up on the dream of family home ownership in the main cities unless they can pry the money out of their parents. He is saying to all those too poor to own a home now will never be able to own their own home. He is accepting the poverty and the hopelessness that often is attached to the working poor in rental accommodation. He is saying tough. My backers own property.
We won. You lost. Eat that.
He is saying I don't like the activity of investing in property to avoid paying taxes, but I'm not brave enough to challenge them or convince them what is in their best long term interests. He has finally shown his colours.
He is a mediocre leader without the vision or the ability to change New Zealand. He is a seat warmer who is too scared to scare the masses. He is saying he wants to get re-elected. How uninspiring. How pedestrian. He is saying he is a not a real leader. He is saying he will follow his followers.
What happens when the baby-boomers who voted him in start complaining about how they can't watch their grand kids grow up in New Zealand?
Who will deliver the tough message? Not John Key.