Ryan Greenaway-McGrevy on hi-tech services and manufacturing, making Auckland affordable, land taxes, paying teachers & how economics can improve your life

Today's Top 10 is a guest post from Ryan Greenaway-McGrevy, a senior lecturer at the University of Auckland. Prior to that he was a research economist in the Office of the Chief Statistician at the Bureau of Economic Analysis (BEA) in Washington DC.

As always, we welcome your additions in the comment stream below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

Five ideas from the OECD to improve economic growth

I do not envy the wonks who must figure out how to improve our economic performance. The OECD came out with our biannual report card in June, full of ideas to lift our economic performance. 

There is much food for thought in the document. In the five points below I give my take on some of their key recommendations. 

1. The high-skilled service sector is growing. Let’s do more to help firms exporting hi-tech services and manufacturing. 

The OECD report notes that employment in the skilled sectors has been growing. What it doesn’t say is that many of our hi-tech firms are exporting their services to the globe. 

In fact, our service sector has been a quiet little earner for the country. Whereas the balance of trade on goods tends to fluctuate over time, since the late nineties our balance of trade in services has been consistently in the black. Policymakers should be looking at how they can do more to support and nurture the firms exporting their services to the world. 

Yes, our economy is built on the back of commodities. But is exporting more dairy the way forward? 

First, commodity prices are buffeted around by the whims of international markets. Second, commodities are low-value added: Witness Fonterra’s push to add value into their production chain. 

But perhaps the biggest problem with commodities of all is the lack of prospects for improvements in productivity. Economic growth is about doing more with less. And although there are labour-saving agricultural technologies out there, I do not see us catching up with the rest of the OECD by milking cows more efficiently. 

Services and hi-tech manufacturing, on the other hand, offer high value added and a more than a sniff of market power to influence prices. Take a look at Vista and Compac – both dominant in their global market segments. They have competitors, but their product is sufficiently unique – meaning that they need not compete on price alone. Moreover, hi-tech is the very definition of productivity. 

These firms exemplify and make use of our national strengths: We are a highly-educated, English-speaking nation, and our workers costs less than the average American, Briton or Canadian to employ. And while distance still matters a lot, the internet has reduced the tyranny of distance substantially compared to thirty years ago. This makes us ideally poised to put together a service export sector. 

We need a blueprint to wean our economy off volatile, low-value-added commodities, and export more high-value-added, high-tech services. 

I could speculate as to what these firms need to expand and grow. But I would rather hear it from the horse’s mouth: So why not have our policymakers sit down and listen to the CEOs of our most successful little exporters to see what they could do to help them do better? Some kind of forum or working group, perhaps?

2. Make Auckland affordable again. 

The report also points out that house prices are ridiculous compared to incomes – particularly in Auckland. But you knew that already. 

It’s hard to understate that importance of restoring affordability to Auckland. Cities exist for a reason; they are incredibly productive places. They are the engine room of the modern economy – the great metropolises are where we find the hi-tech firms in operating in the STEM, IT and creative fields. In the US, for example, just twenty-four metropolitan areas account for half of gross domestic product. 

But high property prices and restrictive land use regulation are a sure-fire way to restrict growth. And although there is peer-reviewed paper after peer-reviewed paper to back up that claim, it is not rocket science: High house prices discourage people from moving to the big city, and firms consequently find it hard to fill new roles as they try to expand. Firms can also lose employees as the younger generations out-migrate in search of a home at a reasonable price. 

Moreover, the benefits to agglomeration in cities dwarf any other policy you have seen our politicians try to sell. US researchers reckon that US GDP would be ten percent higher if it weren’t for restrictive land use regulations.

Put simply, our politicians must declare a war on house prices in Auckland. Do what it takes to make Auckland affordable again. As I have previously argued, this does not necessarily mean that all property investors have to lose. But if push comes to shove, our politicians must favour first-time home buyers over investors, and bring house prices down. 

Unfortunately, they have left it so long to recognise the problem that correcting that mistake will entail short-term economic pain. That is the price we will pay for trying to foster economic growth on the back of inflated asset prices.

3. Teach computer programming. 

The OECD reckons that the robots are coming to take our jobs. Well some of them, at least. (Although there is no real consensus as to how many jobs are in danger of being replaced). It is better to have a job designing and programming the robots than to risk having your job taken by one. 

Regardless of whether the robots are arriving any time soon, technology and data science are here to stay. Some of the best jobs out there – and the ones that need filling here in NZ – are in IT. Put programming on the curriculum.

In fact, motivated by the need for more digital skills in the workplace, Canada has done just that. In kindergartens.

4. Pay teachers more. 

It’s no good asking for computer coding and the other skills we need – like science and maths – to be taught in schools if there is no one willing and capable to teach it. And those proficient in these fields are probably going to earn much more in the private sector. 

That means we need to pay our teachers more – particularly those whose skills are in short supply. Take the example of Finland, where teaching is a highly-respected profession. No wonder they do so well when it comes to education. 

Unfortunately, the public education system looks to be headed in the wrong direction. It is not just Auckland that faces a shortage of teachers. Meanwhile Auckland kindergartens appear in danger of becoming daycare centres. Education matters. We should not be undermining it.

5. Land tax. 

In past surveys, the OECD has called for a land or capital gains tax “to facilitate a more efficient and equitable tax structure.” Our own economists have been beating the drum for a land tax for a while now. In fact, the Victoria University Tax working group proposed a land tax as part of a lowering and broadening the tax base back in 2010. And after commissioning the study, the government promptly ignored it. I guess it did not support what they had already decided to do. 

The problem with taxes is that they create tax avoidance. But a land tax is harder to avoid than other taxes on other forms of capital: You cannot hide that lakefront property in your Swiss bank account. And, in contrast to taxes on other capital, a tax on land does not discourage the creation of more land: the supply of land is more or less fixed. Structured properly, a land tax also encourages suburban development and discourages land banking.  

In other words, compared to other taxes, a land tax comes with fewer distortions, and may incentivise development by punishing land banking. 

A land tax would also hit the pockets of the global elite that are buying up our country for their own bolthole or lavish holiday pad. Our nation’s natural beauty and stable political system clearly appeals, so if we are going to continue to sell our prime real estate to the top one percent of the global one percent, then let’s at least have them spend some of that wealth contributing to our country and supporting the stable political institutions that they benefit from. A land tax would achieve that. 

Final point: it would be vital to have a land tax be offset by tax relief elsewhere – on income and GST, for example – in order to keep the policy change tax revenue neutral overall.

Ok, that’s enough about the economy. Here are five ways economics can improve your life. (Yes, I am being serious!)

1. Know your constraints. Then optimise.

Most economics majors carry the scars of having to learn constrained optimization to this day. Like soldiers returned from some far-off war, the shared pain of completing a course in microeconomic theory creates an unspoken bond. 

We don’t like to talk about it much. 

But as in any struggle, we emerge on the other side stronger. And there is a deeper lesson behind having to optimise subject to constraints: We have things we want, but we cannot have it all. 

Realizing that helps put things in perspective. 

And I am not just talking about material wants. Perhaps you also desire experiences – that counts as a want too. Cast in this light, we all have wants. (Unless you happen to be a practicing ascetic. And I don’t mean a yoga-practising, mindful yuppie. I mean full-on Buddhist Monk on a mountain top living directly off the energy of the sun.) 

Sure, that new-fangled iPhone 7 looks pretty fancy, and it can take seven-hundred megapixel photos at ten times atmospheric pressure, but is it really worth putting it on hire-purchase, and forgoing that life-changing trip to South America you’ve been planning on? It’s either one or the other kiddo. Choose one.

2. Time is the most binding constraint. 

Of course, there is a big difference between what Bill Gates can afford and what most of us can afford. But when it comes to minutes in a day – well, Bill has no more than you or me. 

We should use those minutes wisely – and stop spending time on what does not matter. 

Economist couple Emi Nakamura and John Steinson take this seriously - they even pay someone to troll through their multitudes of digital family photos to choose the best ones. I am not saying you should take things that far, but the point is that they chose not to spend their time on the chores of life, and instead use the time saved on what they enjoy. Moreover, they are willing and able to explicitly pay for that saved time. 

We all know people who seem so rushed and over-committed that they do not seem to even have the time to enjoy their pursuits. (And at the other end of the scale there are those who choose to fritter away their precious minutes on TV and games.) 

3. Death is the final constraint.  

Sorry to be a downer, but here it goes: You are going to die. Hopefully not today, nor the day after. But that day is coming. 

As Tyler Durden says: This is your life. And it is ending one second at a time. Confronting that truth helps put things in perspective. It’s time to get to work on all those things you want to do with your time on this mortal coil…

4. All models are wrong. But some are useful. 

Nobel (memorial) laureate Milton Friedman once said: 

Truly important and significant hypotheses will be found to have "assumptions" that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense).

Personally, I prefer George Box’s take on the issue: 

All models are wrong. But some are useful. 

Professor Box was, notably, a statistician, not an economist. But it is not just statisticians and economists that rely on wrong models. We all do it. 

Consider buying a house, for example. How many times have you been told that house prices only go up? That is a simple model – and a lot of people how found that model to be very useful (read: profitable). 

But it is a model that is necessarily wrong. Prices do go down – and it is only financial prudent to make sure that one is prepared for a downturn. 

5. Correlation is not causation. 

If you remember one thing from taking a course in statistics or econometrics, it should be this one valuable lesson!

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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82 Comments

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5. Land Tax

I keep asking myself why Gareth Morgan's TOP party didn't just go with this extremely simple, straight-forward tax, as opposed to the convoluted capital tax they have proposed.

There has to be a reason and I can't imagine that it is evidence-based (as I've seen no evidence agruing why a land tax would be less efficient as taxes go). It would be great if some reporter would ask him for a straight answer. Or maybe someone here has been to one of his road shows where the question was put?

Isn't it called rates?

No, the only component of rates that involve a tax on land are the General Rate - and most council's calculate that based on a Capital Value (not land value) basis. A capital value basis largely favours the wealthy inner city suburbs (in other words it is a less progressive tax, than a land value-based rating system). Were land value rating used to calculate the General Rate in AKL, then CBD suburbs and beachfront locations would pay a much higher rate, and the folks in Mangere a much lower one.

But, that said, only a minor proportion of your overall rates relate to a tax on land value (i.e., a General Rate). The vast majority of your rates charges are fixed/targeted charges for specific services delivered or a UAGC - which is a fixed rate per rateable unit, regardless of the capital value of that rateable unit.

In short, rates are far, far from a land value tax.

Most people think of them as a land tax simple because they are unavoidable, in other words, there is no way to employ tax minimisation strategies - which is also the eloquence/efficiency of a land tax.

In Auckland the UAGC is only $400, the rest is related to the value of your property.
You are correct that in Auckland they use capital value not land value (although I think that is up to the council to decide), but obviously land value makes up a huge proportion of a property's value.

(Edit :JimboJones beat me to it )
"
The vast majority of your rates charges are fixed/targeted charges for specific services delivered or a UAGC - which is a fixed rate per rateable unit, regardless of the capital value of that rateable unit.
"
Entirely false , for Auckland at least. The current uniform charge is just over $400 - which is less than 25% of average rates in Auckland Central. Not so hard to check the basics like this - perhaps your arguments would gain in strength if you actually based them on facts.

I haven't looked at how they break down in AKL - but surely for example, sewage, stormwater and water services (the bulk of what you are paying for) are not charged under the General Rate - rather they are separate fixed charges per rateable unit?

Here in Palmy, the General Rate (which is based on land value, not capital value) makes up less than one third of my overall rates charges - the rest are various charges based directly on the services I receive. Surely AKL Council isn't THAT far behind the times?????????

There is no rule about how rates are split up except that UAGC's can't be more than some percentage of total rates.

Councils like and use targeted rates because they provide a little transparency about where the rates go but also because not everyone has to pay some of the targeted rates. E.g. rural dwellings that do their own sewage disposal don't pay a sewer rate. Just note that targeted rates are still usually calculated using CV/LV just like the general rate.

Also remember that in some places you pay a water charge not a rate especially in AKL.

In general I wouldn't class rates based on LV as a land tax. But then I haven't found any agreement about exactly what a land tax is. If you are serious about a land tax it would have to be a form of wealth tax that was calculated on the basis of x% of assessed land value. And it would replace some existing taxes. That would provide some automatic stabilisers when land speculation kicks in but not be an onerous addition to the existing tax system.

Some people want others to pay more rates.

Especially share-owning people who missed the property bandwagon and endlessly post on here about the coming house price crash.

I am slowly coming around to the idea of a Land Tax. Providing it is a singular nationwide charge applied to a measurable area.i.e. $x per m2

Anything else like % of value, zoning based, geography based, etc.. is just asking for trouble.

https://en.wikipedia.org/wiki/Land_value_tax

Land value tax is the perfect implementation. The incentive effects are optimal this way.

$/m2 creates all sorts of distortions. Some land you'd have to pay to give away.

It might be a good idea.
The main problem is the need to constantly get valuations on land. And what those valuations include (e.g. is a section that is not sub dividable without demolishing the house on it worth less than a section that is easily sub dividable?).
Also you can be incredibly rich and not own much or any land, so it isn't necessarily that fair...

We already do land valuations for rating purposes here:
https://beta.aucklandcouncil.govt.nz/property-rates-valuations/Pages/fin...
You're entitled to appeal and second opinions.

It isn't a tax designed specifically to punish being rich. It's designed to optimise efficient use of land and benefit all citizens from the most important natural resource of our nation, and compensate us for allowing exclusive private control of our land by moneyed interests. Especially in an age where more and more of our land is foreign owned, a land tax is becoming increasingly important, so that our land rights aren't used against us.

We already have a form of land tax - rates. If you are a land owner, you will get a rates bill which will be largely proportionate to the value of your land. What you are saying is that is not currently enough to encourage efficient use of land. But how much would? Double? Triple? If people were paying say $10,000 in land tax on an average Auckland section, I think there would be a much bigger need to have accurate valuations.
If the government takes in huge amounts of money through land tax, it will need to compensate through reductions to income tax. But that would mean a large burden of tax will fall on land owners, a lot of which are average people on average salaries. Someone who is very wealthy but doesn't own much land will pay less tax than they do now.
And a lot of the overall tax take will end up coming out of Auckland. Is this fair? Should Auckland get better services than the rest of the country to make up for it?
So its not really a perfect tax by any means.

Currently Auckland ratepayers pay about half what everyone else in the country pays as a % of their property values. This is a big part of the reason why property prices are so high here. No money for infrastructure, all sorts of development charges instead, and less burden on landholders. I think doubling rates, and making them a % of the unimproved land values only would be a good start. I think 1-2% of land values would be ideal. I would also be happy if rates were 1% LVT and then central govt also had a 1% LVT.

That's true, I did those comparisons recently - compared like-for-like capital values in Welly, Palmy, Kapiti and AKL.

AKL (even for like values) paid quite a bit lower rates than Welly. And yes, as a %age of CV, it does appear that AKL is cheaper than the lot (bearing i mind both Kapiti and Palmy are land value rated for the General Rate) and I was comparing CVs of $1.5-2.0m in each of the four council areas.

Looking at my rates bill it appears that the general rate in Auckland is 0.2597% of capital value. So there is already effectively a $2597 land tax on a million dollar piece of land.

That's, Peanuts!!!!!!! Think what you pay in income tax as a comparison! Don't forget, we are talking about land value tax as a substitute for PAYE and GST - which are presently the bulk of how central government funds everything it does. Individual homeowners are absolute MINNOWS when it comes to the nation's land!!!!!!!!! But you carry on paying PAYE and GST without complaint. The whole point is, if land tax came in to offset PAYE and GST - the REALLY wealthy in New Zealand would REALLY pay the bulk of central government tax.

And believe you me, individual homeowners are NOT the really wealthy here in NZ. Ngai Tahu is the really wealthy; Fletchers are the really wealthy; Gareth Morgan is the really wealthy. Corporate/Queen Street farming conglomerates are really wealthy. Overseas land owners and corporate landowning interests offshore are the REALLY, REALLY wealthy in NZ.

You are deluded if you think just because you own an 800m2, $1m dollar + section in Auckland that you would somehow come off paying more tax if central government implemented land tax as their main source of income.

Jimbo, you're being absolutely suckered presently. Can't see the forest through the trees. You're one of the poor guys - the proletariat - the other-than-pigs in Orwell's Animal Farm. You're not wealthy, but you're paying the bulk of tax to keep this nation afloat at the moment.

No one, not ONE person blogging on interest.co.nz is wealthy. Gareth Morgan is wealthy - and he DOESN'T support a land value tax.

Ask yourself why (well, that's my point, I'm wondering why!)?

and as we see time and time again at actual sales. The Valuations are complete junk. Either too high or too low.

Keep it simple. $ per m

You couldn't have a single price per m2! The owner of a bit of unusable bush shouldn't pay more tax than the owner of a large building in Auckland city!

That's the whole point though. A m2 charge encourages land to be used more effectively, or released.

- Don't want to pay for that back paddock you never use, then sell it to someone who will use it.

- Don't want to pay for 500m2 with only one house, then build terraced housing, or low level apartments. Intensify, rather than add to the urban sprawl.

- Don't want to pay for that lifestyle block that you never got around to using then sell up.

- Got unusable land, Whack a QEII covenent on it then gift it to DOC, Govt, or the local council to regenerate some native bush.

Creating complexity creates loopholes. Loopholes get exploited. Keep it Simple.

But the charge would need to be extremely small, otherwise almost all land not used for housing would not be worth owning (including farms). If the charge is extremely small, it won't encourage people to subdivide, etc.

Not too small. Most farmers pay very little if any income tax. So why shouldn't they pay a fair share.

Might also help us get some tax out of those pesky corporates with large premises/property portfolios.

You're onto it, Noncents.

Sorry I cannot see it happening any time soon

Um you can't gift a QEII covenant once it is registered - it belongs to the QEII Trust and they only accept land that has some inherent environmental value. Currently QEII Trust has more requests for covenant registrations than they can fund. Feel free to make a substantial donation to them to allow them to have the resources to register more covenants. ;-)

If they are unable to cope with the workload - they need government money to fund them - not donations.

But the government doesn't really want all that much land locked into conservation covenants, does it?

What would we have left to sell to overseas buyers then?

I wondered that too Kate. There are a lot of potential implementation issues. I asked him some questions about those with negative equity, marking difficult to value assets to market and those who hide their wealth overseas. I don't think he has thought these through fully but I do agree that his proposal is a fairer form of taxation.

Because it doesn't target the core of what the problem is in our system. Why target land per se, it sounds punitive in of itself without reason? All TOP's tax policy is closing the loophole generated by imputed rent not being accounted for. If you buy a house and rent elsewhere, you're paying the tax on the rental gains. If you're buying property (or even just shares) through ETFs or in your Kiwisaver, you'll similarly get taxed. But more specifically, we have a fair dividend rate for equities of 5%. We assert that your (normally foreign) equities are making a minimal return on investment and tax on this baseline percentage. If it earns more than this in dividends or capital gains, well it doesn't matter, the goal is to have a straightforward tax. We just don't have that on owner-occupied property and all it is doing is closing a loophole. It just asserts that property is a productive asset, which it is, making us consistent and is easily measurable.

Further on land taxes. Here's the most concise explanation on how they actually have the effect of reducing rents and improving productivity that I've seen so far:
https://www.reddit.com/r/newzealand/comments/6b6qy5/landlords_threaten_r...

And here's Milton Friedman on land tax:
https://www.youtube.com/watch?v=yS7Jb58hcsc

Exactly. Which is why TOP's claim to evidence-based policy just doesn't quite ring true on this issue. Anyway, I've asked the question in two different places on their website. In one place, they sort of indirectly address the question by including land tax in a list of 'one-off' type taxes (like capital gains and inheritance tax) - but of course that is a HUGE misrepresentation by them to stick it in that list as a means to discredit it. Something very odd about this with them.

I think TOP may have chosen policy based on what they think will be more popular rather than what is actually the right solution. They need to look at it from a political perspective, not just an economics perspective. Milton Friedman brushes on why land taxes are unpopular in that video that I linked.

I've asked Gareth Morgan about Land Taxes on reddit before. He won't respond to it. Could be politically damaging. There's a lot of powerful vested interests that can destroy you that own a lot of land in this country.

He won't respond to it.

Well that just totally does them in for me, then.

It actually would be much more popular - particularly if differentials were proposed (say for unimproved residentially zoned land, and unproductive, loss-making rural land).

This makes me think what they actually want to do is take a greater share (a greater proportion) of the tax from OAPs who only have the family home as an asset.

You should hear ZB Marcus Lush's assessment of Gareth Morgan and TOP

Gareth's stance is, he is the smartest guy in the room and tolerates no opposition

He talks down to you

To be fair he does have a PhD in Economics, so chances are in any given room he kind of is an authority.

I really hope we don't get caught by the same pitfalls as the US with regard to anti-intellectualism: "There is a cult of ignorance in the United States, and there always has been. The strain of anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured by the false notion that democracy means that "my ignorance is just as good as your knowledge."

Well said, Ocelot.

Unfortunately it is the case in NZ, too.
We should never give full respect on paper qualification only; having a PhD doesn't make you right. It does however give you substantially more knowledge than the vast majority of others on the subject matter. Unfortunately though, this always gives way to the Dunning-Kruger effect.

A few years ago when Gareth was touting the Big Kahuna here on interest.co.nz it emerged there was a serious flaw that went to the heart of it. I posted a question on how he would address that flaw and he has never replied, and never addressed it, and it still exists to this day. He doesn't call it the big kahuna any more

Fair enough.
Structural issues always need to be addressed.

Interestingly, RGM mentions above time as being the most binding constraint.
I'm not pretending to know the reason but perhaps this was the issue in that case..

Yes, I bought the book as soon as it was published - and mainly loved it (the Big Kahuna) because all the punitive aspects of welfare (i.e., having to deal with WINZ and the horrid abatement regime they employ) would be gone - wiped out - no more WINZ - what a wonderful society that would be, I thought!!!! People could live their own bloody lives without the government in them!!!!!!

Hence, it was the UBI that sold me on it - and I really didn't care how much more tax I might have to pay under the regime, if WFF, Accommodation Supplements and welfare abatements were no longer a part of our society - I was in boots and all..

Then TOP was launched - and all we got was the tax side of it! Eventually they have come out with some forms of UBIs, but just not the Big Kahuna. Which made me suspicious. Was the tax proposal more important than the welfare reform one? And it somehow seems to be the case.

You are both over selling the actual knowledge in a specific discipline that accumulates/comes with a PhD. And that knowledge is out-of-date as soon as you publish the book and put the funny hat on.

Continuous reading is the key - it's a real shame that academic libraries are not open access and free for all at least to be able to read everything that is available through them online.

Largely agree - although even if he is the smartest guy in the room he should always be open to hearing other people's ideas

Gareth Morgan talks down. Yes. I had my Kiwisaver with Morgans when Gareth was still there. I moved it. I had been reading about Ponzi's and in particular the real Mr Ponzi himself. The thread was these characters had an interesting different view on just about everything (Gareth ?) and those ideas seemed attractive (Gareth ?) and they needed to promote those (Gareth ?)
Thing was those characteristics gave them no boundary on what they could do. They were always right. Not the sort of character you want to run your country.
I'd prefer to vote for somebody who was a little more worried about his opinions. Having politicians who are scared of us voters is a good thing.

Yeah but your are focusing on personality - he has stated all along that he is about policy. Thats why we end up with bad policy time and time again...because we vote personality.

Back to the policy issues please youre not on Love Island you know?

Yep Rastus. Focusing on personality in that comment. But you can't neglect it in politics. When faced with that difficult choice around who to vote, I don't believe it would be good to just line up the policy statements and ignore who wrote them.
As for GM - do you really believe he is all about policy alone ? Really believe that ?

I think he genuinely found it unfair that when he was made rich he wasn't required to pay any tax. I think that is probably a much better reason to enter politics than most have (except say people who genuinely want to eliminate poverty or save the planet or whatever)

After reading this thread I went onto the TOP website to check it out. The site is full of vague, half explanations for their policies. Then you get down to the commentary section where there are heaps of questions, unanswered, most voicing more than a little skepticism about the policy or at least their understand of it.

Once you understand the ideas, it's actually quite straightforward. The problem is few people have the context necessary. I have yet to see any media pundit who has correctly understood it (and yet some of the least informed TOP audience members appear to). Media is supposed to help explain to laymen, but they haven't really done their job. Other politicians seem to understand it even less. At this point TOP probably thinks it's too difficult to explain to everyone and has decided to simply reframe it as 'more tax on housing, less tax on incomes, no change in outcome for 80%' which I don't really blame them. But they do need a good clean example, because what they're talking about is nothing like bank savings accounts they have been comparing it to previously.

"This makes me think what they actually want to do is take a greater share (a greater proportion) of the tax from OAPs who only have the family home as an asset".

A fair assessment I think - and this is there the real unfairness of TOP tax plan is .
For many of us ( myself included ) the house we live in represents accumulated savings , paid for by after-income-tax dollars. The increase in market value really is pretty irrelevant - I am not moving anywhere.
Why should my tax bill be twice as high now compared to 8 years ago ? My house has not changed and neither has the level of amenity I derive from it .
Hard to see TOP plans for anything else than thinly disguised gradual property confiscation , specifically directed at OAPs.

Does TOPs imputed rent policy imply a tax on the whole value of a property or only the value net of debt? If the former, the imputed rent doesn't recognise the net economic benefit you get from occupation and ownership if the property ie it's net of the financing cost. But if it's the latter, doesn't that just encourage the use of leverage to miniseries imputed rent and thus tax?

It seems to be the latter. Again, won't people see that as an incentive to increase leverage? Which wouldnt be that helpful?

The same incentives exist for shares. With the imputed rent now calculated, the two are now equally productive investments (where they were not before). Which is a target of his policy. He wants more people to invest in productive parts of the economy. It's not meant to be punitive, it's meant to be fair. Furthermore, the fact that the investment needs a minimum rate of return to stay positive dis-incentivizes non-productive assets and poor uses of capital as it should.

I guess building new houses is considered unproductive by some. Mr Morgan's party can be the build less houses party!

Once you've moderated capital gains and normalized prices, does an empty plot of land or a dwelling on top have a greater return on capital? I don't understand how your logic follows. Likewise the comment above mentions how leveraging (to gain the necessary capital to develop) is relatively incentivized compared to previously as the costs of borrowing directly combats any additional taxes that you are required to pay.

Once property is developed and the debts are recouped, investors have the incentive to get out as soon as possible and work on the next plots of land. Or those that continue as landlords are only paying the same amount of tax they currently pay, because that's how it works. How any of this would affect freeing up of new land and other land restrictions, who knows.

Excellent explanation.

And certainly reflects NZ's historical experience of breaking up land banks and getting land into the hands of everyday Kiwis.

(Not that you'd get that impression from all the "did it all on my own two feet" claims that don't acknowledge NZ's history, and help received from society.)

As I understand it, land tax would doubly tax landlords who are renting elsewhere. It's not solving any inequality problems, it's just another bandaid fix as far as I can tell. Assuming reasonably effective markets, the pendulum is only going to swing in the opposite direction to stock markets, which might be better, but it's a particular demonization of property I don't think is fair or necessary.

Best piece ever. He gets it.
Pity 99.9% of the population and politicians don't

One of the advantages of taxing imputed rent (i.e. TOP's policy) as opposed to a land tax is that it is attempting to treat all income the same or at least tax all income. A land tax is an additional tax where as taxing imputing rent is taxing income. It might seem as splitting hairs but I think it is more in keeping with our tax theory rather than imposing an additional tax that taxes an asset.

But, taxing income (from their perspective) is not preferred when you think on the fact that their tax ;'switch', so to speak relates to lowering of income tax. So, yes, perhaps they want to redistribute a greater breadth of 'income' - as opposed to tax assets/wealth. That's kind of the way I read it.

Yes, I think there intention is to broaden the tax base which normally is seen as a good thing.

The tax base is not broadening in a sense. This is literally a loophole. We have a minimum baseline return for equities and bonds which our Kiwisavers pay in PIE funds. This is the fair dividend rate, and so we make the a priori assumption of a 5% return on which we apply tax (if there is only capital gains and no dividend, this actually captures part of it while being simple). Properties in said PIE funds also pay this rate, so why don't owner occupiers? Why do landlords who rent also pay taxes on their rental incomes?

A common question on the TOP website is "where is the cash going to come from to pay imputed rent tax" and it's a good question.

From an IOU to the IRD, payable on death

What about a FTT on all Bank deposits eh? Much more simple than all the above.

In terms of constraints and optimisation it's a matter of perspective. When you configure a series of functions or equations for linear programming, etc, the system is created entirely from your perspective of the universe. It's possible to approach this optimisation problem from the perspective of consumerism being a burden. If you cut away the clutter and junk you can really push some of those other variables to extremes. Remember that all these assets are a burden and an expense.

1. a friend and I are starting a website and from what I can see there are zero govn initiatives to help fund, staff or advise startups like ours.

Everyone knows high house prices are strangling Auckland's lifeblood.
Vested interests prohibit Government politicians addressing the problem. In fact our politicians want prices to increase to give us property owners and investors a " feel good" experience at the expense of the less fortunate. Gullible NZers will then vote for them!! After 9 years they could have sorted housing out but they chose not to.
House prices must come down but first home buyers who have borrowed the maximum and paid top dollar for their houses will end up owing the bank more than their houses are worth. They could in fact be "wiped out" if they have to sell.

Re: teaching. I have been posting for years on websites as to how we are on the edge of a teachi ng crisis, to a significant extent caused by the housing. Nz's lack of foresight is coming home to roost, once again

Teachers definitely deserve to be paid more (a lot more) but unfortunately their 1950's era unions and the award rates are an albatross around their necks.
Teachers will never get the respect and pay they deserve until they can negotiate individually. Just look at how much people get paid in the IT industry (the new blue collars) and not a union in sight.

At the very least they need to be paid according to their location. $70k is a very good salary in Invercargill, not so great in Auckland or Queenstown

The problem comes back to measurement. Will you pay someone in a lower decile school lower because on average their students are not achieving as highly as those in a high decile school? Or will you do it the other way around - pay more for teachers who take on low decile schools?

It's tricky, especially when so much depends on factors other than the teacher. Including the parents.

This is why we need school vouchers or alike system that would allow a proper job market for teachers to develop. I agree teachers need to be paid more - but not all teachers , uniformly , regardless of their talents and efforts they put in. Unfortunately the unions will never let this happen.

If you want the best education system look no further than Finland.

Well they deserve to be paid more, and what's more we will soon have a drastic shortage of teachers unless they are paid more.
Alongside paying them more we also need more affordable housing options - provided by government.

As I see it the problem with taxing land either directly or by imputed rent is that it drastically changes the rules toward the end of the game. Houses for many are bought to be lived in and enjoyed, with rises in value being largely irrelevant. They are paid for with tax payed income through other consumption choices being forgone. This tax will adversely affect older people who've made a series of prudent choices throughout life. The tax will be in addition to local body rates and cannot be mitigated through reduced income tax to a matching degree when people have stopped earning.
If the purpose of the tax is to redress the formation of speculative housing bubbles there are better ways to do it. Like capital gains tax, like the LVR and DTI tools (implemented before now), like an accurate foreign buyers registry and appropriate tax or ban on non citizen land purchases.

TOP as I recall, have said it will be progressively introduced so as to lessen the effect to those who have planned around it.

That looks like either satire or propaganda. Difficult to tell which...

Re #1 - high-tech services.

A teensy weensy bit of caution is needed here, we don't want to do what Sweden's just managed, and leak the entire EU secure intranet to the Russians.....https://www.privateinternetaccess.com/blog/2017/07/swedish-administratio...

It would be like allowing opaque foreign trusts to be domiciled here, transacting who knows what for who knows who.

Oh, wait.....

An old adage. Dates back to the nineties. "Never put anything sensitive on a public facing network."

With governments wanting back door access to encrypted services everything becomes a public facing network. There's no such thing as a secure back door - only security vulnerabilities to be exploited. Your banking, your private communications, your kids social profiles...when people like John Key say "if you've got nothing to hide you've got nothing to fear", most people don't realise that means a readiness to have all your private online information exposed to those who would misuse it.

Just how do you 'restore affordability to Auckland " when we build only 7,500 new houses and have 75,000 new faces arriving here each year ?

Build a slum ?

Affordability will occur when banks no longer lend stupid multiples of income to gormless investors. This is not about supply and demand for housing as accomodation.