Brian Fallow at the NZ Herald has a provocative piece this morning suggesting the tax working group should look at the idea of applying GST to mortgage payments and rents. The move, he said, would reduce the amount buyers would be willing to pay for a property and reduce the chances of another housing bubble. It may also keep away the need for rises in the Official Cash Rate which would hurt the tradeable sector. Fallow said that one way or the other, any overhaul of the tax system worth the effort would have to find a way to bring housing into the tax net, and that this could fund serious cuts elsewhere in the tax system.
What is so special about expenditure on housing that warrants exemption from a consumption tax? Other necessities like food, clothing and electricity attract GST. It would bring in a useful amount of money, enough to fund serious cuts elsewhere in the tax system, like the income tax scale.
Including principal, Stats NZ figures show the average household spends just over NZ$10,000 a year on mortgage payments or rents, Fallow said.
With nearly 1.6 million households, at the current GST rate and ignoring any second round effects, that would yield about $2 billion a year. That is also about what an increase in the GST rate to 15 per cent would yield and is reportedly enough to fund, for example, a cut in the top income tax rate to 30c in the dollar - an avowed goal of the Government.
All else being equal, like incomes and interest rates, you would expect the application of GST to mortgage payments and rents to reduce the amount buyers, whether owner occupiers or investors, are willing to pay for a property. It should reduce the chances of another housing bubble, or its diameter. That would be a good thing. In dollar terms the value of New Zealand's housing stock doubled between 2002 and 2007. Does that mean we are twice as wealthy as we were? No. Like other forms of inflation it creates losers as well as winners and encourages a misallocation of resources. And if timed right, the introduction of such a measure might spare the economy some official cash rate rises - and the collateral damage they do to the tradeable sector.
Your view? Ideas on how to change the tax system are flying in think and fast at the moment. How do you think this one stacks up? What effects would this have on the housing market if it were to be implemented? We welcome your comments and insights below.