Days to the General Election: 26
See Party Policies here. Party Lists here.

In interest.co.nz's Election Series, KPMG's John Cantin asks whether we have our tax settings right as NZ battles the COVID-19 crisis and other 21st century challenges

In interest.co.nz's Election Series, KPMG's John Cantin asks whether we have our tax settings right as NZ battles the COVID-19 crisis and other 21st century challenges

By John Cantin*
(This article is part of Interest.co.nz's Election Series).

As a tax professional, I am occasionally asked what I would do as Minister of Revenue. I usually decline to answer as tax is just one part of the Government policy jigsaw. However, it’s a timely question, and with tax options likely to play a role in the COVID-19 fiscal response, it deserves an answer.

We have a good tax administration system due to the billion-dollar investment to make it fit-for-purpose. Inland Revenue and taxpayers operated successfully together throughout the lockdown because they were able to effectively engage electronically with each other. (You only need to Google how other revenue authorities have coped to confirm how good this has been).

And before COVID-19, Inland Revenue was starting to use this system to drive enforcement activity. It can collect and, importantly, match information from multiple sources, data which is also helpful for tax policy development and post-implementation review.

With this in mind, my thinking is first framed by two considerations:

We have time. It is increasingly likely that we will be cushioning the economic impact of COVID-19 for some time. Increasing taxes and introducing new taxes are likely to be counter-productive, meaning short-term tax changes should be focused on making sure the current system continues to work efficiently.

One lesson from COVID-19 is resilience relies on availability. A successful health response relies on PPE and ventilator stocks which normally won’t be used. Tax policy however, has tended to be done on an “in time” basis – when the decision is made to proceed, that is when the deeper thinking is done. The lesson for tax policy is that we should be prepared to invest in considering different options sooner. This does increase the cost of running the system but will mean that we are better prepared to respond. As an aside, the COVID tax response has shown that tax policy can move quickly albeit with trade-offs so that not everything can be done or done as well.

The next question is, where would I focus?

Tax thresholds are low hanging fruit. Income tax and GST are littered with them. Two questions. Do we still need them? If so, at what level? Commerciality should apply when setting thresholds with less focus on having a theoretically “pure” answer, particularly if there is little revenue impact. A good example is keeping the low-value asset write-off threshold at a minimum of $5,000 permanently.

The rest of my answer is less definitive. 

I think there are several questions to ask. That does not mean that something should be done. Often, stating why we aren’t doing something is as important as actually doing something. The answers may simply confirm the status quo.

My questions:

  • Are capital and labour really separate in New Zealand? A lot of economic literature says that capital and labour should be taxed differently. COVID-19 has highlighted that for many New Zealand businesses, in particular SMEs, the business is the owner’s labour with low capital inputs. If the two can’t be separated, does that make a difference to tax policy?
  • What is the real impact of tax on entrepreneurship? Bill Gates noted income tax rates were as high as 70% and capital gains taxes were 20% when Microsoft started, but this did not prevent its start up. However, tax is not just about rates. What is taxed, when, and how, is important. When New Zealand had personal tax rates of 66% in the 1970s and early 80s, there were myriad deductions and exemptions which meant the tax rate was not the effective tax rate. It is the combination of rates, timing and the base that is important.
  • What are the benefits and costs of combining Inland Revenue and Customs? The UK has a combined Revenue and Customs. GST in New Zealand is an obvious overlap where there may be synergies. However, each in New Zealand also has quite different roles (border security and social policy are notable differences).
  • How can high effective tax rates, when income tax and social policy measures are considered, be solved? If 33% tax is a disincentive, effective tax rates of 100% must be more so. However, this is a perennial problem with Working for Families (and other “in work” benefits), with no obvious solutions. Various tax reviews have had the issue scoped out of their brief. It can’t remain in the ‘too hard’ basket.
  • Where can tax play a role in whole of Government responses and policy? The Tax Working Group noted that tax may not be a solution, but it can support a policy. Two areas for a whole of Government focus include infrastructure and the environment. Are there specific tax rules which can help, or be removed because they hinder desirable outcomes?
  • Are tax incentives worth providing? The current Government has reintroduced R&D tax credits, a system set up so that the effect of the policy can be tested. Are there other incentives best delivered through the tax system? Inland Revenue’s new system should provide some flexibility as tax changes do not have to be programmed ‘forever’ and information to test the policy can be more readily gathered.

Finally, I would not rule out any tax changes. I appreciate this is a politically naive position. However, there are genuine tax policy questions that should be answered to properly inform good tax policy. The political question should be, is tax the right answer? If so, what is the right tax? 

Unfortunately, the political debate is too often focused on not “scaring the horses” and making promises. This leads to sterile debates on the promise made, rather than focusing on what is the right answer.


*John Cantin is a Tax Partner at KPMG.

KPMG’s Repairing Government Finances: Some taxing options? outlines several taxing options, and their pros and cons, as a possible response to the COVID-19 fiscal environment. The aim is to provoke thought and discussion about tax policy. 

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

27 Comments

Bringing back unloopholed land value tax is the obvious solution. The incentives are brilliant. It's a transfer away from interest to banks due to reduced land values reducing borrowing and to government revenue instead.

Accountants aren't usually keen on it because it's so simple to implement and police.

Here's a list of benefits of LVT.
https://www.taxjustice.net/cms/upload/pdf/gen_ben_f_land_tax.pdf

It's not as simple as you think. What happens when the government has a financial incentive to keep land values as high as possible? What does that mean for housing affordability? Land costs are already a huge portion of any house's cost in Auckland. What would this do for rents if every rental property had to give an additional percentage on top of yield? What relationship does a land tax do with the services that are available to service a piece of land if it were more intensely developed? Would you tax a quarter acre in Rodney at the same rate you taxed it at in Mt Eden?

What's the trade-off we're making for being taxed on simply being *on* the land as opposed to what we're using it for? How would the government (central or local) be held accountable if they continue with perverse planning policies that would suddenly be to their benefit financially to continue? How would this impact owner-occupiers who are facing a decline in real incomes, yet who are taxed on the inflation-component of their incomes? Why wouldn't the government just keep adding more people and driving up house prices to maximise its own revenue?

If they can implement a non-insignificant LVT and raise land prices then they can reverse gravity.

LVT is a percentage of land values.

You're taxed for exclusively monopolising your landholdings.

If you're holding a piece of land and you can't afford the tax, then you're not the optimal holder of that landholding. You sell it to someone who can be more productive and efficient with that piece of land. Remember, the land value will only be at a point where it's still worth owning the piece of land after the LVT has been levied against it.

The government isn't a business. The incentives for government are not the same. This frame of reference can be difficult for specialist businesspeople to understand. Another good reason why governments shouldn't be run by people who only understand business. Have a read of this HBR article on why a country is not a company.

https://hbr.org/1996/01/a-country-is-not-a-company

So a government is not a business, but should expect citizens to be the "the optimal holder" of land-holdings and have the power to tax them - presumably with the intention of being paid in the form of cash that has already been taxed as income? If a government is not a business then it cannot expect to treat its citizens as CGUs. I'm also curious to know what this means for government landholdings, or conservation land? Do we apply this level of desire for resource efficiency to social welfare? I can't see that being a vote-winner.

You also haven't addressed my point: in Auckland, land prices are the direct result of central and local government failure to allocate land efficiently through public planning processes and reform thereof. There's all sorts of agency issues with suddenly making continuing that a potential source of revenue for the government.

I'm not arguing a country should be run like a business - not sure I proposed that at any point - but if we are to significantly increase the tax burden simply for owning land then there is going to be flow-on costs for renters and owner-occupiers. So what is the trade-off that they are making, what is it in it for them? Otherwise you are simply adding costs onto households for.... what in return, exactly?

A government sets the rules of the marketplace and economy. Businesses and people participate within those rules. The role of the government is to implement rules that maximise wellbeing, of which productivity is an important component.

LVT would not be applied against government and conservation landholdings.

Yes we do apply desire for resource efficiency to social welfare, that's why people don't prosper on welfare, it's there to keep their heads above water. It's already tight enough. It's definitely time to apply efficiency pressure to the biggest beneficiaries of the NZ economy, the landholders.

A big part of the reason why there are overbearing restrictions on land usage in Auckland is because the people with influence, the wealthy landholders, have significant sway with the local government, and they are incentivised to restrict land usage which pushes up house prices and rents. In reality relaxing the rules around landholdings actually increases the utility of that land, increasing the productive potential which increases yield and subsequent land value. We noticed that land value in areas where the unitary plan increased potential utility of that land also increased the values. Also, with an LVT in place the incentives for the wealthy landholders would shift too, they'd be more determined to be productive with their landholding, which means they'd be providing pressure with governing bodies to allow increased utility of that land, instead of pressuring to restrict it.

The advantage for owner-occupiers are that they can buy and upgrade for significantly less money. The advantage for renters are that the supply of tenancy space will increase which pushes down rents. The advantage for everybody is that the government can shift the tax burden off economically destructive taxes like GST and income tax. The vast majority of people will be paying less tax. The biggest losers are the banks who have their mortgage books shrunk considerably with land values significantly lower.

Even Milton Friedman thought that the land tax was the optimal tax. https://www.youtube.com/watch?v=yS7Jb58hcsc

Here's a simple explanation for how land tax would have the effect of reducing rents.
https://np.reddit.com/r/newzealand/comments/6b6qy5/landlords_threaten_re...

Here's an excellent article that goes into our history with land taxes and the effects that they had in this very country.
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=115...

If your interest is still there in this topic, I'd highly recommend reading "Progress and Poverty" by Henry George.
http://www.henrygeorge.org/pdfs/PandP_Drake.pdf

The advantage for owner-occupiers are that they can buy and upgrade for significantly less money. The advantage for renters is that the supply of tenancy space will increase which pushes down rents. The advantage for everybody is that the government can shift the tax burden off economically destructive taxes like GST and income tax. The vast majority of people will be paying less tax. The biggest losers are the banks who have their mortgage books shrunk considerably with land values significantly lower.

Sounds good! Whether this simple' option is The Answer! might well be something worth putting to the test. But.....
No political party will come out with such as long as those vested interest you mention hold sway.
It's going to require 'legislation by stealth' ( something that wasn't campaigned on and comes out of left field), a la Lange, to get something like this through, and we know what happened to him!

"The biggest losers are the banks who have their mortgage books shrunk considerably with land values significantly lower." We currently have a banking sector which has repatriated tens of billions to Australia without much concern - is it realistic to think these losses or costs won't get pushed onto mortgage holders - many of whom are servicing massive mortgages due to land allocation failure from the the government who would then stand to benefit from taxing it? It's entirely foreseeable that (like with any tax) once everyone has used it as an excuse to up the ante, taxpayers and owner-occupiers could end up far worse off.

I am all for a move to transfer the tax burden away from earners and onto *something* but taxing land would face multiple, structural issues that go far beyond tax law and given we accept the sheer bastardy of taxing the inflation component of earnings, it's pretty easy to be cynical about how much real benefit would go back to taxpayers. The primary concern of any tax reform in this country has always been to move money from taxpayers to government coffers - see the TWG report and the dissenting report offered by the tax professionals as a contrast. Other outcomes are a distant concern.

The other issue is your development potential is always going to be constrained by the infrastructure that central and local government is prepared to fund. If we are going to accept that land should be developed in the most efficient way, then there is a moral and economic obligation from government actually fund and deliver the infrastructure to support it. This is not something that New Zealand governments have proven capable of doing - even in the case of super-leaders like Ardern or Key, who did not see any need to expend political capital to ensure the country could service the current population before adding new residents. So we could/are likely to end up with a situation where imported population pressure pushes the desirability of land higher and higher, but there is no infrastructure to support the development potential required to maintain an acceptable standard of living. Tax every section as if it could have a six story apartment block on it? Maybe, but what would happen if we actually stuck six story apartment blocks on every section we taxed on that basis? I cannot believe that governments would suddenly find the competency to allocate infrastructure and development funds in a way they have proven historically incapable and reluctant to do, even when it has been arguably in their own self-interest.

I agree you could work a land-tax into a system-wide reform of the tax code, it would be anything but 'simple' if we want to avoid numerous perverse and predictable outcomes.

Appreciate the response. Some good questions, I don't have any more time today, working and all. Will try to respond later.

From where I'm sitting it's one of those situations that are only too hard if you don't want to do it. Another quote it makes me think of “Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty… I have never in my life envied a human being who led an easy life. I have envied a great many people who led difficult lives and led them well.”- T Roosevelt

Ditto - should probably attempt to at least look productive, Monday aside. Thanks for the links above, will take a look when I get the chance later on!

So gran’s got to sell the house then?

LVT depends entirely on Valuation. And that's where the complexity lies. A hectare of rural land is $50K or thereabouts. So is a 600 squares urban plot worth $3K? Or the AKL average of $600K? Somewhere in between? Who values it, how often, under what regime to ensure some modicum of fairness, and are there carve-outs for Maori land (ToW), conservation land, riparian strips, steep country, polluted land (ex timber treatment etc), public utilities (three waters, roads, bridges, powerline easements)?

The statement that "it's so simple to implement and police" is risible. The statement, au contraire, that it's a gold-plated gravy train for valuers, lawyers, accountants, QS, and other consultants, is much closer to the mark.....

Land is already valued for rating purposes.

Wow waymad.. tell me where I can buy a hectare of rural land for 50K, I'll be in boots and all. I have 1.3 ha without reticulated council water and no wastewater or power connections and it's just been slapped with a QV value of 310K.

The article is well written but so inherently conservative.
We have been having these polite conversations for years.
Meanwhile, equality and the state of the environment have continued to slide.
Tax can be a meaningful tool to address these issues.

It's hard to have a mature conversation on such a crucial topic when those opposing taxes always argue that higher taxes would mean less disposable income for hardworking individuals and more 'wasteful' spending on welfare. This is despite the fact that in 2019, WEF placed NZ at number 7 in public sector efficiency (obviously councils weren't included in the metric).
Countries are always debating over size of the government as a proportion of national economy when we should be focused on more efficiency ,i.e, what multiple in long-term socioeconomic return does every tax dollar spent fetch the general public and how a tax change would improve the social investment landscape of the country?

How about taxing those who drain our economy and put hard working tax payers out of a home and knee deep in debt. Here's s very soft ripe target that can generate large amounts of revenue, in the region of $405,747,900 per year by simply taxing empty homes in our larger inner cities.

It's been a huge success in other cities like Vancouver who were the first to adopt this idea back in 2018. They property prices massively increased by Foreign Buyers, Speculative Investors and Money Launders. Vancouver managed to rake in $30 million from empty homes tax in first year and their number of empty homes has reduced by 14.6% since 2018, making them available for rent/sale.

Auckland has 39,393 unoccupied dwellings, that's fifteen times more vacant homes then Vancouver had before they introduced their Empty Homes Tax!! That money could be used to build new homes for residents.

So knowing that most of these empty homes are in the multi million bracket even if you taxed them at 1% year based on their 2017 CV (Council Value), they could generate an average yearly revenue of $405,747,900

This calculation based on Auckland City December 2019 median house price of $1,030,000. Evidence here: https://www.interest.co.nz/sites/default/files/hla/2019/december/Aucklan...
Auckland median house price $1,030,000 - 1% yearly tax = $10,300 per empty home. x 39,393 Auckland officially unoccupied dwellings (Based off recent census results) = $405,747,900‬ potential in revenue fist year of Auckland's empty homes tax!! A Win! Win! for NZ residents since this can help to build new homes.

Sure there will be some money grubbing Aucklander's out there who will object to this tax, But that's probably because they're living overseas and leaving their property empty for over six months a year. What I say is, if they can afford to leave a property empty in a major city for long periods of time then they can afford to pay tax on it!

We simply need to reverse that damage done by Foreign Buyers, Speculative Investors and Money Launders.

Exactly!
Punish bad behaviour, reward good!
To get a quantum shift in the environment, we should be punishing polluters.
I'd like to see petrol up at well over $3 per litre.
Then bring in compensatory income and business tax cuts.

Then, if a business or household pivots so that it uses public transport much more, or uses EVs, they will get a double benefit.

Taxes can be a source of revenue AND also act as a great policy incentive / disincentive.

Yes, Also like to add that we should give business incentives possibly by tax cuts to allow workers to work from home more, that will be a huge save on pollution and transport infrastructure costs. It shouldn't have to take a global pandemic to make people more focus on this style of working.

Awesome, so the areas with heaps of access to public transit (like the well-off inner-city suburbs who refuse to intensify but still get Link buses etc) get a wealth transfer from those who can't afford to live centrally and have no choice and have to drive?

But John Key is telling us the solution to our problem/s is to allow foreign money back into the market?

Queensland also has an absentee owners' annual land surcharge (tax) that is higher than for Australian tax residents.

Five year retrospective CGT. The specuvestors won't mind helping us all out in hard times.

sounds very much like a vested interest party arguing for more status quo - minimal changes - and essentially preserving the interests of banks / accountants / big business et al

Where are the genuine critical thinkers - and visionaries -- how about abolishing tax on the first 50K on income - we have agreed minimum wages / living wages / levels of income that trigger child poverty - yet we continue to tax people and families earning less than those -- or tax them until their take home pay is below these levels ? then we replenish the income with WFF, Accommodation Supplement and other benefits - the costs and the cost of administering such top ups would seem to exceed the tax revenue generated -

if we are to borrow 200 billion dollars - surely we can afford to make some of these fundamental structural changes -

Land Value Tax will never happen in NZ. People don’t want to be made tenants on their own land, paying rent to the landlord government. LVT is a bad idea as well as a political non-starter. CGT on the other hand may have a snowball’s chance, and at least a logical argument can be made for it.

Georgism is a deeply flawed fringe movement, even though a few noisey disciplines won’t drop it. Productive land (I.e. improved land) is not fixed in supply or perfectly inelastic. Supply curve shifting to the left is not good.

Land tax makes more sense than a CGT. CGT is over complicated, lumpy and not predictable, and pays less in a recession. In Australia it took 15 years to become significant due to the time it took for values to increase after the valuation day. CGT is a dream for accountants and lawyers as it is so complex and applies to so many assets. The NZ proposal also wasn't offering any discount for inflation. Land tax on the other hand is easily collected, regular and much better suits government requirements for predicting cash flow. It could start off very low but always be increased by tax hungry governments at the stroke of a pen. There would be sad stories of cash poor land holders not being able to afford it, but they won't be Labour Green voters, and would be ignored.

Totally agree about our pathetic asset value threshold. 10k would be a reasonable threshold. $500 is a joke and the new level of $1,000 is still ridiculous. It just leads to loads of compliance costs, and very busy asset schedules that are meaningless after a year or two.

If we don't have any useful answers then can we please have the money we spent on the taxation working group back?

Days to the General Election: 26
See Party Policies here. Party Lists here.