Bill Rosenberg says inequalities in wealth are much greater even than inequalities in income, and it is important to head off growing extremes of wealth

Bill Rosenberg says inequalities in wealth are much greater even than inequalities in income, and it is important to head off growing extremes of wealth

This is the fourth of ten articles in the Public Service Association's "Ten perspectives on tax" series.*


By Bill Rosenberg*

Wealth is assets. They can be physical like land, buildings, plant and equipment, ‘intangible’ like trademarks, patents, and a firm’s reputation or brand, or financial like a bank account, shares, bonds or other securities. Companies and people own assets because they hope to get future benefits from them whether as income or capital gain or non-financial benefits such as having a house to live in. 

Why tax wealth?

Inequalities in wealth are much greater even than inequalities in income. The most recent data from Statistics New Zealand1 showed that in the year to June 2015, the wealthiest one-fifth of households had almost 70% of household wealth and the top 1% alone had 18% of the wealth - more than the least wealthy 60% combined.  The highest incomes tend to come from wealth, and can be much higher even than extreme chief executive salaries. Extremes of wealth concentrate power and influence and are therefore bad for social cohesion and a healthy democracy. If wealth can be passed on without limit between generations then those extremes worsen. 

A large part of wealth is in housing. Home ownership can boost local communities and social stability. But fewer people live in their own homes, which are becoming increasingly unaffordable. Fixing that is a complex issue beyond this discussion, but taxes on wealth are among the policies that need to change. They could help to reduce the likelihood of more housing bubbles and to rebalance the New Zealand economy if more investment moved out of buying and selling larger and more expensive houses into productive assets that supports good jobs.

Taxes on wealth also help to combat tax avoidance. Companies with operations around the world avoid taxes by using various tricks to shift profits to low tax countries. They undermine the revenue we need for good public services. Wealth taxes can be more difficult to avoid than income taxes.

What taxes on wealth do we have?

New Zealand has few wealth taxes left. The only notable one is a weak capital gains tax. Income tax is payable on the profit made in reselling a property (not the owner’s family home) within the first two years or if it was bought with the intention of resale at a profit.

Taxes on wealth used to be much more extensive. Until 1992 there was an estate duty of 40% on deceased estates over $450,000 ($730,000 in today’s dollars). Gift duties (abolished only in 2011) discouraged avoidance of estate duties.

Stamp duties, abolished in 1999, taxed property sales. They are a form of transaction tax, and in many countries are also levied on share sales.

They are a close relative to financial transaction taxes which can reduce the flows of speculative international finance. These flows can at times have disastrous effects on financial stability and the value of exchange rates.

Land taxes were one of the earliest taxes in colonial New Zealand but were abolished in 1990. However there is still a property tax in the form of local government rates which are levied on the value of both land and buildings. Property registers make land and property taxes very efficient to collect.

Most of these taxes are common among other countries, including Australia. New Zealand is unusual in its weak taxation of wealth.

What taxes on wealth would be useful for New Zealand?

It is important to head off growing extremes of wealth. Any form of progressive income or wealth tax would help with this, but the most direct would be to reinstate estate and gift duties. A simple and progressive structure for an estate duty would be to exempt an amount approximately equal to the median house price ($550,000 at time of writing) and tax the remainder at the top income tax rate which is currently 33% but should be higher – at least 45%.

We should do what is possible through taxation to make housing more affordable, less subject to price bubbles and to encourage investment in other productive forms of assets. A full capital gains tax on property encourages investors to focus more on investment income than on rising asset prices. It may slow the formation of a price bubble, but it would need a tax that almost confiscates the capital gain to make speculation unattractive once rapid price rises are underway. Capital gains should be taxed like any other income. For public acceptance it would exempt the primary family home.

An alternative is a tax on a deemed ‘risk-free rate of return’ on the property (usually taken to be the interest rate at which Treasury can borrow).  Again the primary family home should be exempted or low income home owners compensated by reductions in other taxes. This would have the benefit of being a more reliable source of revenue than a capital gains tax, but the disadvantage of being less responsive to downturns in the economy. It removes much of the advantage that housing currently has over other forms of investment. A capital gains tax should be retained for other forms of wealth (such as shares) and on property if price bubbles recur.

There is concern that overseas residents push up house prices, particularly during a bubble. We could copy the Australian ban on non-resident purchases of existing houses. Alternatively we could levy a hefty stamp duty on property purchases by non-residents: for example British Columbia in Canada introduced a 15% property transfer tax on foreign real estate buyers in 2016 .2

Assistance to low to middle income first-home buyers must avoid the risk of pushing prices up further. We could couple concessionary interest rates or a contribution to their deposit (paid for by the above taxes) with a requirement that they buy new houses. At the same time the government should be building or requiring developers to provide good quality low cost starter houses for which first-home buyers get priority.

Finally, we should be designing an international financial transaction tax to help manage the exchange rate of the New Zealand dollar and during financial crises. Cooperation with other governments would make this more effective.


[1] Household Net Worth Statistics: Year ended June 2015, Available at https://goo.gl/L8oz66               

[2] Canada tax targets foreign house buyers, 26 July 2016, available at https://goo.gl/eqWn09


*Bill Rosenberg was appointed Economist and Director of Policy at the CTU in May 2009. This is the fourth article in the PSA's "Progressive thinking series, Ten perspectives on tax."

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It is good to have the additional wealth coming into the country however controls(taxes) should be introduced to stop the price distortion in the residential housing market. The wealthy should be encouraged to put money into our companies and overall economy. Additional stamp duty on 2nd homes has been introduced in the U.K. as an example.

Doesn't being able to deduct huge amounts in interest payments on loans to overseas entities mean that the local branches of multinationals are heavily indebted and as such very likely to have negative wealth? Taxing wealth would then result in even bigger tax breaks for them?

But you forget there are 'thin capitalisation' tax rules which prevents that simple strategy here. MNC tax strategies are far more sophisticated than that.

A 60% limit still means that they pay 60% less wealth tax than us poor mono-national fellas. Why do we believe that wealth tax would be more difficult to avoid by these multinationals who can spend huge amounts on avoidance? Wouldn't this just result in drawing the top talent of this generation into finance instead of technology?

People get rich because they aren't being taxed enough, and people stay poor because the rich aren't being taxed enough. Wealthy white males immigrated to NZ and built a first world country from nothing, because of their privilege. This is the reason they need to be specifically taxed, and their property given to the government for fair distribution.

Gee from the 21st century and how we are so alarmed at the rate of destruction of remaining virgin forests and the fauna, contained in them, I am not so sure we should look back on the destruction of New Zealand's forest, fauna and the introduction of noxious pests as building something out of nothing. We need to learn from stuff we have done in the past so that we do not completely flatten everything in our wake.

Haha.
If this was serious, it would sound like a number of bitter and twisted Herald commentators!

Also for example if you made $100 paid $30 of tax on that and saved saved $10 of the $70 that remained then a wealth tax such as you are suggesting would mean that you get taxed another $3 of that $10 that you saved? Would the tax on that $10 apply every year? Why wouldn't you just spend the $10 right away so that you completely avoid the wealth tax? Don't we already have an issue with us as a nation not saving enough? Should such a tax be implemented will we be given the opportunity to withdraw the entirety of our KiwiSaver and opt out of the scheme?

I think you have the maths wrong there. You wouldn't be taxed $3 on your $10 savings. If you were taxed on the capital gain, you would be taxed a percentage of the interest (passive earnings) you made on the $10. It would be a few cents not $3

Tax on the interest already exists. It is a form of income tax. Wealth tax would directly affect the savings.

Tax on the interest already exists. It is a form of income tax. Wealth tax would directly affect the savings.

I'm struggling with calling a capital gains tax a wealth tax. Taxing the net capital gain from a transaction is just that, a capital gain tax. I'm all for a full and complete comprehensive capital gains tax, without any exceptions. Taxing a financial gain isn't a wealth tax in my opinion. Taxing a financial holding based purely on the static worth of the holding is a wealth tax by my definition. One is fair and appropriate (CGT), the other (wealth tax) encourages spendthrift behavior as opposed to prudent behavior.

Unfortunately, most of the developed world has been given a stealth wealth tax via the wonders of QE, but that is another topic.

It will not help. Real estate is the only one really save asset. You can loose almost any assets in the case of bank system collapse but an investment property still will be giving you some income. This is especially important for older people.

that is only if nothing is owed on it, I think you will find if the bank system collapse unless you have the cash or another source of money to hand over the bank can take your property sell it take their chunk and after expenses hand you what is left.
you might want to read your mortgage T&C

I meant investment without mortgage as a way to save your money if you have it. Such people would be targeted by the taxes mentioned in the article. Any investment of loaned money is too risky.

In the case of a bank system collapse, do you think that you will still be getting income from your investment? From what source would this income come from? Do you think that the tenants would be immune from the effects of a bank system collapse?

The older you get, the more certainty one wants from ones income stream. My analyses indicated that a few years ago I was better served via increasing the odds of return of equity instead of return on equity. On average, I would be better off having a rather high equity portfolio. The issue is in the tails of the distribution. I would far rather live with a lower standard of living on average than a higher standard of living but with a 20% probability of outliving my saved equity. The latter is a risk when one is older and attempts a high rate of return on assets.

A bank system collapse will devalue most savings in cash as hyperinflation will be triggered. Equities will be devalued as well, some companies will go bankrupt, others will stop paying dividends. So you will not have any income on your stocks for some time. Bonds will be even worse, because hyperinflation will devalue them and they will never recover.

On the other hand, if your tenants are working they will still pay you. They can loose their job though. Eventually economy will recover and you will get your income again, the same will happen with stocks if the companies are still alive.

So you are probably right and a good stocks portfolio can be secure enough, but residential property investments are more understandable for most people. Personally, I would not invest into residential property mostly because I do not want to harm other people who really need a house to live in.

I just don't understand your comment regarding property investment harming people. Property investment is how rental homes come about. I think what you are referring to is instead property speculation. An investor goes for positive gearing and positive cash flow, making a business out getting profit from the delta between the income and expenses. A property speculator tolerates very low or negative income via rental and speculates on the capital value increasing. This is also known as the "greater fool" theory.

The presence of property speculators are in large part the primary cause of the surprisingly large imbalance between rental price and capital value in Auckland. If the issue was in fact a lack of housing supply, then there would be little imbalance between rent and house price. That is, if there were no speculators in the market, the home prices would likely be considerably lower, and rents would be considerably higher. This is simple supply and demand in action.

After owning a home for 20 years, I went back to being a renter for 10 years. My net wealth for those 10 years increased far more than if I had owned a home. This gain was compliments of the foolishness of property speculators looking for capital gains in markets that had no capital gains and in some cases instead capital losses. For a few years, I was paying my rent via approximately 50% of the proceeds from term deposits of the same value as the home I was renting (I really miss the 9% term deposit returns of a decade ago!). Sometimes speculators get ahead (Auckland in the past 7 or 8 years), sometimes they do quite poorly (Hawkes Bay in the past decade, and Christchurch a decade ago are two known quantities for me).

The fun part, as always, is that past performance is no guarantee of future performance.

Property investors and speculators are competing with home buyers for the same asset. This is driving prices up.

Of course, some amount of rental properties are required but there are always more than necessary. Rental prices are limited by wages of tenants and cannot go too high. The two markets are linked with each other but rental prices are more dependant on economical conditions rather than on amount of rental properties. There are still the same amount of houses for the same amount of people to live in.

I agree that speculators are worse because they can drive prices beyond economical efficiency point because they do not rely on profit from rent.

Yes, now in Auckland, it's better to put money on a deposit than to buy a house. You will make a profit if you have this money. Most first home buyers will not have this money and rent is making it very hard for a person on an average income or below to save enough money even for a first deposit.

If that really is the case, then it really needs to be changed. The method to change it could be in the form of land-taxation, flooding the market with affordable homes or some other means.

When the general public thinks "The only real safe asset is real estate", then there's something definitely wrong. There should really be a rebalancing of risk so that each asset class is equally appealing.

I agree, it would be good to tax property investors but all the taxes will not change the fact that it's the only safe asset available for the general public. So any reasonable tax will not stop investments. It can affect professional property investors which is good, but not older people who want to save their money.

Would not it be better to offer another safe asset to public? Why should the banking system be fragile, be able to break rules and have no responsibility for this? Why should governments take so much debts making everything unstable instead of guarantying stability?

There will always be safe assets that the public can invest in. It's not necessarily the government's job to ensure that housing is always that asset, and in fact it's becoming increasingly evident that it should be the opposite.

Too much capital sitting in housing means a stagnant innovation and research landscape, which is what we really should be focusing on.

What would be ideal is if someone had a lot of capital today and wanted to invest it safely, and housing wasn't the obvious choice. Once that mindset is established, then we're going somewhere. It might take something like the sharemarket crash of '87, but at least that had a lasting result.

What I'm saying is that the government should ensure that there are another safe assets available. They cannot really make residential property investments unsafe if only they will not stop guaranteeing private property rights.

Change OBR is high on my list. I know of a few people that are seriously into property holdings now because they feel that property is far safer than simply keeping their money in a bank compliments of OBR. This is so seriously wrong...

NZ is one of the very few civilized countries in the world without any form of deposit guarantee. An unintended consequence of the institution of OBR was increased property speculation...

Yes, I think a deposit insurance could help. In this case you would know a limit which will be safe and you could spread your money across different banks. It will not help in the case of the whole banking system collapse, but at least you will not loose anything if only one bank fails.

We want a wealth tax?
What next?
Unbelievable all these people wanting other people to pay taxes just because they won't be included in being hit with it!
What part of it that people don't understand?
It will never be that everyone has the same amount of income or assets.
It is called life and we are not all equally as well off!
If you are not happy with how much income or wealth you have, then do something about it.
Get off the train of thought that it is not fair that you are not as financially well off as other people, therefore they should be taxed more so that they don't have as much!

You have it completely wrong. He isn't looking for pure communist outcomes. But closing the ever widening inequality gap can only be good for society.
Why do you think there has been a spate of dairy robberies for cigarettes ? Why is this crime becoming ever increasingly violent ? Why are we facing a major meth issue here ?
The bulls@#t comment - then do something about it - just shows how out of touch you are with the plight of the least wealthy people in NZ.

Steady on THE MAN 2. Don't you know it's an immutable law of the universe that everyone should have the same wealth and that inequality is innately wrong. Wealth disparity arising from prudent risk taking, saving and endeavour is morally reprehensible. Why - because I say so. No need for explanations. It just is. Pull your head in my friend.

Essentially this PSA group are advocating mediocrity. To strive for success is just not fair so everyone must learn to be mediocre.

If socialism worked even once throughout history then one could understand this crazy argument. This is how societies go into decline and we are on the way down. If we don't strive for a meritocracy and one law for all then we are doomed. This is one of the reasons that the left always seek to banish all religions. One of the Ten Commandments is to not covet thy neighbour's property. The left can't stand anyone having more than them and they have a history of going to war to get what is not theirs.