By Alex Tarrant
Will there be anything left for Labour's Tax Working Group to recommend by the time it's set up? At the rate we're going, it would seem not. Any sort of income, asset or wealth you can connect the word "family" to is quickly getting ring-fenced (ha!) from the Group's future terms of reference.
I was quietly chuffed that Jacinda Ardern on Tuesday would not rule out introduction of a land tax that applied to the land underneath the "family home". On Radio NZ's Morning Report, when pushed on differences between Labour's stance (or non-stance?) on CGT vs land tax, this was the ultimate quote: “I am saying that we are not going to affect the family home, and I’ve been consistent on that.”
Read technically, that doesn't include the land. But, as ever, the next day brought a 'clarification':
"My message will be very clear to [the Working Group] - do not bring me any recommendation that includes the family home or the land that a family home sits on," Ardern told Radio NZ, reported on Thursday.
Ardern keeps reiterating that Labour's main desire for setting up the Tax Working Group is to help tackle housing affordability problems and help 'her generation' into their first homes, while at the same time not allowing for existing owner-occupied properties to fall in value. This is despite the earlier line that Labour just wanted to ensure fairness across the tax system.
On Tuesday she said: "I want the experts to have the room to be able to present to me the best options for improving housing affordability, because after nine years, we have a crisis. And I’m not willing to sit back and let that continue.”
Well, I'm sorry, but the Tax Working Group in 2009 felt a land tax would be one of the best ways to help improve housing affordability because it would reduce the value of land. That includes land with houses on that people live in - these massive examples of assets and wealth. (Assets and wealth being what Labour wants the Working Group to look at evening up the taxation of, relative to waged income.)
Yes, I know it's political suicide to go out and say you want house values to fall. Just think about this though: If a land tax is applied to all non-owner-occupied property (ie rental property and uninhabited/unimproved property), then the value of those land holdings should fall, triggering sales. Inevitably, home buyers will target those properties to purchase at lower prices, which should reduce demand for existing 'owner-occupied' property that isn't subject to a land tax, which would cause the value of those properties to fall, which means Labour could not accept such settings.
It is very, very difficult to argue that you will improve housing affordability by altering the tax system while at the same time saying those changes to the tax system should not cause values of existing owner-occupied properties to fall. One way you could attempt this is by saying your tax system changes will focus on the income tax system - by taxing waged income less, that would mean more free cash to go out and buy property. In that case, why does Labour entertain any talk of CGT or land tax at all then?
Labour's been careful to say that the Working Group isn't being set up to look at ways to increase the government's tax take - it's effectively going to be told that recommendations for changing our tax system should be revenue-neutral. Yet Ardern is still not speaking about using potential new taxes to cover for reductions in existing rates (like introducing a land tax to allow for income tax and/or company tax rate reductions). She should start doing this.
At the moment, the best we could hope for given all the exemptions and caveats is for the introduction of a Capital Gains Tax on all capital excluding two-thirds of all residential property (the two-thirds of a trillion dollars worth of owner-occupied housing), which would then cover for reductions in income tax rates (or greater transfers if Labour sticks to its aversion of income tax rate/threshold changes also benefiting higher earners), which would hopefully give first home buyers extra cash for a deposit for what it is currently calling an over-priced asset.
(I'm assuming that taxing "family" inheritances/death duties aren't exactly going to be high up on Labour's tax change agenda.)
If that's the case then just get out there and say it. Or at least say that you will give the working group un-caveated terms of reference. Don't say that you won't allow them to recommend the best scenario. Then you can add your political "family" exemptions afterwards.
This is bordering on the ridiculous. Bill English is loving it. You can see him in the video below having a crack at Labour over land tax on Tuesday. English himself isn't a fan of a land tax (at least publicly - I'm not sure what he thinks privately), his reservation being that it would hit people on fixed incomes, such as the superannuitants living in the retirement home he was visiting that day. The 2009 Working Group acknowledged this, and said there could be ways around this, including allowing these people to hold off until death.
There are also ways to ensure farmers aren't kicked in the mud too much, for instance by applying a value-per-hectare threshold under which the tax isn't paid (ie encouraging efficient use of land).
If you want to read more on this, then Gareth Vaughan this week published an interview with UoA senior economics lecturer Ryan Greenaway-McGrevy on the subject. This Motu working paper by Andrew Coleman and Arthur Grimes contains a bit more detail, and here's our coverage from back in 2009 on that paper, presented during a Tax Working Group session:
Land Tax (from 2009)
- Economist Arthur Grimes then presented a paper on a Land Tax by himself and Andrew Coleman from Motu saying that a land tax would be more efficient than a property tax which included the value of both the land and buildings.
- Grimes said the introduction of a land tax would trigger a one-off fall in land values, which would hurt landowners, but improve affordability for first home buyers. "A land tax would be likely to cause home ownership rates to rise slightly, and gross debt to GDP and net foreign assets to GDP ratios to fall due to lower foreign borrowing. "
- Grimes said the taxable land base in New Zealand, which excludes government and conservation land, was worth NZ$460 billion. A 0.1% land tax rate would raise NZ$460 million, although this would fall to NZ$160 million if agriculture, forestry and owner-occupied land was excluded.
- Retired people would be hurt most by a land tax as they held proportionally more land and would not benefit as much from other tax changes in any reform package.
- A land tax would be easy and cheap to impose because it was already set up for local government rates, Grimes said. It would be almost impossible to evade, he said.
- "Thus a central government land/property tax could be added as an adjunct to the current system with virtually no additional administrative cost. Furthermore, the ability to avoid (or evade) the tax is virtually non-existent since the land/property is valued by an independent agency and the land/property is available as collateral in cases of non-payment of tax."
- A land tax would capture foreign owners of New Zealand land, Grimes said. "One currently untaxed sector that it would fall on is foreign-domiciled owners of New Zealand property, who otherwise pay no income tax and who pay no GST if they do not purchase goods and services in New Zealand. A shift to a land tax would therefore widen the tax base not just in terms of the base of assets on which tax is raised but also in terms of the number of people (i.e. non-New Zealand residents) who become taxpayers."
- A 1% land tax would immediately reduce land prices by 17%, while a land tax phased in over 20 years would reduce land prices by 11.5%, he said.
- A property tax with an exemption for home owners would cause the rental market to collapse, he said.
- Grimes said a property tax and the resulting fall in property prices would over time reduce New Zealand's foreign debts. "Put simply, high domestic property prices raise the portion of the country's production that is paid annually to foreigners, and a policy that reduces these prices is likely to lead to an increase in net foreign assets and in the fraction of income available for consumption."
- Residential land makes up 65% of all land values, while agricultural and commercial forestry make up 24% of the land value. A land tax would hit agricultural based households harder than residential households because each rural household owns proportionally more land.
- The average land value for residential properties is NZ$215,000, meaning a 1% land tax would cost each household NZ$2,150 per year.
- A 1% land tax would raise NZ$4.6 billion, which is equivalent to 20% of income tax.
- A land tax would effectively transfer wealth over time from the old to the young. "The retired cohort would be more likely than younger cohorts to incur a wealth loss (in absolute terms) given the higher initial value of their housing assets. They would also likely face an increased overall tax burden if a land/property tax was matched by an income tax reduction, simply because their incomes tend to be low in relative terms. Younger cohorts would face reduced current and future income taxes that, on balance, would generally more than make up for their higher lifetime land tax payments."
- Grimes suggested some variations on a land tax that would reduce the impact on farmers and lower income people, including a reduced rate on farmland or a per hectare rebate.
- He also pointed out a rebalancing of the New Zealand economy could boost productivity and per capita living standard.
And here's Bill English on Tuesday talking about land tax: