Geoff Simmons on why we can't have a fair and efficient tax system, as well as an exemption on owner occupied housing

By Geoff Simmons*

Dear Tax Working Group (TWG),

Personal preamble:

I’m a little bit peeved to be writing this because I am currently in Buenos Aires, it is a lovely day outside and I’m sure there is something better I could be doing with my time. However, I want to make sure these views are expressed. My submission is entirely personal and does not represent the views of The Opportunities Party nor Dr Gareth Morgan. I am pretty sure he would say similar things in terms of substance, though the tone would no doubt be a bit less polite than mine. Last time I spoke to Gareth he wasn’t making a submission because he is pissed off about the Terms of Reference. I’ve decided to make a submission anyway, because I realise that isn’t your fault.

And yes, you can contact me if you want to discuss any of the points raised.

Summary of key points and recommendations

  1. The future of tax is reducing the tax on labour and paying for it by increasing the taxes on capital, resources (environmental taxation) and bads (alcohol, junk food and other legalised and regulated drugs).
  2. The purpose of tax is to collect the money we need to pay for a civilised society in the most efficient and fair way possible.
  3. We aren’t taxing the right things – see 1 above and 5 below.
  4. Tax can make housing more affordable. However, the exemption on owner occupied housing is complete tosh.
  5. What matters to me is both fairness and efficiency. We can’t have both with an exemption on owner occupied housing. Instead I am suggesting a form of asset taxation with a tax free threshold high enough to exclude most Kiwi families (and therefore their homes). This tax-free threshold must also apply to Kiwisaver, and ideally include shares and bank deposits.

Submission

First up, I think we all agree that the purpose of a tax system is to gather the revenue required to pay for a civilised society;

  1. in the most efficient (least distortionary) manner possible; and
  2. in the fairest way possible – meaning people with similar means are treated equally and people with more means pay more.

Our current tax system is failing on both these counts, as this analysis shows. There is a growing gap between rich and poor, and our tax system has a massive distortion towards housing and away from productive investment. How can we solve these problems?

A capital gains tax is not the answer

Let’s get this out of the way. Simply put, a capital gains tax (CGT) applied on a realised (cash rather than accrued) basis is distortionary. It discourages selling of assets in order to avoid the tax. This reduces turnover of assets, resulting in sub-optimal allocation of assets in the economy. Houses would get held on to by baby boomers even longer. Succession of family businesses would get delayed even more. This is before we even start to contemplate the distortions added by an exemption on owner occupied housing. This really makes a CGT a total waste of time because it encourages all sort of gaming of the system, as Morgan Foundation found in our review of what works in taxing wealth and property.

Less distortionary alternatives include a land tax and the comprehensive capital income tax (CCIT) as designed by the Morgan Foundation and advanced by The Opportunities Party at the last election. A land tax is no doubt simpler than the CCIT. However, realistically a land tax will result in (accurate) cries from farmers about double taxation. After all, they are already paying income tax on their profits (if they make a profit). In my view the result of this process would be a land tax that looks surprisingly like the CCIT.

Of course, this quickly takes us to the issue of how to deal with the exemption on owner occupied housing.

A fair tax system. An efficient tax system. An exemption on owner occupied housing. Choose two.

First up, let’s be clear: one simply can’t achieve fairness and efficiency with an exemption on owner-occupied housing as per the TWG’s Terms of Reference. Let’s put to one side the difficulty of even applying such an exemption in reality, as I have discussed previously. The central problem is that you can’t have all three of these things: a fair tax system, an efficient tax system and an exemption on owner occupied housing. You have to choose two. I realise this issue is outside the Terms of Reference of the TWG but I believe the number one finding of the TWG should be to reiterate this point, at the very least to help educate Kiwis.

As Bernard Hickey pointed out (with the TWG’s own analysis) the tax break on owner occupied housing is the largest distortion in the New Zealand tax system, both in relative and absolute terms. Much maligned ‘speculators’ are merely capitalising on this addiction at the fringes.

By ignoring this distortion in the tax system, it means that any money raised by a tax change has to be spent either reducing the resulting inequality or improving efficiency of the tax system. You can’t do both.

Reducing inequality requires money to make the tax system more progressive,  either by reducing GST or dropping the tax rates applied to lower incomes. The alternative is to reform the welfare system, which also costs money and is sadly also outside the Terms of Reference of the TWG.

Assuming the distortion on owner-occupied housing remains, improving the efficiency of the tax system could also be achieved by reducing the tax applied to other investments. This happens in some European countries, such as tax-free savings accounts or tax exemptions on retirement savings. This would not improve equity one iota, because such exemptions benefit the rich most. Dr Michael Cullen knows about all this. It is why he designed the Kiwisaver incentives the way he did; on a dollar for dollar basis up to a cap.

The trouble is that there would not be enough money from a tax reform to pay for both a fair and efficient tax system. We see this in those countries with exemptions on owner occupied housing and incentives on other forms of investing. They don’t have fair tax systems, resulting in a growing gap between rich and poor. Those that act to reduce inequality generally do so through steeply progressive income tax systems which reduce inequality in income – not wealth – but also they harm the efficiency of the tax system.

A CCIT or land tax (including the family home) would remove the key distortion in the tax system, allowing the money raised to be pumped into reducing inequality. It is a win/win solution.

On a personal note, if the exemption on owner occupied housing is applied, my intention is to pour all my wealth into buying a really really big house. Maybe the one next door too, and knock through. Then I will live in it, allow my friends to live there too rent free in return for in-kind services such as maintenance, buying and cooking food, paying the electricity bills and rates. This seems like the rational way to minimise the tax bill on my wealth going forward, as well as appealing to my slightly hippy dippy tendencies toward communal living.

Managing the politics of taxing the family home

How do we manage the politics of taxing the family home or family farm? In my view the best way to do this is not by excluding the family home, but by implementing the CCIT and putting in place a tax-free threshold. The level of such a threshold is a political question, although the higher the level means less tax is gathered.

A tax free threshold is less distortionary because it is blind to which assets an individual invests in. If they want to invest their tax free assets in a lifestyle business or farm, so be it. The money need not go into the family home. To make the system truly neutral the money raised could be applied to making sure people have a similar exemption threshold on the earnings from bank accounts and shares. At the very least any earnings from investments in Kiwisaver should be included in the exemption threshold.

The average Kiwi family would probably not balk at an individual threshold of $500,000. Aucklanders might, but we care about regional development now, right? Such a threshold might finally give people like my parents a reason to cash up and leave central Auckland, freeing up housing for people that actually work there (sorry Mum and Dad). If you really want to be politically safe, have a personal threshold of $1m – that would be $2m for a couple. Most Auckland houses would still be exempt, except maybe in Epsom. Beyond that level, the CCIT would apply.

Of course, this does nothing to help the 40% of New Zealanders that have no assets at all. That is why any exemption - including the family home - is ultimately middle class welfare.

In my view it is vital that we have an efficient and fair tax system. I have only been in Argentina a matter of days but the gap between rich and poor is stark, and it seems to feed into the massive political instability the country suffers from. Attempts to reduce inequality by populist governments are usually poorly implemented and end up damaging the economy, fuelling neoliberal reforms which favour the rich (and so the cycle repeats). New Zealand must avoid this fate, and tax reform is central to doing so.

Environmental taxation

A final thought on environmental taxation. The usual economist view is that the double dividend from environmental taxation is only possible if it can reduce distortions in the tax system. New Zealand is generally seen as having a non-distortionary tax system (apart from housing as discussed above), hence the double dividend isn’t possible.

I disagree. There is a new school of thought on this which points out that any taxation on labour favours the linear economy over the circular economy. The circular economy is labour intensive, and the linear economy is capital intensive, and our current tax system incentivises people to replace labour with capital.

To incentivise people to reduce, reuse and recycle we need to shift the basis of taxation to environmental or resource taxes and use the revenue to reduce taxes on labour. This will encourage the use of labour for reusing and recycling resources.

So should we have environmental taxes? Hell yeah. If I were boss, there would be a carbon price of at least $50 per tonne of CO2, and a price on water for commercial users. All commercial ocean users would pay a resource rental too. All money would either go into either improving the environment or lowering the tax burden on labour.

The golden thread

The golden thread to all of this is the need to future proof our tax system. The economic changes starting to take place are large and rapid. Jobs are being replaced by robots and artificial intelligence. The need to retrain is increasing. Technology is not only taking the jobs from the poor, but also the middle class.

To keep up with these changes we need to shift of taxation from labour to taxing capital, environmental taxes/ resource taxes and taxing “bads” including alcohol, junk food and other legalised drugs. I have not discussed the last concept in this submission but it is at least as important in terms of improving wellbeing in the long term.


*Geoff Simmons an economist, who is a former deputy co-leader of The Opportunities Party and the former managing director of the Morgan Foundation.

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51 Comments

An excellent exposition.

Thanks Geoff.. Mostly agree and would add a financial tax also... Is not the family home already taxed in the form of rates? Would a land tax be added to the rates bill? And try the roasted hamsters they are yummy...

Well said Geoff..you must be tearing your hair out with frustration. Here's another. Farm worker (or whatever) gets house provided. The 'value' of that accomdoation grossed up as taxable income. The farm owner also gets a house on the farm (the flash one) and gets no such tax factored in - whats more he claims 25% of all outgoings as an 'office'.

Then we have the renter. His interest gest taxed on his savings (he can't afford a home) and pays rent form taxable income. He gets no wff because he exceeds the asset threshold of cash. Meanwhile home owner has invested all his dosh in the home and the return on this investment (rent not having to be paid) is not taxed. Plus he gets wff because the home is exempt for the asset test.

When will a govt have the balls to give the next generation a fair go?..they are getting plundered by greedy asset boomers loading up the system for themselves.

That only explains part of the story. While it's not explicitly expressed to the sheeple, you also have the possibility that the removal of tax advantages triggers a "slow melt" akin to what has happened in Japan. With house prices drifting lower and longer, you can argue that the confidence will be sucked out out of not just the consumer economy, but also the private sector (ex-h;holds).

This is where the National Party and Labor party are essentially the same. They understand the above far better than the general public does. Most people don't really understand the relationships between asset prices and the wider economy.

So your take is that basically that the economy is a ponzi scheme, that can only be propped up by ever-increasing house prices and debt?

So your take is that basically that the economy is a ponzi scheme, that can only be propped up by ever-increasing house prices and debt?

You should use HTML tags so that readers can understand what you're questioning.

Arguably economies, particularly in the Anglosphere, have been "propped up" by asset bubbles and private debt. You can probably add China,

What asset test are you referring to for WFF eligibility?

asset test $8,100 for accommodation supps.

My one comment to the TWG would be.

"Don't tax us based on what you want to fund, tax us on what we can afford to pay"

Anyone on 2x or more of the average income can afford to pay a lot more than they are right now (this includes myself).

Everybody needs their first $50k more than their second.

They probably could. But the point is we should be looking at spending our tax more effectively. Not just funding everything on the assumption that we can just raise more revenue via tax increases if needed.

Just because you are an Economist does not mean you are not a moron. All Simmons wants is more tax for the govt (hopefully left leaning) to waste on bums, pet Green projects etc. Why should my mother pay tax on a $1M house on a pension? Where is she meant to go like his parents?

Reverse mortgage to realise cash flow and pay the tax. Or it accumulates and gets taken out of the estate.

ummmm its not about more tax its about the spread.

As for your mother, so she has a $1mill house, national super and a gold card and free healthcare and qualifies for all other asset tested assistance. But across town the poor old codger is paying most of his super in rent, getting taxed on the $100k he has invested and gets asset tested for everything.

Sound fair to you does it?

I don't think geoff is the moron here.

Well said.

For arguments sake let’s say that they both made $1,000,000 over their lives and one of them put it into a house whilst the other spent it on narcotics. Your proposal is to tax the one who saved? You would be discouraging savings in favour of debt! Wouldn’t all local savings simply seek overseas nominal owners?

I believe that the net effect of taxing wealth instead of income would be to create the world’s easiest hybrid mismatch. Locals would “Spend” their savings overseas via a webpage (“effectively just depositing their money in an overseas bank”), avoiding both income and wealth taxes and in the process increasing the cost of funding in NZ making borrowing here more expensive and as such homes less affordable?

sadr001 .....an irrlevant hypothetical distraction. Equally the other guy is a war vet, suffering from psd who got invasive cancer at aged 45 and never had an oppurtnity to accumualte $1mill. Stick to the technical isues raised by the article and we might make some progress here.

Problem number 1 ........... when I go on the Super , how on earth will we pay tax on my mortgage-free home in which our children grew up and which we do not want to leave until we cannot care for ourselves?

Problem number 2 ........... how many Kiwis DO NOT own their own home ? Nearly half I understand , will they effectively be tax exempt ?

Problem number 3 .......... if I had a 90% mortgage do I own my house ? Or is it owned by the Bank who has lent me the 90% mortgage ?

If banks had to pay tax on the % of the asset held by them they would simply price that into mortgage rates making housing less attractive. If they did not need to pay tax on the % of the asset held as security you will find lots of people having assets 100% leveraged to various companies / offshore trusts.

Does the finance company pay for my vehicle licensing charges?

Problem number 4 .......... given this Governments open hostility to Capital and favouring Labour , why on earth would anyone employ people unless it is a last resort ?

Given previous governments open hostility to labour and favouring capital, why on earth would anyone bother to work? Seriously, personal income tax funds a way to high proportion of government income and it needs to change.

Problem no 5. Some commentators.

Problem number 5............ Capital is way way more mobile than humans, I can go online and transfer money to my US$ account at BNZ in under 30 seconds.

I can also go online and instruct my broker to sell all my NZX assets and cash up , and transfer the Capital to a less hostile environment like Australia or the Cook Islands or Vanuatu or even Hong Kong for that matter

Why would you effectively discourage Capital by taxing it ?

Its like double dipping Boatman, they taxed you when you earned the money and now that you have made something of yourself by investing wisely instead of being a dropkick health liability smoker drinker. They want another slice of the cake, an ongoing, every year after, slice of the cake.

Based on this if a pair of identical twins with identical histories earn $50,000 each, and one spends it all on an overseas holiday whilst the other keeps it all in a non interest bearing Zealand bank account, then we should tax the one who kept the money in NZ because he has an asset. Would this not mean that the one who spent his money hedonistically is better off, because the one who saved loses some of his savings to tax?

That's capitalism - consume, consume, consume. If you don't the world will end.

I sort of agree, but I am not sure you give a good analogy that is fair tot he situation being discussed.

Plus the problem is actually more complex, for instance if you have the $s in a deposit account you pay interest on the gain. Surely this is easy to understand? so where does "interest free bank account come in? or even exist?

If you are trying to compare it to a house, well there are 2 gains, its not an non-interest bearing account
as there is capital value gain and free accommodation both of these have an actual money value that can be determined and should be taxed.

TOPs position as an example is these should be taxed and then standard PAYE gets dropped as a counter-balance. The point here was 80% of people paying PAYE would even with paying an "extra tax" on their house be better off as PAYE would drop so much. This "good effect" here is to catch ppl paying no gains on capital value yet making a lot of money at it. This also for me should include al such items increasing in capital value not just housing.

Isn’t author proposing to tax wealth as opposed to gains from wealth? Ie if you have $50,000 you pay x% as a wealth tax regardless if you started the year with $100,000 or $25,000?

That was how I saw it as well.

Effectively it is a secondary tax on all accumulated pre-taxed income.

Do you understand that investors in offshore funds have for some years payed tax on a deemed return on their investments irrespective of the actual return earned.

A wealth tax by another name.

Yet the world has not come to an end and it prevents tax avoidance to a degree.

A land tax would be no different in concept and an exemption for say the first $ 500,000 would make it politically acceptable.

Any tax that provides an incentive to invest in productive enterprises vs our neighbours house gets my vote as long as it is easy to implement and universal. Another line on your council rates !

A land tax with an exemption limit meets that objective as been found in many previous studies.

What's your point?

NZ used to have a system where ratepayers chose whether rates would be rated on improved values i.e land+house values or unimproved values -just the land value.

Ratepayers at local body election time were given a local referendum. Many districts chose unimproved value rating.

In other words NZ used to have a localised form of land value taxation.

Michael Bassett and the Rogergnomes got rid of this system.

We also I think had a system where retirement savings were not taxed until the point they were used as income.

Surely reversing these changes would be more politically doable than what Geoff or Gareth Morgan want to do with taxing houses.

The politics of envy. The argument here it to tax people who make a sound decision to provide for themselves later in life, to support people who decided to spend their money on lifestyle. I have read all the arguments as to why family homes should be taxed and all ignore the sacrifice it takes to get into them, but resents the benefits they provide later in life. Ultimately aren't you arguing that people should not be allowed to make their own choices in case they might benefit financially out of them, while others who made other choices might not have that benefit?

Mr Simmons appears to advocating that people who own a home that has appreciated in value due to the vagaries of the market, should be taxed on the value of that change in value simply because they are secure in their own home (bunch of assumptions here), if they refuse to sell it and move on. e also fleeting mentions the family farm - do i need to point out the obvious to him? A farm is a business, owned to generate revenue and an income. The point made above by Rastus, about the home on the farm (and groceries) are tax deductible is well made.

Rather than taxation, what is wrong with balanced regulation that prevents manipulation, but allows markets to operate with clearly defined rules. The current situation is the result of no rules - what did you expect in a Wild West scenario?

That isn't the argument, at all.
The argument here is to tax people fairly and efficiently - I think that's alluded to in the title..

Your first point.
Obviously you haven't understood the arguments, then.
Is a house difficult to obtain? Yes.
Guess what. So is accumulating a $500k equities portfolio.
Saying one should be taxed and the other isn't on the basis of "hard work" is a fool's position.
Ironically you then say people should be able to make their own decisions - well, by incentivising one investment over another, you are persuading them to make that decision for them. Exactly what we see with property.

The farm is no longer a typical business at all. The business of farming in New Zealand is to struggle for 30 years and then sell up in order to realise a windfall of tax free capital gains. Oh, and suck on the teat of tax payer subsidies for those 30 years. When farm values are reduced back down to be more anchored to their actual productive value, let's start calling them a normal business again.

A balanced system with no opportunity for manipulation?
Again, in essence, isn't that exactly what is being advocated here?

Ironically you then say people should be able to make their own decisions - well, by incentivising one investment over another, you are persuading them to make that decision for them. Exactly what we see with property.

Nudge theory as promoted by govt policy.

What a pointless comment...

Only pointless if the consequences are irrelevant

Sorry but just more of let’s,tax people who try to get ahead in life.
If property whether it be owner occupied or investment goes up in value, is the owner better off if he has to pay more for the next one than he would’ve paid when he bought the one that he sold?
This crap about taxing housing on capital appreciation is just an ENVY tax that is not required.
Investors pay more than their share of tax by way of terminal tax on profits plus employ heaps,of trades that also pay tax.
Cripple the landlords with these stupid regulation changes and many will bail out and others won’t bother improving their properties and there will be many tradies who lose work and therefore less tax.
This lefty COL Havent been successful in business themselves and so they want to cutdown people who are!
Twyford is looking more lost by the day, and our leader that is going to take over from Ardern has gone BUSH because he knows he is in with a rudderless bunch of nillers!

New Zealand doesn't need more people who are 'trying to get ahead'. These games of oneupsmanship are very destructive to the values of our society.

TM2 - have you ever asked yourself who exactly it is that you're trying to get ahead of, then if you self reflect further, ask why you are motivated by the desire to get ahead of your fellow citizens? (did something happen to you when you were younger that has caused insecurities that are now manifesting as the need to get ahead of your neighbor? 'oh my god, I might just be a normal person who is equal to others, I can't have that, I must be better than others, I must get one up on those that I live among, I'll beat them financially by buying houses...') Shouldn't simply being apart of and contributing to a happy society be the desire? (not trying to 'beat' them) Why the need to have more than others?

independent Observer, no insecurities with “The Man”,and nothi g manifesto either.
Chosen to be a professional landlord providing housing for people who need it providing they are going to be good tenants.
I can categorically guarantee that we personally have never forced prices of houses for the houses that we have purchased.
We have always purchased under true market value on every property!
Yes I would love to see more first home buyers buy their first home providing they can afford it and deserve it!

Capital gains tax is one of the world's most pointless and cost ineffective tax's.

Just bring in a stamp duty on purchases. It is a simple tax.The rates can be varied.

..and brings in shedload's of cash.

Commenting on this hypothetical idea is actually pointless , our leaders cannot even organise a gathering of the party youth to have a party without it degenerating into a drunken orgy , let alone embark on any meaningful tax reform .

They are hell bent on taxing us us til they run out of other peoples money to spend by introducing a raft of new levies , taxes and excises , and increasing the existing taxes

Yeah we get it BM - you didn't vote for this govt, opting for the "Do nothing" party instead.

Your shrill hysteria about this govt even asking questions about tax reform (and suspending petroleum permits) tells me they are hitting pretty close to the mark for people such as yourself who benefit nicely from the system as it is, and would rather see others suffer before your precious portfolio is affected.

Totally agree Geoff

Instead of looking for new tax streams shut the immigration door and let our low wage economy get a bit competitive so employers have to pay a living wage if they want good staff. The housing will take a few years to catch up. The infrastructure deficit about 20 yrs to catch up and public services like health and education will also be a few years to catch up. Leave the immigration door open and things can only get worse.

You don’t really need competition at the low end. Mandated minimum wage rises make it so that the bottom and top bands have similar increases in rate of pay. It is the middle that needs help, but the middle making any more would basically make 33% everyone’s marginal tax rate.

You use the word 'fair' a lot. There are many dimensions to fairness - fair to who? And in what regard? When it comes to redistribution good luck getting everyone to agree on a 'fair' level of tax!