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Still room for changes to tax mix to disincentivise property investment bias, TWG chair says; Asset bubble notion a 'completely different argument'

Still room for changes to tax mix to disincentivise property investment bias, TWG chair says; Asset bubble notion a 'completely different argument'

By Alex Tarrant

Some concerns about the integrity of the tax system have been addressed through changes made by the government, although there is still room for more work to be done to iron out investment biases created by the current tax mix, the head of the government's 2009 Tax Working Group (TWG) says.

Meanwhile, the notion that a capital gains tax could help stop asset price bubbles from forming was a "completely different argument" to why the TWG looked at capital gains taxes, with there being little evidence to support that notion.

TWG chair Professor Bob Buckle, from Victoria University's faculty of Commerce and Administration, told interest.co.nz the TWG looked at capital gains taxes from the perspective that biases in the tax system meant certain investment options were more favourable than others.

'About integrity of the tax system'

Talking about the Tax Working Group's work and report to the government, Buckle said the group looked at the option of a capital gains tax alongside other options for broadening the tax base and providing a more comprehensive taxation of income. A capital gains tax could bring into the tax net income generated by changes in asset values that was not currently captured.

“Given the tax system that we were looking at at that time, we felt it could potentially enhance the integrity of the tax system. In other words, there were at the time strong incentives to shift your income into property and other assets which weren’t captured by a capital gains tax," Buckle said.

"Secondly, the current capital gains tax regime we had applied to specific types of activities – some property dealings, some financial assets, foreign shares through the fair dividend regime, some intellectual property – but it wasn’t comprehensive, and it depended on intentions," he said.

Whether or not a capital gains tax addressed the TWG's concerns about the integrity of the tax system would depend on how comprehensive it was, and how the tax was designed.

The more comprehensive and well designed a tax was, the less opportunities there were for arbitrage. However it would potentially become more complicated to administer as well.

There were situations that could arise depending on how comprehensive the tax was. For example, if a capital gains tax excluded a person’s primary residence, there was always the risk of the ‘mansion effect’, where instead of investing in other property, a person just invested more and more into their primary residence.

It would take time for revenues to build up from a capital gains tax, with the Australian experience showing a period of up to 15 years for revenues to peak.

"I understand from the Australian tax revenue figures they are collecting about 4% of their tax revenue from their capital gains tax," Buckle said.

'Changes have helped'

Some of the integrity concerns the TWG had were being generated by the height of marginal tax rates people were facing, such as the top personal tax rate.

There was less concern now given changes to the tax mix had been made.

“By pushing up the GST rate, and reducing the top personal tax rate, some of these concerns have been ameliorated somewhat,” Buckle said.

Changes to depreciation rules had also helped.

Ability to tackle bubbles a different argument

Whether a capital gains tax was going to overcome asset price bubbles was unclear.

“The New Zealand tax system was favouring investment into residential property. And that’s what I meant by the integrity concerns – it’s biasing investment decisions. So in that respect, I think it warrants serious consideration," Buckle said.

"Whether or not that would help overcome asset price bubbles, the evidence on that – it’s unclear, because countries with capital gains taxes have had asset price bubbles. They’re generated, I think, by other factors that dominate these tax effects,” he said.

More importantly was the resource allocation effects of a tax system which encouraged biases in investment decisions.

In tackling the bias toward property investment, an argument could be made that instead of taxing property more, one could tax other forms of investment less. An example would be indexation of the inflation component of interest payments in order to make investment in bank deposits more attractive.

“There’s no doubt that should be considered as well in weighing up which is the best way to overcome these biases in the tax system, and broadening the tax base," Buckle said.

“That why I said the changes last year have gone some way to ameliorate those concerns. Not all the way, but it’s gone a good distance,” he said.

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16 Comments

The wider risk of property price bubbles are better resolved by modifying the RMA and deconstraining land-supply, re. Hugh P. Also, RBNZ effectively regulating 'bubble credit', something they are now onto and will be more onto with a modified RB Act - and which political party has declared rejection of the concensus on monetary policy?

CGT is worthwhile for other reasons. So what if it doesn't arrest property bubbles - more tax to collect to assist with rebalancing the economy during bubble phases, assuming no movement on the aspects mentioned above and other things like 'ring fencing', etc.

Now where's my matches - Strawman at 11.02am

See:

http://www.realeconomy.co.nz/144-capital_gains_tax_pros_and_con.aspx

"Craig Elliffe and Chye-Ching Huang from the University of Auckland Business School have written a series of articles for the Herald on the merits of a Capital Gains Tax in New Zealand.  The first article looks at whether the tax changes introduced this year were wide ranging enough, the second discusses the benefits of a Capital Gains Tax and the third examines the most common reasons for the rejection of a Capital Gains Tax with reference to South Africa which has recently introduced the tax." "

Why do we want to continue supporting economic apartheid in New Zealand?

Cheers, Les.

www.nzmea.org.nz

How are you going to deconstrain land in Wellington and Auckland?  There isn't any convenient land left.

Once CERA pull the finger out and facilitate opening up of fringe land in ChCh it'll be less of a problem here, so come on down:

http://www.stuff.co.nz/the-press/national/5246537/Family-bucks-trend-moves-to-Christchurch

+ other tax changes and what RBNZ could and will do will help restrain bubbles in Wellington, Auckland, NZ in general.

I am down here thanks, but I was asking about Wellington and Auckland.

So, "other tax changes and what RBNZ could and will do will help restrain bubbles in Wellington, Auckland, NZ in general." Affordability is not just about land supply, plus consider the the increase in incomes that implementation of a CGT will assist by rebalancing the economy. See:

http://www.interest.co.nz/property/54236/labours-capital-gains-tax-will-also-cover-business-sales-shares-and-other-assets-wont#comment-628993

Land in Wellington in Auckland not zoned for high rise development can be re-zoned, problem solved.

Building costs for new buildings are soaring so problem not solved.

I think Hugh P et al might argue that Auckland isn't as constrained as some might imply - I mean, isn't that the game?

As for Wellington - shrink government and relocate around the regions.

Flown out of Hamilton lately? 

Take a look as you do.(if you can see thru the fog) ..hundreds of hectares of prime dairy covered in mansions, swimming pools and tennis courts.  Huge lawns producing grass, only to be cut and wasted by ride on lawn mowers....crazy.

 One can only imagine how much worse it would be if we unlocked land restraints a many suggest.

 

Unlock the land constraints, and those McMansions, or the bare land, will be sub-dividing like crazy ( "there's money to be made in property development!"). That's a huge amount of smaller sections, instantly available. What happens to the price in that circumstance?

F()#%K  Capital Gain Tax , they should rather spend less on welfare , than tax hard working Kiwi's  any more .

John Key should seriuosly front- foot the debate and state Its time for a seriuos look at the current Welfare payments system

Welfare should pay for Food by way of food stamps ( healthy stuff only) , housing and power, with an unemployment  card to be used for public transport .

Right now far too much Welfare money is spent on booze cigarettes , P and gambling. Just go to the gambling room at the Clendon Mall on th Thursday and Friday and see where your hard paid taxes are going.

Its enough to make you sick 

I agree.  Here's a plan. Instead of increasing tax, stop spending so much! Instead of paying "wages" to the "customers" of the Dept welfare pay their rent directly to their landlord, their powerbill (up to a limit) directly to the power company, negotiate a great deal with local supermarkets to provide them a food parcel made up of fruit, vegetables and healthy food each week. Give them free passes for public transport (with photo id). That covers most of their needs. Then pay a small amount of cash to their bank account to cover other needs. To get this they would need to work out a budget with a budget adviser to cover eg clothes, haircuts etc. If they want to buy alcohol, drugs, cigarettes, SKY, consumer items they would have to try and find some work to get cash. That would solve many other social issues at the same time, and we'd know our money is being spent well. They then wouldn't be able to get into debt borrowing money at outrageous rates to buy consumer goods as they couldn't service the loan. We need to make sure people are sheltered, warm, educated, have medical treatment, and are not hungry, anything else should not be paid for by the taxpayer. If people then choose to trade their food for cigarettes etc and let their kids go hungry I'm afraid there is no helping them.

I agree.

Here is a plan:

stop all welfare payments at all,

let the stronger survive, if someone cannot survive it is someones problem,

lets make all state service payable, users pays only,

no army, police, gov departments, local bodies etc, - no taxes

arm yourself, build fortress for you and your family,

....... be HAPPY !!!

Right righteous utopia.....agenda

I think it is a lot to do with land supply as only by decreasing the value of the underlying land will house prices decrease.  With populations increasing, building prices and labour costs soaring,  prices of new houses are increasing.  Land prices will have to drop for house prices to stay level and that's not going to happen in Auckland or Wellington, tax or no tax.

Plenty of areas in Akld for more greenfield development. Start with Dairy Flat, north of Albany.

NZTA are planning to extend the busway up there, so could have quite good dedicated public transport.  

Get  a structure plan done with a small town centre, compact surrounding areas, spreading out to less intensive housing.

Strong environmental approach mandated.

As I said, there isn't much convenient land in Auckland or Wellington.  Opening subdivisions way out of town won't decrease the house prices in the convenient suburbs.

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