John Key agrees it's not fair 'on balance' that property investors pay no tax

Prime Minister John Key has agreed that it's not fair "on balance" that property investors pay no tax on NZ$200 billion worth of property, but he is not committing to taxing them. Key made the comments to TVNZ Political Editor Guyon Espiner in the final Q&A programme of the year. My view Key seems to be leaving himself some wiggle room for reforming taxes on property investment, but his comments are hardly a clarion call to get on with it. We'll find out more after the Tax Working Group comes back with its report at the end of this and we see more detail in Budget 2010. It's hard to be confident though that Key is serious about reform when he talks like this. 'On balance' he seems more like a populist politician reluctant to reform than someone who really wants to use government to make long term improvements in the structure of the economy. Your view? We welcome your comments below.

Here is the part of the interview referring to tax reform.

GUYON Okay and one of the big elements that people talk about there is tax, now I know you've got a review underway, so that you're not going to want to give exact details, but let's keep this broad. Generally you're looking at trying to lower personal and company tax, and fund that potentially by raising consumption taxes like GST, or possibly some sort of property or investment tax. JOHN Well the mix to the tax regime is possible, I wouldn't rule it out, but nor do I necessarily rule it in. Let's say a mix is possible, let's go away and wait and see what actually happens, there's a lot of different factors out there and I think the Finance Minister was on last week talking about some of those options around the edges of property investments and the like. GUYON Yeah he said that we would seriously consider changes to the treatment of investment properties. Are you committing to some change there? JOHN Well what we do know from the tax working group, is round about 200 billion dollars worth of investment in that area, and basically the Crown's lost money on that investment. GUYON Well they pay no tax. JOHN That's right. GUYON And in fact they pull down 150 million dollars, is that fair? JOHN No, probably on balance. GUYON Okay, so you're going to do something about it aren't you? JOHN Well we need to go and look at all that, I'm not going to pre-empt that on the last show of 2009. GUYON You've said that it has to be fair and equitable this tax review, you've just told me it isn't fair, that they pay no tax because they can organise their affairs correctly, are you going to do something about it? JOHN That's a basic principle of the tax system. GUYON So they can expect change in some form? JOHN Well it's also about an issue that both IRD and other have identified the Treasury, and that is the robustness of the tax system over time. One of the concerns about New Zealand is that we tax labour and we tax capital, and they are by far the most mobile. Now on the other side of the coin we also want to put the right incentives in the economy, and we also very importantly don't want to increase the tax burden, I mean we are running a deficit we understand that, but actually the last thing you want to do is put a big sea anchor on the New Zealand economy, and the more you tax people the more effectively you do that. GUYON It sounds like there may be some change coming for property investors, what about GST, will you raise GST? JOHN That's an argument that the Tax Working Group's put up. GUYON Cos you've previously ruled that out. JOHN No, what we've said is we'd need to be convinced of a good case. GUYON But you have to fund these personal tax cuts don't you, somehow? JOHN Yeah, well again it's about a potential change in the mix, that's a possibility, but I wouldn't put it any higher than that. We need to go and have a look. There's a number of different factors in there, and what is true about New Zealand is, if you take our top personal rate it's lower than Australia's but it kicks in a lot lower, we kick in at $70,000 they kick in at $180,000. GUYON In fact until you earn $200,000 you pay less tax than in Australia, and they've got a review over there you're gonna have to move aren't you. Are you going to move that top rate down? JOHN Well one in four New Zealanders who are tertiary qualified now live overseas. We are rapidly &. GUYON Are you going to bring that top rate down? JOHN Well we've said we have an ambition to do that, and to get that down to a 33% rate to align that with the company rate. GUYON Do you think that'll happen next year? JOHN Let's wait and see.