Susan St John*
I like others, have had the experience of seeing the price of a modest house reach stratospheric levels in an auction. The agent whispers ‘go on what’s another $20,000 you will make it up in a month or two’, you stop bidding, horrified, only to discover that the agent was correct.
Bubbles in real estate are bad for everyone and tend to end badly. Who can say this time is it different?
Real estate is highly tax-favoured, and along with loose monetary policy has under- pinned the emergence of a dangerous speculative bubble and a huge and growing wealth divide. But the government dismissed the work of the 2019 Tax Working Group and ruled out a comprehensive capital gains tax or any other new tax. So where to from here?
The path chosen of extension of Brightline tests, and removal of interest deductibility has been criticised, along with raising the top rate to 39% as tax adhockery at its worst. Norman
Gremmell asks for example “What is happening to tax policy in New Zealand and is it sensible?"
The housing changes are fiendishly complicated, easily avoidable and will be difficult to implement as the recent discussion papers from IRD indicate.
In the meantime, low interest rates and the tax subsidisation of housing remain as potent incentives for over-investment in owner-occupied and rental/investor housing.
The upshot is an increasingly polarised society of those securely housed who feel wealthier by the day, and the rest of NZ who subsist in the unstable overpriced rental market.
The number of households squeezed out by the capital gains feeding frenzy are increasing on the housing register of serious housing need. These 24,000 households include parents and children on whose capacities to contribute an older population depends, and older low-income workers who face an impoverished and insecure retirement.
In the meantime, and it is beyond belief that we tolerate it, at least 4400 children are experiencing a childhood of ill health and school transience in unsafe and unsuitable motels.
The fortunes of the two classes; the securely housed and the others, are intimately connected. The solution is not to rant simplistically that more supply is the only answer, or to hanker after a capital gains tax. The horse has bolted. We need to use the resources in housing more intelligently.
From an economics perspective the current situation has resulted in a gross misallocation of resources and a sharply divided society in which we are gifting the rich and their children a reason not to contribute through useful paid work.
Upgrading the family home to a mansion is a highly tax advantaged way to accumulate wealth. Developers have an incentive to produce new builds for the investor class, who can avoid the recent demand-side impositions.
All these activities divert scarce building resources away from providing basic housing for low- income New Zealanders.
Speculators sitting on empty residential land or homes are largely not caught by the 10-year bright-line test as most have bought before the changes or can just hold on for 10 years. Accumulated untaxed gains over decades are the real problem.
Terry Baucher and I have written about a possible extension of the income tax base to start to correct the false economic signals around ownership of housing for investment purposes.
The Fair Economic Return (FER) is not a new idea but was first discussed in the McLeod Tax Review Issues paper 2001. In the FER approach, currently untaxed housing income (the FER rate times net equity) is included in the tax base. A realistic per person net equity exemption means that it affects only the top deciles of residential housing owners.
The FER approach overcomes the disadvantages of introducing a Capital Gains Tax (CGT) which, in any case is dead in the water. The FER approach means there is no need for a rental profit and loss return for tax purposes. Thus the FER does not upset well-functioning rental markets; landlords already investing for rental income and not among the majority who generate tax losses or poor returns are likely to be better off.
The FER encourages better use of the housing stock and makes a significant and stable revenue stream possible for government.
So how would it work?
Home ownership is still the backbone of the good life in New Zealand, promoting community, reducing transience in education, improving health and mental stability. Any feasible scheme would have to acknowledge the centrality of having one adequate home.
FER could be introduced gradually using a high exemption and a low rate of FER. In that way only the top two deciles of residential real estate owners would notice any difference, and only the seriously overinvested would pay substantial amounts of extra tax.
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We ask that you read the paper before commenting. We don’t tie the exemption to the family home because that requires careful definition of what is a family home and leads to manipulation of the system.
We can see this in the debate over how the family home will be treated in the 10 year the bright-line test. We suggest a blanket $1 million per person exemption, but FER on houses held in trusts and companies would usually be taxed at the entity level with no exemption.
Some have said a $1 million exemption is too high, but the value of houses in FER is based on CVs and these are set to sky-rocket later this year.
Latest figures show that the net worth of NZ households increased $402 billion over the year from March 2020 to $2.3 trillion in March 2021 with increases in the values of residential property accounted for about 54% of the household asset increase for the March 2021 year. A high per person exemption seems justified so that moderately well-off households are not affected.
Others have said that FER is easily avoided because, for example, a couple sitting in a $4 million house could bring in two grandchildren so each of the four would get a $1 million exemption.
Please show us the grandparents who would sign over half their house to their teenage or older grandchildren? If they genuinely have the space and tolerance, they would be better to rent to their grandchildren to cover the tax on their FER income. Now that would help the housing shortage!
Still others worry that applying a 1% FER to net equity won’t generate enough income to justify its introduction. We can argue about the figures but the important thing here is that it will begin to get the prices signals right. If people are diverted from housing as an investment to business or shares there will be more tax paid.
It can also be signalled that over time the FER rate will be gradually increased although always be below the mortgage rate.
The good thing about the FER approach is that is based on sound tax principles, not adhockery.
The FER expands the income tax base by requiring that all real estate is treated as if generating a return akin to at least what could be obtained if same net equity was invested in the bank. It’s therefore in keeping with the “Broad Base, Low Rate” approach ostensibly at the heart of New Zealand tax policy.
We acknowledge that in a perfect world all income would be aggregated and taxed at the marginal tax rate of the individual. There would be no exemptions and the company, trust and top tax rate would be aligned.
Tax policy is the art of the possible and good tax changes move us further towards tax Utopia instead of further away which is what is happening at the moment.
*Susan St John is an Associate Professor at the University of Auckland Business School.
115 Comments
It's not an economic problem. It's not a tax problem. It's political problem.
It won't be fixed because the spineless politicians in this country are more interested in their next meal ticket than doing something that might risk the cost of living going in the right direction.
It's all well and good to propose this policy or that policy. None of it will be enacted.
It's a shame because New Zealand used to be a decent place to live. Now it's a laughing stock.
I suspect we will carry on with the same inaction until someone loses the plot. Russell John Tulley felt unfairly treated over the course of a few months and look what happened? Not condoning violence, but given our recent track record on violence and mental health.......
What will change the status quo, is when the generation most effected by these pro property policies are running for government. It's a time thing or age. I would say in 5-10 years or so, a new generation will be making the rules, expect housing to be nailed against a wall. Enjoy the lime light while it lasts.
Yeah, this is the key political dynamic going forward. Property taxation is going to be a battleground for decades to come. 'Rights' that have been taken for granted will be questioned; when you've grown up seeing the entire course of your peers' lives determined by whether or not their parents were property owners, the 'injustice' of taxing 'Mum n Dad' (!!) is a lot less obvious. But as you say, there will also be a demographic wedge who committed to property ownership at frightening prices who risk being nailed to the wall by such changes.
That same group has now paid student debt back, paid more for a house deposit in nominal terms that previous generations had to pay for the whole damn home outright, and is also likely to have to finance their own retirement through Kiwisaver as well as that of their parents through general taxation, and somehow finding a way to raise a family while our congested cities mean longer commutes and less time with their loved ones.
At some point, further dipping into their pockets in the name of 'fairness' becomes the kind of perverse exercise you'd see in some sort of specialty arthouse german films usually found behind beaded curtains.
"That same group has now paid student debt back, paid more for a house deposit in nominal terms that previous generations had to pay for the whole damn home outright, and is also likely to have to finance their own retirement through Kiwisaver as well as that of their parents through general taxation, and somehow finding a way to raise a family while our congested cities mean longer commutes and less time with their loved ones."
Dont forget to mention paying for the bludgers who get houses for free and an income without work
Who are these FHB do you think? My guess is these are FHI (I’m sure you can work that out without me spelling it out). Getting in while they can, while also hoping to get out while the market is still hot and put their gains into something cheaper before the pop occurs. Fools.
The systemic problem cannot be solved because we had been using a faulty approach.
There's no such thing as a level playing field- there will always be people with more money than someone else. What we could do instead is to create a fair playing field by having more options for housing.
But we can't build enough can we? We tie our hands up ourselves with ideologies to ensure we'll never be able to build in any meaningful quantity.
Taxation can reduce demand but it also reduces the incentive to build and is the most negative way of approaching a supply issue.
Like the good old socialist mantra to rising food prices, "Let's increase taxes on food, the demand will fall and food will get cheaper- so everyone will have their equal share."
CWBW
Agreed that there is a deep seated systemic issue.
There are many on this site who like to use Orr and the current Government as whipping boys.
However homeownership rates have been falling for the past 35 years: for 25 to 35 year olds it has fallen from 65% to 35%.
The reality is that since 2017 and strengthening of LVRs, RBNZ data (since 2014) shows the number of sales to investors has actually been declining and (as yesterday’s article highlighted) the number of FHB have been increasing and over the past 12 months are at historic highs for the past seven years.
While yesterday’s article highlighted high levels of FHB sales, what is not apparent, but almost certainly likely is that the age of FHB has been increasing as FHB are now needing to save for a longer period.
So yes, there is need to address the systemic issues - actions by RBNZ over the past year have simply exacerbated a long term trend.
Knee jerk reaction of calls for RBNZ to increase the OCR is not going to address the issue -while an increase may cool the market for FHB, price affordability will simply be replaced by mortgage affordability.
I also continue to see calls to stop leveraging - the reality is not a simple reality.
I am not convinced that DTIs won’t have the greatest impact on FHBs.
The use of LVRs, increase in brightline test, encouraging increasing supply, and removal of tax deductibility on existing rentals are all good and appropriate actions but their effectiveness are not yet fully apparent in turning the tide.
Other actions are seemingly required which could include increased Government support targeting FHBs.
There is no easy fix here but to reinstate the true purpose of houses - a place where people come to rest when they aren't out there engaged in the real economy.
Creating more opportunities in modern hi-tech industries (trying to live up to our first-world tag) and away from housing speculation (perhaps tax the bejesus out of speculators if you have to) would be an amazing start.
The government created the problem now we are expecting the government to solve the problem ? Any form of taxation is not the solution, you need people running the country that know what they are doing. You need to incentivise the right areas of the economy and quit trying to tax people 3 times on money they have earned.
Which imbalance is that? The huge portion of income tax paid by an extremely small group of taxpayers? Or the tax rates that tax wage inflation on the assumption your living costs haven't increased in a decade, and every pay-rise you've had since (even the ones they mandated to help wages keep up with living costs) are all pure profit?
If we want to start fixing imbalances in the tax system then making people rent their own home from the state is not the place to start.
Yes. I'm part of that extremely small group of taxpayers. It's going to get smaller because I just can't be f***ed anymore.
Capital gains are lightly taxed and income is heavily taxed. There is a significant imbalance in this country, the tax system incentivises housing speculation and it's been covered to death many times previously.
I agree that "renting your own home from the state" is not the place to start. But lets not pretend that the problems with the tax system don't exist.
I'm not, but 'the tax system favours housing speculation' is one moving part of a consistent failure to update and administer the tax system in a way that changes with how New Zealand is changing. These wide-ranging proposals are all well and good, but if we go down this route and then neglect the tax system again, we will end up with a new massive set of problems. I don't trust the same people who got us into this mess to suddenly get more competent if they suddenly have access to a whole new source of revenue after decades of being on cruise control.
Actually yes a 6 figure income is impressive in NZ. Yes it makes a difference, if you cannot manage on that you need to attend classes on how to budget and prioritise your spending because your clearly wasting most of it and making bad financial decisions if its making "no difference" to your life. Google search... "If you’re judging wealth by when the top tax rate kicks in, these policies suggest the Green Party believes anyone earning more than $100,000 is wealthy, National believes it’s $90,000, and Labour $180,000". Try living on the average salary in NZ, you will then have something to squeal about.
Carlos69.
The point being made was that makes no difference on housing when the price of a family home in Auckland was engineered 300-400k higher over the past year.
Whether or not you are comfortable in this country has everything to do with historical purchase of housing with taxed salary and business income coming a very distant second.
Spare us the clichéd boomer lecture about money management and the tall poppy syndrome when you clearly have difficulty grasping basic numbers.
The best financial decision I ever made was leaving New Zealand and the worst I ever made was recently coming back.
It is clear that New Zealand is going to have extreme difficulty retaining the skilled workforce it needs over the coming years. The future of this place is looking dimmer by the day.
I'm confused if the worst decision you ever made was returning to NZ then why don't you just simply go back ? House prices skyrocketed, NZ is not the only country where that happened. This is not a personal attack on you, things are what they are and home owners got lucky in the same way some people get lucky just buying a lotto ticket. One of the biggest financial mistakes I ever made was not buying a 10 acre $60K section next door when I was on $32K a year salary. Had I done that I would have been a multimillionaire by now but cars and motorbikes were way more exciting at the time when your in your 20's.
Speak for yourself. I'm a retired homeowner and at 1% I'd be looking at a personal FER tax bill of $1,250 a year - a big chunk out of my pension! Buggered if I want to pay more to live in something I built and have owned for 13 years because has increased in value due to circumstances outside of my control. I could sell & downsize, but why should I be forced to leave somewhere I like and have invested considerable effort in because government policy on housing is such a CF.
Well if you can't afford the FER on your pension, you may be forced to sell and wipe away your tears with your tens of thousands of hundred dollar bills.
If you're not making enough revenue on land worth millions of dollars to even cover the tax bill, you're likely not the best or most economically optimal owner of that piece of land.
Because they stopped making land a long time ago, we can't keep having the elderly sitting idle in properties far greater than their needs while the next generations have to consider raising a family in shoebox apartments.
Also your response reminds me of the voting bloc in the 1970s that gave Muldoon victory. "Buggered if we're going to help pay for our retirement through contributions to a superannuation scheme".
My word, you have a very poor and opinionated view of the elderly "sitting idle in properties far greater than their needs"! Who are you to decide what my or anyone else's needs are? My first home was a Coronation St "2 up,2 down" furnished 2nd hand, very similar to your "shoe box Apt'. Nothing wrong with starting at the bottom, except that's apparently not where today's FHB expects to start from.
You spend your earnings how you decide, allow us to do the same. For your info, my NZ super is mostly paid for by the UK Govt via direct deducted NI contributions for the 30+ years I worked there. I wasn't here in the 1970's, but I also believe my NZ taxes paid over the last 20+ years have contributed to the Super Fund. Stop decrying those of us that have built up some wealth to make our latter years a bit more enjoyable - you might be one of us eventually!
We've done just that, started in a poky shoebox house at the bottom of the market, upped sticks to the regions 4 years ago.
As for superannuation, do you really believe someone's taxes for 40 years has paid for the $20k p.a. for a single pensioner? If they live until the current life expectancy of 82, that's $350k. Nearly 30 years of a $50k p.a. wage earners entire PAYE. And yet the pensioners are crying out that it's not enough, while simultaneously claiming current FHB are acting entitled.
Let us face it - this whole proposal ( just like those from TOP and Greens ) are basically about screwing the pensioners.
There is no economic rationale for those proposed taxes - it is all about "fairness" as the proponents understand it .
It would nothing to solve the housing issue - you would notice that any claims to that extent are pretty weak afterthoughts.
If people want to avoid tax, they'll avoid it. We already define what a 'family home' is for the purposes of the Bright Line, so it's not an exercise that is so hard that it's not worth bothering - because we already have. It is, however, an excuse to cast your net wider when you're arguing for a new tax on people for owning their own home.
You are welcome to the huge 30 year mortgage on the grossly inflated property value I had to pay, as well as the life insurance I had to take on board to cover my end and all the stress that comes with it if you would like. That bit doesn't feel like a privilege tbh.
That is a generalization, you forget that 9 out of 10 landlords own <= 2 properties in NZ.
These are largely hard working kiwis, mum and dads, I doubt many of these pay high priced accountants.
The solution is not a new tax, again, but to fix the existing problem by building more properties.
Simple supply and demand market demographics.
I still reckon it's a supply and regulation problem. Too much rather than too little. If people could buy a 50m2 patch of land a build a shed on it, everyone would be able get into the market at a level that suited them.
Because people then have options, sellers couldn't rort buyers.
Plenty of people would rather live in a portacom they own, than be ripped off for rent on something they don't own, but they're currently not allowed.
It’s a people going out and buying properties problem because the last 50 years have supported the massive increase in availability of credit along with ever decreasing interest rates especially since the GFC when the Global banking system came very close to a complete meltdown.
While we fail to treat asset price inflation in the same way we treat consumer price inflation, or low end wage inflation, then we will probably still have the same problems.
This idea of good inflation and bad inflation is strange, even the mandated 2% CPI inflation represents an exponential growth, a doubling every 35(approx) years, yet we regard this as good inflation.
While we fail to treat asset price inflation in the same way we treat consumer price inflation, or low end wage inflation, then we will probably still have the same problems.
This idea of good inflation and bad inflation is strange, even the mandated 2% CPI inflation represents an exponential growth, a doubling every 35(approx) years, yet we regard this as good inflation.
Looking at stats NZ:
- In 2001 we had 1.49m dwellings and in 2021 we had 1.95m dwellings, so we had +0.46m dwellings in the last twenty years.
- In 2001 we had 1.42m households and in 2021 we have 1.95m households, so we have +0.53m households.
- 0.46m dwellings - 0.53m households = 0.07m houses short.
I think we're up to 40,000 houses per year built at the moment. So just stop all immigration and in about 2 years, with careful demographic management thereafter, you'll start to see prices moderate towards 2001 levels.
It's so simple even the current government could implement it. :-)
What about those who want to spend their twilight years enjoying their garden and having loads of grandkids to stay? Heaven forbid if an older person wants to remarry... which only happens all the damn time.
No, off you go to a one beddie across town as befits your remaining usefulness. You are permitted however to farm a small plot in the communal garden, the produce from which will be allocated to those who are deemed the most needy.
I'll repeat my comment from last weeks FER opinion.
"Fair Economic Return" reminds me of TOPs envy tax policies. Steal from those who've worked all their lives to live comfortably in their old age & leave something for their children. The Govt then pay it as a UBI to people who can't be bothered getting out of bed.
House price increases are simply reflecting supply/demand & price inflation isn't unearned income, its exactly the same home as before revalued by the medium of exchange. The way to make housing more affordable is obviously to change the supply &/or the demand, not forever fudge facing up to this by enacting socialist theft.
The issue in NZ is not that we don't tax houses enough, but that the LAND prices are sky high. It's not the house. Land will become more affordable if we make more of it available, and if other supply issues are addressed.
Adding another tax does help our supply issue at exactly 0%.
Yeah, beggar the people they will used as stock for their "people farming" to gain their comfortable lifestyle at the expense of others by shutting them out of the market and making them remain their "farm stock", too bad about their retirement.
Left turn required
The issue in NZ is not that we don't tax houses enough, but that the LAND prices are sky high. It's not the house. Land will become more affordable if we make more of it available, and if other supply issues are addressed.
Adding another tax does help our supply issue at exactly 0%.
If housing is Labour's Achilles heel then it will be National and Act's Sword of Damocles, because if there is one thing I can tell you for certain, it's neither of them will do a damned thing for those who are now seriously suffering after decades of neoliberalism that anyone with a modicum of understanding would know would lead to this.
To even this out is going to need a genuine shift to the left.
There is no easy fix here… definitely not with tax incentives/disincentives alone.
The main issue is supply/demand imbalance that is driving prices. That and the lack of reasonable return on term deposits for the oldies.
What we need is a f-n big propaganda machine established that educates all about the ills of their greedy ways… kinda like the drink driving adds government runs. It’s human greed and f the others attitude that’s at the heart of it. But I suppose this is utopian view will never happen.
Life should be simple… why do you need to amass so much in the world…
If the govt didn't underwrite bubbles the greed would not be a problem - each generation would get a lesson in market frenzy and collapse and pass it on to the next.
Remove govt's control of the money supply and it's options to do damage are more limited and transparent.
Oh… and look what I just stumbled upon in my trawling… the apt lyrics to Chris Rea’s song, The Road To Hell:
Well I'm standing by a river
But the water doesn't flow
It boils with every poison you can think of
And I'm underneath the streetlights
But the light of joy I know
Scared beyond belief, way down in the shadows
And the perverted fear of violence
Chokes a smile on every face
And common sense is ringing out the bells
This ain't no technological breakdown
Oh no, this is the road to Hell
And all the roads jam up with credit
And there's nothing you can do
It's all just bits of paper
Flying away from you
Oh, look out world, take a good look
What comes down here
You must learn this lesson fast
And learn it well
This ain't no upwardly mobile freeway
Oh no, this is the road
Said this is the road
This is the road to hell
Oh yeah, spot on. I'm glad Chris Rea had time to record this before, you know, the end...
https://www.youtube.com/watch?v=OcW-BSEB3ng
Hello Susan
As someone has written extensively on this topic for more than a decade, I am glad you have come to the party and acknowledged that NZ's very unusual tax system is one of the factors leading to a major intergenerational divide by artificially inflating house prices. As you note in your paper, the major problems began in 1989 when the Labour government, without appropriate economic analysis, decided to change the taxation of savings (other than housing) and thus significantly increase the advantage of investing in housing rather to other asset classes. If you read the official documents from the time, the people changing the taxation of retirement income savings ignored the potential effects of the tax changes on housing markets completely. New Zealand departed from standard international tax principles and standard economic theory - and not one country has copied what we do. Since some of the problems started by changing the taxation of retirement savings from EET to TTE, I am surprised that you did not even suggest that an alternate solution is to change the taxation of retirement savings back to EET so that housing is no longer so advantaged. After all, this is what other countries do - it meets your criteria of doing what is possible as it is the main method of avoiding the problem around the world - and this is what mainstream economic theory suggests could be done. Lord Kaldor wrote a book about in 1955, as I am sure you are aware. There is a large literature on this issue that you completely ignore in your paper.
There are two curious aspects to your proposal, which your paper does not adequately analyse. The first is the exemption. An FER with a million dollar exemption will still make housing a tax advantaged investment class relative to other investments unless you tax other investments on a consumption basis (like other countries do). This means creating a class of investments that are taxed on an EET basis. This could be retirement savings or it could be bank deposits made directly from labour earnings (an approach adopted in the UK). If you do not do this, young people - people without a million dollars equity - still have a tax incentive to invest in housing, albeit, in less expensive housing. What will be the best tax advantaged way to get ahead? To buy a house. Unfortunately, you do zero analysis on how this exemption will affect house prices or rents. A FER is likely to reduce high priced housing, but why do you expect that low priced housing will become more affordable? It is still a tax-advantaged asset class to lower-wealth owner-occupiers. Some analysis of this issue would be useful, or else we risk revisiting the 1980s when tax reforms were implemented without a proper analysis of their effect on housing, and we know where that lead.
Secondly, your analysis seems to suggest that all income should be taxed at the same rate. You say, for example,
“We acknowledge that in a perfect world all income would be aggregated and taxed at the marginal tax rate of the individual.”
This is simply not correct. For fifty year it has been a basic principle of taxation that it is not normally appropriate to tax all income at the same marginal rate. This is the fundamental principle behind the optimal taxation literature - James Mirrlees was awarded a Nobel prize for this work, and his co-author Peter Diamond was subsequently awarded a Nobel prize for other economic contributions. In particular, there is no reason why capital and labour income should be taxed at the same rate. It is not efficient, and if capital and labour income are taxed when it is earned it does not generate horizontal equity (measured in terms of consumption) either. Most countries have taken this lesson on board, and most countries attempt to tax labour income at higher rates than capital income. This is true in the world’s most equitable and highest income countries, countries like Sweden and Norway or Germany. New Zealand is a conspicuous exception. If you are arguing for a principled approach to taxation, you should at least try and adopt the principles outlined by standard tax theory and adopted all around the world.
To me this suggests that before adopting a new tax system, one that is not properly examined, which does not appear to be consistent with basic tax principles, and which is not widely used abroad, perhaps New Zealand could consider other approaches that are consistent with standard tax theory and which are widely adopted abroad. All that is required is (i) an admission that New Zealand may have made a mistake in the late 1980s by adopting a tax system that creates significant distortions in housing markets, and (ii) consideration of reversing the late 1980s decisions and reconsider adopting an approach to the taxation of savings that is the global standard.
Andrew Coleman
Thanks Andrew but you are selective in your story about EET to TTE. I am no fan of Roger Douglas but there was a coherence in the late 1980s tax reforms. Rather than a full expenditure tax (Kaldor) we were to have a comprehensive income tax that treated all income the same (supplemented by a broad GST). The problem was that Labour’s plan to include broad capital gains in the base (including the family home with a fixed exempt amount) was scuppered (by them)in 1990. Without that, real estate was as you say is a favoured investment.
But the worst thing we could do is to go back to EET: it would be highly redistributive to the rich and would undermine the tax base. The tax principle that NZ reforms have been based on was broad-base low-rate and successive tax taskforces have endorsed that. New Zealand did not adopt an optimal tax framework that favours income from capital: it makes little sense in NZ where the problem is that labour income is very heavily taxed compared to capital.
You talk about someone who still has an incentive to invest in low price rentals- yes but that person still has to have equity in a home to house themselves and if they don’t they will pay a non-deductible rent.
Hello Susan,
You are, of course, completely right about the EET/TTE decision in 1989: it was part of a package that was never completed. This is the problem. The question is: do you try and complete the package (no progress made in thirty years) ; or do you reverse the initial decision and adopt a tax system that looks like the rest of the world's. You seem to believe in a Utopia that NZ can complete the reforms, albeit in a partial way that has not be tested or even properly analysed. Maybe I am conservative, but reversing the reforms and doing what the rest of the world does seems more likely to succeed.
Your comment that "EET is the worst thing that could occur" nicely captures your ideological position, but from most other respects it seems bizarre. You say that it is highly regressive, but this clearly depends on the way it is designed. Most countries that have an EET system match it with a higher top marginal tax rate in order to introduce a package that is both efficient and redistributive. Unfortunately when the Tax working Group investigated how redistributive an EET system might be they did so under the assumption that it would be introduced without changing the top marginal tax rate ie in a manner that it is not introduced in the rest of the world. They also ignored the effect on house prices - ie they did not bother to look at the incidence of the tax by calculating the feedback effects on other asset classes. It seems to me that your ideological stance on EET is colouring your analysis and your choices. If NZ had the world's most progressive tax system there might be merit in what you say. It does not. The countries with the most redistributive tax systems mainly have EET systems. The distributive properties of the tax system depend on the whole system, not one component of the system which means EET could be reintroduced while maintaining redistributive aims - this is exactly what other countries do.
In any case, you comment about the redistributive effects of an EET system ignore the effects on house prices which is main topic of your paper. Adopting an EET without changing the top marginal tax rate (not recommended) will reduce housing inequality. This is the goal. It will probably reduce consumption inequality overall by reducing the extent that capital income is taxed at different rates, distortions that affect the overall performance of the economy. You happen to believe the goal can be achieved another, untried, and untested way rather than a way tried and tested around the world (and supported by mainstream economic theory).
It is also strange that you think that your interpretation "broad-base low rate" should be the fundamental principle of the tax system and that this statement is appropriate because New Zealand based tax working groups have endorsed it. This seems hardly a good enough reason given it is not supported by standard tax theory and is not practiced in most countries around the world. Most Scandinavian countries, for example, expressly oppose this principle on the basis that it undermines the performance of the economy and is likely to lower wages. Major tax enquiries such as the Mirrlees enquiry in the UK did not support it. That you think NZ has a monopoly on wisdom on tax design principles when you are writing a paper on the way that the NZ tax system has had major flaws for 30 years is a little odd. i would have thought that looking beyond the narrow borders of NZ for wisdom on tax matters might have been useful. When you do this you will find that most people around the world support a consumption tax approach to the taxation of retirement income. It is not just that left wing economist Lord Kaldor - most economists think consumption taxes perform better than income taxes. As other countries have found, an EET system means you can introduce progressive consumption taxes and have both efficient and equitable outcomes. But perhaps for other reasons you don't want to look at the design features of rich countries with progressive tax systems.
By the way, if you check the facts, New Zealand has some of the lowest tax rates on labour in the OECD. It also has some of the highest effective tax rates on capital income in the OECD.
Here are the data on labour income tax rates - in 2016 NZ was the second lowest in the OECD (Labour taxes on a person on mean income)
https://stats.oecd.org/index.aspx?DataSetCode=TABLE_I5
Here are the data on capital income taxes - in 2016 NZ was the highest, although this varies by year but we are normally in the top 4.
Source: https://stats.oecd.org/index.aspx?DataSetCode=REV
Category 1200 - Taxes on income, profits and capital gains of corporates
It simply is not true that NZ has high taxes on labour income. It is not true because in the 1970s NZ adopted another unique approach to taxation - it decided not to fund government retirement incomes out of social security taxes. This may not be relevant to the FER, but it is helpful in tax debates to have a basic understanding of the facts.
Andrew
Any OECD
First, it simply isn't con.
Very interesting discussion - thanks to both Susan and Andrew for this.
On the matter of our (supposed) "broad-base low rate" tax system - do either of you know how our rate of consumption tax compares on a global basis? I'm always mindful that it started at 10% - which seemed in keeping with the BBLR ideology at the time - but it's grown to 15% (the last increase by JK's government being legitimized as a 'tax switch' in order to bring the top rate of income tax down).
That episode in decision-making seemed entirely at odds with BBLR and to me was a regressive move.
I'm with Andrew - our tax and welfare system is a mess. Needs a re-look from first principles. And because this system is a mess, we have countered the tax inequities with a whole swag of welfare add-ons (Accommodation Supplement, Working for Families, etc.) as a means to counter the "mess".
This is where Labour have failed - and will continue to fail - to be truly transformational. And if we move back to National we'll have another round or action that digs us deeper into the hole of inequality.
Dear Kate
see https://files.taxfoundation.org/20210125160521/Consumption-Tax-Revenues…
NZ is one of the countries with the highest percentage of tax revenue from consumption taxes like GST.
I agree at 15% GST is hardly low rate-- Australia is still 10% and NZ is much more broad-based including basic food etc
NZ has a GST rate of 15%, which is one of the lowest in the OECD – the average “normal” rate is about 19%. But NZ applies it to all goods and services, whereas most countries exempt some goods and services from the normal rate; for example, many countries have a zero rate on food. In terms of the amount collected, NZ is above slightly average. According to the OECD, NZ collected about 12.5% of GDP as GST, which is 8th in the OECD behind a bunch of small European countries. About a dozen OECD countries collect 11 – 13% of GDP as GST, so NZ is only slightly above average.
There is one wrinkle in these statistics. The NZ government sometimes uses two GST revenue numbers. One of them includes GST that government departments pay the government – ie money it pays itself. By this measure, NZ has the highest GST collection in the world. This is because no other countries calculate GST revenues like this. The Government occasionally reports this measure eg in the Tax Working Group preliminary report you find out that NZ has the highest GST in the world. This comparison should be ignored – the Treasury in its revenue accounts uses the lower number reported by the OECD. (The difference is something like $6 billion per year.) When the government reports how much tax it collects, it ignores the GST government departments pay itself so that the data is internationally comparable.
The data can be found here
https://data.oecd.org/tax/tax-on-goods-and-services.htm
Incidentally, it is possible to design a GST system that charges provides rebates to low income people. For example, people earning less than (say) $40000 could get a rebate each year that reduces the effective GST rate they pay to 10% rather than 15%. This is the famous "flat tax" proposal of Robert Hall and Alvin Rabushka from Stanford. Countries such as Estonia have been considering their proposal, and have attempted to move towards it. That said, the proposal has not been adopted my major countries yet - although I have often thought it would be a good idea. NZ could raise the GST rate to 20% (and hence tax capital gains as well as other income indirectly ) while at the same time keeping the rate on lower income households at 15% or lower. The extra money could be used to reduce income taxes and thus rebalance the tax system from an income basis to a consumption basis. The late Princeton economist David Bradford offered an alternative scheme VAT/GST that was even more progressive.
Hi Andrew
In my view it makes more sense to complete the TTE reforms given we have 30 years of experience rather than reverting to an untried progressive EET. None of the rest of the world has a pure expenditure tax. Interesting as the graphic in link in reply to Kate shows only 8 poorer East European countries get more from consumption taxes than NZ. In the conversion from EET to TTE in New Zealand, there were windfall gains as company pensions became tax free often with little or no write down. Imagine if we reverted back to EET—the wealthy would become even more super wealthy. No tax on the way in, no tax on investment earnings. To say the top rate should be higher so it gets taxed on the way out-will not solve the problem. From memory in theory a comprehensive direct expenditure tax (DET) is only equivalent to a comprehensive income tax, if under the DET all gifts and bequests are taxed. We don't live in the high world of theory- it is time to act now and something practical and doable- hence the FER.
You assert that “ The countries with the most redistributive tax systems mainly have EET systems” is not support by the graphic. Only Chile gets more than 50% of it revenue from an expenditure style of tax.
I just don’t understand this assertion “ Adopting an EET without changing the top marginal tax rate (not recommended) will reduce housing inequality. This is the goal. It will probably reduce consumption inequality overall by reducing the extent that capital income is taxed at different rates, distortions that affect the overall performance of the economy. You happen to believe the goal can be achieved another, untried, and untested way rather than a way tried and tested around the world (and supported by mainstream economic theory).”
You say “ looking beyond the narrow borders of NZ for wisdom on tax matters might have been useful. When you do this you will find that most people around the world support a consumption tax approach to the taxation of retirement income.” I dont agree with this statement as many countries bemoan their highly inequitable EET systems
Lets take Australia- the high cost of their EET which is pro the already rich could finance the change of their horrible means-tested age pension into a much fairer NZ-style universal one. You say “New Zealand has some of the lowest tax rates on labour in the OECD. It also has some of the highest effective tax rates on capital income in the OECD.”
BUT instead of using payroll taxes we use the much more progressive income tax to fund social security so I am not sure of your claim at all. The OECD and IMF continually point out we have a huge gap in our capital gains taxation. I gather you are no fan of Piketty?
The 2020 OECD tax revenue stats report
“In 2018, the latest year in which final data is available for all countries, social security contributions (SSCs) amounted to the largest share of tax revenues in the OECD, at just over one-quarter (25.7%), on average. Together with personal income taxes (23.5%), these two tax types amounted to nearly one-half of tax revenues in OECD countries. Value Added Tax (VAT) accounted for a further one-fifth of total revenues (20.4%). Other consumption taxes and taxes on corporate income accounted for smaller shares of tax revenues (12.3% and 10.0% respectively), with property taxes (5.6%) and residual taxes accounting for the remaining share.”
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We are probably boring other people here, but you seem to be using "progressive EET" in a different way than is used in most of the literature. A progressive EET system for retirement savings is extremely similar to a progressive income tax - there are increasing marginal rates for people on higher incomes - but money placed in a specified retirement schemes (the equivalent of KiwiSaver) is not taxed when it is earned but is taxed when it is withdrawn. Thus someone earning $100,000 and placing $10,000 in retirement scheme would pay tax on the $90,000 immediately (at the appropriate marginal rates, which could be as high as you like) while paying tax on the $10000 plus accumulated interest and dividends and capital gains when the money is withdrawn in retirement. The tax rate paid on the withdrawn money may well be lower than the tax rate when the money is earned. But by adjusting the marginal tax rates on income, you can make the whole scheme as progressive as you like. This is exactly what most OECD countries do. NZ is a conspicuous exception. No, other countries don't have a pure expenditure tax. I have never claimed that they do. But they do have have a progressive EET system for retirement income savings, and this reduces some of the economic distortions that stem from income taxes. This is standard economic theory, and the only place where it seems to be controversial is NZ. To be honest, I really don't get your opposition to this, the theory is crystal clear and it is the practice in most OECD countries. To repeat, it simply not the case that no other countries have a progressive EET scheme. All countries that have EET schemes have progressive EET schemes. This is why i advocate reversing the decision made 30 years to adopt TTE - a decision that appears to have ignored the effects on housing markets, even though theory strongly suggests that getting rid of EET without simultaneously imposing a capital gains tax and a tax on the imputed rent accruing to owner-occupiers will substantially distort housing markets. (This theory was well known in 1989 - not just the work of Kaldor in the 1950s , but also the work of Martin Feldstein in the 1970s and Chamley and Wright and others in the 1980s ). I guess we don't see eye to eye - i like the tax system of many rich, progressive countries and you seem to find the tax systems of rich progressive countries unattractive.
NZ could make a transition to an EET scheme by allowing young people to adopt it, while keeping older people on the current system. This would solve most of the problem. We do not need to be stuck with decisions from the 1980s, anymore that we need to be stuck with 1980s telephones.
You are right that most of the countries with higher rates of GST are "poor" Eastern European countries. This is deliberate; after they reformed their economies in the 1990s, many tried to adopt tax systems that reduced economic distortions. (Incidentally high income Scandinavian countries also try and reduce the distortionary effects of taxes on investment patterns by have a lower set of taxes on capital income than labour income.) These former communist countries are poor, but they have been growing much more quickly than NZ since 1990 and many of them now have higher productivity per hour worked than NZ. They do have lower wages, but this is offset by much lower prices - productivity is higher. Their house prices have not increased as fast as NZ's since 1990 either, despite much faster productivity growth.
According to the OECD, the claim about NZ labour income taxes being some of the lowest in the world is completely correct - it is because we don't use payroll taxes to fund retirement income. NZ is more or less the only country not to do this, or use a compulsory saving scheme. NZ made a deliberate decision in the 1970s not to adopt the mixed contributory/welfare retirement income systems adopted in almost all other countries. A side effect is that we have ended up with high and particularly distortionary taxes on capital income, and low taxes on labour income. For forty years most theory suggests it is better to have high marginal taxes on high labour incomes than high capital incomes, although views are starting to change on this. I know from your other writings you like NZ's unique retirement income system. This is your preference. Unfortunately in the course of adopting a different system from the rest of the world we have ended up with neither a progressive tax system nor an efficient tax system. We have a system that is so distortionary that three tax working groups have complained about it since the late 1980s. There are many other models, models that are both more progressive and less distortionary, but NZ tax commentators seem to want to adopt a system that is different from the rest of the world, one that we both agree generates incentives that create artificially high house prices. I figure that we are better to adopt practices tried elsewhere, you want to push on in an untried alternative direction.
There is one bright side. Ultimately tax is not as important as health, and at least NZ has decided to use most of the international standard medicines and medical techniques that other countries use. Things could be a lot worse - we could be trying to use medical treatments invented in NZ in the 1970s and 1980s. That would be catastrophic. Come to think about it, in the 1860s Samuel Butler spent his spare time on a Canterbury sheep station writing a book about a country that tried to ignore progress and went nowhere fast: the justly famous Erewhon. I don't think this was included in Piketty's book, despite his references to many other 19th century novels. But that is all I shall say about my views on Piketty, other than to say I often refer to his book.
People owning houses are already taxed.
They pay "Rates" which is a tax on home ownership.
Something that people that down own houses dont have to pay.
Those rates pay for all the council infrustructure that non house owners use all day long every day.
Why should house owners such as property investors have to pay more tax's.
If we wanted a socialist communist state we would move to Russia.
Seriously? Since when does anyone have the absolute right to own a house? The biggest problem in NZ is the availability of land for housing and it starts in Auckland. The Rural Urban Boundary has artificially stymied land supply when there is high demand. Of course house prices go up. And there is then a knock on effect through the country. And for all those whining that it's not fair that investors buy houses, someone has to, as there are plenty of people that want to rent. So when you make rules to disadvantage investors, rents go up. And I point out, in the 2018 census, home ownership rate in NZ was 64.5%. Which isn't bad when look at the OECD average is below 50%.
renting right now is the smart option - I live in a 2 million dollar house for $530 a week - why would you take out a mortgage to buy that lifestyle and pay 4x as much to a bank in interest - only capital gains would make it tenable and any secondary property should be taxed accordingly on sale as "investment income" ffs - do your job IRD
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