Going cold turkey on the thing that made your family rich is always going to be hard, which Labour is discovering all over again.
This is all about our economy’s addictions to imported low-wage labour and leveraged-and-tax-free gains on residential land price appreciation.
This week’s backsliding by the Government on its hopes to wean NZ Inc off cheap migrant labour shows that. Along with the continued ruling-out of wealth or capital gains taxes by Prime Minister Jacinda Ardern and PM-in-waiting Christopher Luxon ‘in their political lifetimes’.
The older home-owning median voters in the suburbs of our big cities and provincial towns and cities cannot imagine a different way of doing things. More importantly, they cannot see how going cold turkey would be anything other than disastrous for their own plans for retirement and their hopes of helping their own children into stable homes, i.e. the ladder to financial security.
Ironically, but perhaps not surprisingly, the more extreme the addiction has become and the more obvious it is it needs kicking, the harder it is to kick. Median voters and the politicians that court them cannot see an alternative.
A residential land tax is an alternative
Without too much fanfare, the Labour Government has just reversed its course on one of its main economic strategies. It had hoped to use Covid as a chance to re-set NZ Inc’s addiction to low-wage temporary migration, which has been a key ingredient keeping our economy growing faster overall than our peers for most of the last two decades.
The record-high migration has also disguised the highest rate of ‘leaching’ of home-grown talent in the developed world and even-more-sluggish productivity growth than the rest of the world. It also fueled an explosion in house values to the highest in the world, relative to incomes and rents, that made it palatable for those with homes to still be on low incomes.
Low wage migration goes hand-in-hand with leveraged and tax-free capital gains on residential property to keep NZ Inc feeling wealthier than it actually is – for asset owners.
Here’s what was written in a Cabinet paper late last year as the then-Immigration Minister Kris Faafoi was finalising the Government’s ‘rebalance’ of migration policies:
“The Rebalance aims to support a future economy that is less reliant on lower-paid temporary workers, better addresses productivity, skills, and infrastructure challenges, and increases the skill levels of migrants," Faafoi's office wrote, adding it wanted to only let in skilled workers on 1.5 times the median income.
A quick reminder of the problem
Faafoi's office explained the issue well last year.
"Our pre-COVID reliance on temporary overseas workers and rate of population growth have been recognised for placing unsustainable pressure on our infrastructure (such as housing and transport) and placing downward pressure on New Zealand workers’ training, wages, terms and conditions," they wrote.
“A rebalance would aim to improve outcomes for New Zealanders and enhance our economy. This approach is predicated on the basis that businesses previously reliant on migrant workers to fill low-skilled or low-paid roles would be incentivised to find other ways to address their labour needs, such as improving wages or conditions, recruiting or training New Zealanders, or increasing automation," they wrote.
“The Rebalance aims to support a future economy that is less reliant on lower-paid temporary workers, better addresses productivity, skills, and infrastructure challenges, and increases the skill levels of migrants."
Our economy had the highest use of temporary migrant labour in the developed world prior to Covid and one of the highest rates of ‘leaching’ of home-grown talent.
We built a system that sucked in new temporary workers to replace the local ones who left because they couldn’t see a future for themselves here, given brutally high housing and other costs. This system only ‘works’ for those who have already captured the unearned, leveraged and tax-free gains on residential land values.
The idea was that the Government would use Covid as ‘system reset’ opportunity to force businesses to go ‘cold turkey’ on the cheap labour, which is the oil that keeps the badly-designed and tuned economic engine running.
But a system-reset requires investment
The missing link in the theory is investment. Small businesses would need to invest in technology, consolidation, training and new management systems to increase output with the same number of workers. That requires a combination of their own investment and central and local government investment in infrastructure. That investment is desperately needed.
For 30 years, Aotearoa-NZ’s households and businesses chose to invest in residential land, rather than in businesses. Governments of both flavours also chose low taxes and no taxes on leveraged gains in residential land values because that makes people on relatively low wages (who have high living costs and own homes) feel wealthy and keeping voting in Governments.
Households and businesses know the choices they have. They could invest in R&D, technology and training or M&A to make their businesses more productive. But they know that investing in leveraged residential land is vastly more profitable and vastly less risky because the Government has pledged (and shown) repeatedly that its main priority is protecting and enhancing those unearned gains in owner-occupied residential land prices. Those assurances and the lack of a tax on these gains has made Aotearoa-NZ the fastest-appreciating and most unaffordable housing market in the world in the last 20 years.
Those who say our market is just as bad as others who do have capital gains taxes are just plain wrong. The outsized fall in our market since interest rates started rising also shows that.
Don’t expect a better engine without a rebuild
No party anywhere near Government, including Labour and the Greens, has ever pledged to tax owner-occupied land price appreciation. Attempts to tax capital gains beyond the family home failed to win support of median voters and is now embedded so deeply as a ‘third rail’ in politics that the most popular politician in our recent history, Jacinda Ardern, pledged never to try again in her political lifetime.
The best the current Labour Government has been able to do is try to throw some sand in the gears of rental property investors through extending the bright line test for property traders, ring-fencing landlords’ losses and removing interest deductibility for tax purposes. But even those measures do not have a social license.
The Opposition Leader, Christopher Luxon, has pledged to reverse all of those tax moves and his party is ahead in the polls. His own choices as an investor, despite his self-described success as a business operator, has been to buy rental properties. Businesses and households know the lay of the land. The incentives are all there to invest in residential land, for both small and big businesses. (By the way, Luxon again reiterated on Tuesday National's preference to open the migration taps right back to full blast as soon as it was elected late next year).
The fastest-growing and newest source of wealth on the NZX in the last decade has been the listing and rise of retirement home operators such as Ryman Healthcare, which are essentially plays on tax-free capital gains on residential land values as they buy land, keep the gains, and sell services to the beneficiaries of those tax-free gains.
Most small businesses would not survive long without the backstop of continued rises in land values pumping up the equity that can be used in the down years to bolster retirement nest eggs. It’s one reason why we have one of the highest small-business-ownership rates and self-employment rates in the world. Our rate is more than twice that of Australia and three times that of the United States. Both have capital gains taxes and effectively incentivise the alternative of business investment, which encourages higher R&D, technology investment and international competitiveness.
Why bother working when the land keeps generating wealth
After all, why bother to invest in an outward-facing high-wage business when you can build a much bigger and less-risky nest egg for your children (who will need it to get their own homes) by investing in your own residential land.
When the land under our homes earns more than our actual jobs or businesses, we shouldn’t be surprised when investors choose to sink their money in dead land, rather than active businesses or infrastructure.
A failure at the first attempt and within 103 days
This week’s decision by the Labour Government to extend exemptions for at least two to three years to the median wage minimum for temporary work visa holders for construction, aged care, seafood processing and adventure tourism was announced just 102 days after the ‘rebalance’ was announced. The attempt to go cold turkey failed after the economy had its first case of the cold sweats and violent shaking.
It was always going to happen when the underlying problem of changing the incentives for Government and private sector investment remain in place. The current machine only keeps going forward with the oil of cheap migrant workers and the rocket fuel of unearned, untaxed and leveraged gains on residential land values.
So what now?
All roads were always going to lead back to changing those investment incentives through a new tax that gives the Government the resources to invest in productivity-enhancing physical and social infrastructure. That tax would also radically change the incentives for businesses and individual investors.
We have to invest a lot more in infrastructure to power a burst of productivity growth that lifts real wages, real savings and the size of the economy without the need for yet more oil and petrol being pumped into a spluttering engine that is bursting a gasket and blowing black smoke.
So what type of engine rebuild might work?
In my view, a Capital Gains Tax would be too politically toxic, complicated and slow to break the log jam. The case for a residential land value tax, a much simpler, faster and more politically possible option is a simple and very-low-rate infrastructure levy or tax on residentially-zoned land values that is calculated annually from land value measures in council-maintained databases.
The Opportunities Party (TOP) has proposed such a tax in its current policy document, although it has not detailed its level or how any funds would be used. I’d prefer to see any revenues hypothecated into a housing and climate infrastructure fund jointly administered on a region-by-region basis by central Government and councils, with the aim of using those funds to achieve affordable housing and net zero transport and housing emissions by 2050. Those responsible for the investments could target rents of less than 30% of median equivalised household disposable income and owner-occupied homes being available for five times gross disposable household income.
At current land values, a 0.5% tax on residential land values would raise an extra $6b, and effectively increase the Government’s tax rate from 30% of GDP to 32% of GDP. It could service around $120b in extra Government debt over the next 30 years with an interest rate of 5%. That would increase Aotearoa-NZ’s net debt from around 30% of GDP to 40-50% of GDP by 2050, depending on the interest rates and economic growth rates. That would still be significantly lower than net debt levels for other countries with similar economies and credit ratings such as Australia, Britain, Canada and the United States. They are all expected to have debt levels of 50% to 100% of GDP over the next 30 years.
I would also suggest a higher multiples for the land tax for serviced ready-to-build and unoccupied land, and zoned-but-not-occupied land to ensure land bankers release land much faster and repay some of the unearned capital gains made over the decades. You could use a similar multiple to capture the unearned gains of those owning land that benefits from public investment, including areas around rail lines, motorways and new public infrastructure such as hospitals, schools and universities.
So what would be the deal?
It’s worth asking how this would work politically. Essentially, the two large parties would have to agree or be forced into a new consensus, which would be similar to the ones National and Labour effectively agreed from the early 1990s until today.
They include:
- no messing with the age of eligibility for NZ Super of 65;
- no means-testing of NZ Super;
- indexing NZ Super for a couple to 66% of the average weekly wage;
- creating an independent inflation-targeting central bank to keep inflation around 1-3%;
- leaving borders mostly tax and tariff-free; and,
- keeping Government taxation and central Government net debt around 30% of GDP.
Under MMP, being forced into a new consensus would require one or both of the balance-of-power parties to dangle an affordable housing and climate infrastructure levy in front of both parties as the price of power. Te Pāti Māori and TOP would be the most obvious candidates for that, potentially in tandem.
144 Comments
...except for the agency issues. Councils and Govt have crammed extra people in AND restricted land available for development. This has been fingered multiple times as a contributor to the housing crisis. And on top of that, neither one is capable or competent enough to supply infrastructure to new areas, and work hand-in-hand with well-off central suburbs to ensure that they never bear the full brunt of intensification like the fringe does.
So despite all that, despite all the failures even when it would be politically advantageous to free up new land, connect with new services like schools and rapid transit, the government can't or won't. And now the argument is we should make the increasing value of the land a core revenue stream? This is a recipe for disaster, a way for Govt to profit from years of their abysmal failure to actually do their jobs, while reaching into everyone's wallet at the same time.
Hard pass. The Government can't manage basic tax administration like updating tax rates once a decade without framing it as a tax cut. Giving them a whole new revenue stream that allows them to cash in on their crappy track record in other areas is just dooming anyone outside Wellington to provincial serfdom.
Progress and Poverty - Henry George c1879
"George saw how technological and social advances (including education and public services) increased the value of land (natural resources, urban locations, etc.) and, thus, the amount of wealth that can be demanded by the owners of land from those who need the use of land. In other words: the better the public services, the higher the rent is (as more people value that land). The tendency of speculators to increase the price of land faster than wealth can be produced to pay has the result of lowering the amount of wealth left over for labor to claim in wages, and finally leads to the collapse of enterprises at the margin, with a ripple effect that becomes a serious business depression entailing widespread unemployment, foreclosures, etc."
Sound familiar anyone?
Yes it does. But everyone below focuses on one part of the proposed solution - a land value tax - when in fact Henry George brought to light an underlying problem with how capitalism works in the real world - the same one that Bernard is explaining. He proposed a number of solutions - not just land value taxes. In particularly Henry George hated monopolies and hated the lobbying of lawmakers by monopolists to give themselves rent seeking advantages. A whole area of economics - rent seeking - follows from his work. Henry George saw that urban land had a locational monopoly - I don't think it would be stretch to say if Henry George was alive today he would be on the side of YIMBYs demanding that planning laws be less permissive to reduce that monopoly advantage.
But urban land prices will never be completely competed away - the price of inner city land will always be greater than the price of land away from the city (pretty much every city in world exhibits this pattern - the ones that don't are weird soviet type cities) - because inner city land has real amenity advantages - it is closer to shops, jobs, customers etc. Inner city landowners also benefit from services that the city provides - roads, footpaths, policing, schools, hospitals, fresh water, sewers etc. None of these benefits are the result of efforts made by inner city landowners. In fact if enough landowners withhold their land from the market it undermines the value that could be created. Henry George proposed a land value tax so that there would be a fund to invest more in city infrastructure. He proposed a property tax on land but not a tax on improvements (capital) or work (income tax) because he rightly understood this would discourage their provision. He correctly understood a tax on land does not prevent the land from being put to its best use.
How do we marry Henry George's anti-monopoly thinking with his infrastructure funding thinking? Bernard is right - government institutions responsible for town and city building need to be held to account with measurable targets - both rent as a proportion of income and house prices in relation to income.
GV 27. There is increasing understanding in NZ about how much land value is the result of landowners exploiting anti-competitive planning restrictions and how much is the result of improving localised amenity. In both cases the increase in land value was not due to any effort on the part of the individual landowner (hence the term unearned gains). For the first category the solution is to remove the unnecessary planning restrictions and allow competition to bid down the land value curve. For the second category because the land value increased due to community actions then the value rightly belongs to the community - hence a land value capture tool should be used - land value taxes are a tried and tested option with good economic credentials.
Towards the end of my article (see below link) there is a Treasury Anti-competitive Urban Land Markets diagram that explains this thinking.
https://www.interest.co.nz/public-policy/116867/brendon-harre-assesses-…
Hi Brendon, glad to see you pop up here! I don't have a problem with value capture taxes in principle, but I think it's worth scrutinising the track record of our governments in terms of adding population pressure while leaving the planning restrictions situation to play out how it has. The value isn't as much 'earned' by the landowners as it is inflicted upon them by central government, at the expense of everyone else.
Given the role of government as both poacher and game-keeper in this scenario and their incredibly poor track record at addressing population/migration planning/overdue tax reform, as well as delivery of things like rapid transit, I'm extremely reluctant to give them a further incentive to keep dragging their feet by making it profitable for them to allow increasing land prices to prevail. I think that trust needs to be earned before we go down the land-tax route.
IMO the whole system is rotten (as I say below).
We have massive numbers of kiwis who live overseas because the cost of housing, rent etc in our towns and cities is so poor compared to many other towns and cities overseas. Yet instead of fixing this problem we open the immigration floodgates whilst poorly funding and manage infrastructure provision and have crazy urban planning practices. The net effect is the median homeowner voter is kept happy with unearned land value wealth gains. But everyone else is screwed.
The whole dynamic has to changed. Land value capture is an important part of the solution. But it will only work if it is part of reforming the whole rotten system. The first acknowledgement is to admit the moral wrong of a system that gives massive unearned gains to one group - residential landowners.
I agree GV - LVT as a one-off intervention is not enough but we do need to start somewhere...
P.S Bernard's article is better on his website - The Kaka - because it includes international comparison graphs - which really highlights his points.
https://thekaka.substack.com/p/tuesdays-dawn-chorus-all-roads-lead#deta…
To Brendon & GV
The main issue as you point out is the unearnt gain, which makes this type of land tax and value capture tax problematic in there is an incentive for Govt. to continue creating 'false' value as that increases the tax collected.
Bernard's example of what revenue the Govt. gets to collect looks a lot different if we were to strip out unearnt, non-value added gains, ie cuts the revenue figure in half.
Under the present Govt. idealogy, this is just another cost in the system, and thus as a first principle fails. They are using it to not only collect revenue, but as a form of social engineering to change people's behaviour. The change of which should be to make housing warmer, healthier, and affordable.
None of their efforts to date are achieving this.
Hi Dale. There is some consensus between National and Labour about removing planning restrictions - the NPS-UD and MRDS. We could argue they need to go further.
But the real political logjam is infrastructure funding. The 3-water reforms are a political football and there is no consensus on how to fund new transport projects either.
Land value capture mechanisms would open up more competitive urban land supply.
For instance the Infrastructure Commission found that the City Rail Link has increased property prices close to rail stations by over $3bn compared to more distant properties. If NZ had a LVT then some of this type of land value increase could be captured and used to fund a proportion of such projects.
A comprehensive nationwide LVT would allow better comparative cost benefit studies to determine which projects are more worthy.
The council had most of the money for infrastructure replacement in the form of depreciation, just like individual investors who (used to) could also claim depreciation. Much of the infrastructure debate is around replacing existing, irrespective of what is needed for growth.
But while they claimed it, they never spent most of it replacing the depreciated item, but spend it on other things, eg Councils on 'look at me' projects, and investors on subsidizing their interest costs, a new boat, or holidays etc.
So in response, Govt. remove the depreciation, so now even less gets spent on keeping the infrastructure or investment property up to scratch, which the Govt. now counters with a taxation law or a bureaucracy to enforce the most basic of healthy home standards.
If they wanted to introduce a law it would say that depreciation must go into its own account and can only be claimed on invoice to prove that the money is spent on that depreciated item. IE real costs are matched to real depreciated items and produce real benefits.
For council, this would cover all existing replacements, and developers would then pay most if not all for any new, with only a small % of extra funding needed. You could put the LVT on the developers, because once they realized it was their cost, then they would feed this back down the chain, and this would be taken off the land price they would offer the land owner.
The point is, whatever happens, is not to let someone who offered no value make an unearnt gain.
And who gets to determine if projects are more worthy or not?
I watched Ms Mahuta in parliament yesterday. A lesson in how not to answer simple questions from the opposition, and a lesson in how not to follow up with more obvious questions that need to be asked. It looked like both sides are tired and disinterested.
Also, bad example with the old people"s homes company. Whatever they do, they pay tax on declared profit. If their land values go up, they increase their charges accordingly, and pay tax on the profit. Is it ignorance or disingenuity that says different? All who derive income off land do the same. I have charged and paid increased charges on increased property and land values many, many times in the past, and will do so in the future. Any increased profits will have tax paid on them. Is their anyone who reads this website who does not understand this?
Local bodies already take property value into their calculation for rates. For instance in our neighbourhood in Christchurch two properties alongside. Same size section, structure, street frontage. One pays pa approx $8,700.00 the other $4,900.00. The difference being the former is a EQ rebuild. Yet it is a charge for services for which both households are identical and on top of that the government reels in 15% GST. All of that, in its own right is a wealth tax. Therefore anomalies such as this too need to be addressed and a restructure based mostly on land value would at least be a step towards that.
Exactly right Foxglove, we have friends who's rates are $4,600 in CHC, the street up, on the beach front, same size section etc...11,800.00. The couple are retired and are now looking to sell and move as they can't afford to stay in their own house of 20 years anymore. (as far as I am aware they get the same council services as our friends- footpaths and 3 waters, and pot holed roads)
I believe there is an option to defer rates payment until the house is sold or the occupants die. This could be a good option for retirees without cashflow although obviously it will affect the inheritance.
Perhaps if the beneficiaries don't like that idea they could contribute to the rates bill?
I have a real philosophical issue with taxes that become so big that they cannot be paid without borrowing from the future in order to fund them at an individual level. If that becomes acceptable as a de-facto situation then there is literally no incentive for Councils to practice any degree of moderation in terms of spending or accountability.
Granted councils must spend money but that doesn't mean they get an open checkbook to piss away on woo and feel-good crap that is secondary to their actual reason for existing. Otherwise it's just another level of government duplicating the wastage we already have at a central govt level.
I have a philosophical problem with land value tax I think it should be called community rent. I think like Henry George that the true source of property rights is work (labour, innovation, skill). So improvements to land rightly belong to the property owner - they either provided the improvements themselves or paid someone else for them. But in many cases increasing land value does not fit into that category - it is the result of a growing community, better amenities, better infrastructure... - i.e. it is community actions that create the value so the community should be able to charge rent for the value they create.
It is the taking by the community, for the use of the community, of that value which is the creation of the community — Henry George, Progress and Poverty (1879), Chapter 33
On practical level if an elderly person's land value increases and the rate (rent) they pay increases to a point where they struggle to pay - yet there is a system of deferment until death - then the increased value of the property will cover the deferred rate payments.
Ah good old Henry George the socialist.
"Contemporary sources and historians claim that in the United Kingdom, a vast majority of both socialist and classical liberal activists could trace their ideological development to Henry George."
Beach front you say? Wouldn't have anything to do with the cost of sea level rise study and mitigation needs would it? The money spent on keeping beach fronts looking clean and being accessible also, which directly benefit those with the view and walking distance. I expect there are many more societal costs associated with beaches that I am unaware of, but those two are pretty obvious. Why would you choose to ignore this?
All rates are expensive if you view them through the lens of bureaucratic waste, which there is some.
But the operational expenses, which are what rates are meant to cover, are about the same around the country eg wages are about the same to fix a water pipe in any city. Thus you would expect rates to be similar anywhere in the country based on similar location eg seaside vs seaside, country vs country etc.
The value of the property has no bearing on the rates comparison between locations and is only used to apportion expenses within locations.
Just wait until Mahuta and her corrupt mob come to you with their bill for your water. These idiots in central and local government have been wasting your rates money for years funding pathetic nonsense making streets with rainbow colours, funding pride marches, building gender-neutral toilets , building stupid monuments, and all sorts of other associated stupidity. Their actual job is to take away the sewerage, the rubbish, supply water and maintain infrastructure. They do all the woke stuff to get elected, but they neglect to do their actual job and spend rates/tax funds on the things it should be spent on. Hence the need for 3-waters legislation, so you get to pay twice. Your rates are going to be a lot higher if National don't win next year and scrap 3-waters. What they should do (after scrapping 3 waters) is pass legislation immediately, banning council spending on non-core activities until the infrastructure is fixed or brought up to date.
I would like some economic analysis on effect replacing dozens of different property tax regimes (local government rates) with one consistent land tax regime - say Bernard's 0.5% of the unimproved land value. Surely that would simplify building construction investors who operate in multiple areas - they would better able to find the best investment opportunities?
For larger buildings - like 100 bed hotels - the current local government rating system is a real disincentive - rate bills of over $100,000 annually for downtown Christchurch whilst the same sized bare land next door is less than $15,000.
One consistent rate for the whole country that only taxes land would IMO really open investment.
See link here for some discussion from a few years back about the rating system of downtown Christchurch - I am sure the same problems are encountered elsewhere in NZ.
https://brendon-harre.medium.com/saving-christchurchs-cbd-dc0ea72d27e
The point is though, it’s not. LVT doesn’t determine use - the market does.
Land on city fringes is banked for property and largely unused (or underused). Central land is often left undeveloped, or with dilapidated building on it.
The purpose of an LVT is to disincentive the above via ground rents (a variation of ‘use it or lose it’).
You’re assuming that the only economic improvement to land is building something though. That’s not always the case.
LVT is simply a way of ensuring land isn’t left idle. And by it’s nature, it incentivises best economic use as a way of minimising the tax impact to the owner.
It would have to be an absolute economic edge case for the choice to do absolutely nothing with land outweighing doing anything else. And if the owner has so little imagination or forethought as to own land but not know how to make best use of it under economic conditions, they should be incentivised to sell it to someone that can.
"And your last sentence shows a completer lack of commercial reality."
I'm interested in this. How so?
"How, for example, does an LVT would work on a 4 ha lifestyle block and house that only has a few cows and sheep on it?"
It works exactly as it's supposed to. The land represents a store of wealth an is taxed accordingly. If someone wants prime real estate to be their play farm, then that's a choice they are making. That doesn't mean they should be free of bearing the opportunity cost.
"You have already confirmed your lack of commercial reality in your answer to my example of a 4 ha block."
Again, please explain. You're just stating an opinion, not making a case.
Store of wealth = The land. A finite resource with its value determined in market by its location and potential uses.
Why is it prime real estate = Who knows? It's your example. Let's just say it's Akl city fringe and zoned for mixed residential / commercial.
Opportunity cost = better land usage on the edge of a growing city. It's (presumably) the owners choice to keep it as a hobby farm, but that doesn't detract from the hypothetical need for that land to be put to better use, particularly as its value increases.
LVT doesn't stop the owner from keeping the land exactly as they want it - as a hobby farm - but it does capture the land's hypothetically increasing value as a store of wealth, as that particular parcel becomes more desirable in market.
The reason it is 4 ha is that is because it is zoned as a 4 ha minimum, but a couple of cows and sheep are not its best use under your definition.
The jurisdictions with the most affordable housing do not use LVT as the stick to motivate use, they use the carrot of land supply to motivate what gets used.
But certain ideologies like using sticks, which a LVT is, rather than carrots.
If we removed most of the land use restrictions, then we would remove the need for LVTs.
"The reason it is 4 ha is that is because it is zoned as a 4 ha minimum, but a couple of cows and sheep are not its best use under your definition."
I'd say a couple of cows and sheep on 4ha of city fringe land is not a good use of resources under anyone's definition. That 4ha has been set as a productive minimum land area for agriculture, not for any other purpose. If the hobby farm was in the boonies, no problem; the LVT would be lower as the demand for the underlying resource would be priced accordingly.
It's simply a question of maximising the utility of a finite resource. The bundle of rights associated with land is not absolute; it never has been. Someone's right to personal enjoyment always has to be counterbalanced with public good.
"The jurisdictions with the most affordable housing do not use LVT as the stick to motivate use, they use the carrot of land supply to motivate what gets used. But certain ideologies like using sticks, which a LVT is, rather than carrots. "
Sure. But if land supply is locked in by a poor legislative framework and no carrot or stick, then we have a problem. Also, LVT is multipurpose - it both incentivises use and captures taxation on wealth rather than income, so I don't see it as either/or.
"If we removed most of the land use restrictions, then we would remove the need for LVTs."
Quite possibly in terms of resource allocation, but (i) that's not going to happen because NIMBYs like to protect their unearned wealth and not pay tax and use their votes to ensure that, and (ii) easing restrictions would not change the tax incidence to wealth rather than income.
Did you forget that those 100 beds come with 100+ people filing them with 100 rents, 200+ feet waking the foot paths, many more vehicles of those renters using the roads and other utility and services infrastructure and so on? You are not just paying for the use of that particular piece of land but the pressure and needs of the number of occupants on infrastructure.
Yeah but if you think about it, you are paying for the service right, the houses have exactly the same service's from the council, so with the difference in rates, then in effect you already have a land tax, but the local body is collecting that, not central government.
Foxy - you correctly identify that rates are not payment for services but a tax not related to the cost of services to the property or its occupiers, the new build may contain a single elderly lady and next door a family of 5. A poll type tax is the answer as when everybody pays their interest on how it spent and the efficiency of services looms large.
They also have higher wages, massively higher super contributions and preferential tax treatment in Australia.
But good luck convincing Kiwi millennials they should get nothing after paying for everyone else's own retirement, massive mortgages, possibly digging themselves out of negative equity and having repaid student loans. They've already been in the workforce for almost 20 years now, bit late to suddenly tell them they're going to have to cover their own end as well.
It would be the ultimate culmination of the last couple of decades' policy efforts to pull the pension rug out from millenials just after they've paid the boomers' pensions, after also being saddled with massive education and housing debts so the older generations could have tax cuts.
I'm currently in Oz/QLD visiting family. The family home is usually exempt & other financial assets will exceed $400k before abatement starts.
https://www.servicesaustralia.gov.au/assets-test-for-pensions?context=2…
The aged care is also interesting in that it appears to be much more universal & well funded than NZ. You can keep your home, rent it out to pay for your aged care. If you fully fund your care suite yourself you get 100% back when you don't need it. The basic care cost is limited to 85% of the pension.
I contacted QLD Aged Care on behalf of my elderly mother (NZ citizen) who is deciding her future. I was pleasantly surprised to confirm that anyone in Australia on any visa will be eligible for subsidized care (subsidy is subject to both health and means assessment, as is NZ). Mum will probably return to NZ however it isn't a bad option for Kiwis to consider (my brother & sister also in Oz).
I’m for a land tax. The most politically palatable way to implement it would be to take the $6B, add another $2B from general revenue and give an $8B tax cut. That way most people will get more than they pay. You’d also have to likely bump NZ Super.
The real barrier I see is that PAYE is somewhat invisible whereas the new land tax would drop quarterly or annually and people would be really aware of it. If only you could incorporate it into PAYE somehow and wash it up annually.
I think you have already identified the problem with a land tax. Many of the landowners are retired and have very little income to pay it. They also vote. It’s why councils can’t increase rates to match the real cost of running a city hence why our infrastructure is going backwards.
I went to the car wash the other day, my car was worth 7500 and a guy pulled up beside me in a new Tesla worth 160k. Both got washed at the same time, did the same job, I went to pay I got charged $55, the Tesla owner went to pay, he got charged $200, he went off, asked why that was, they said cause you're car is worth more, but he said I still owe 150k on it, don't matter they said. Yep it was a council run car wash.
Interesting anecdata but raises the obvious question; who on earth even pays $55 for a car wash let alone $200, unless your discretionary time is worth more than $110 an hour after tax (assuming the service took no longer than 30m)?
Saying that, if you drive a $160k car then either (i) you are making more than $110/hr after tax or (ii) you're stupid to take $150k debt on it (a fool and money parting ways etc.) so the $200 car wash is a good object lesson.
Those were the days. The old cut & polish & Simoniz wax (not out in the sun though, and don’t get it on the windscreen.) And then after a few of those, household detergent to get it all off and start the process all over again. Thank the small lord for acrylic paint, when it finally arrived.Mind you the old family Velox, all in black, looked pretty good when it was finished.
I think if Inland Revenue was managing land tax they could have easy to pay options - like paying it alongside PAYE installments. So if you were paid fortnightly then you could choose for the annual levy to be divided into 26 fortnightly payments and automatically withdrawn with the PAYE deduction.
Something like that might make a land tax more palatable.
NZ's economic consensus is rotten to its core because it requires we sell houses to each other at ever higher prices.
As a nation we should have economic targets to reduce rent to under 30% of after-tax income for all income groups and to reduce the median house price to income ratio down until it is under 5. This might take time - but the sooner we start the sooner we will achieve as a society the provision of a basic necessity of life (warm dry shelter is quite high up there on our hierarchy of needs)
This should be prioritised as much as Reserve Bank inflation targets, government debt and spending to GDP targets.
The fact we don't prioritise these targets and we don't allocate any resources via the tax system to achieving the targets shows how rotten NZ economic consensus really is.
100% on the money.
The whole property racket is basically a ponzi scheme, relying on the greater fool theory.
It simply add no meaningful economic benefit and incentivises investors holding shitty property while maximising rents to cover the inflated purchase price, with the hope of cashing out unearned gains. As a store of wealth, it's completely antithetical to the productive economy.
The only real winner is the extractive FIRE sector, which is reflected in their eye-watering profits.
Reducing GST unfortunately is fraught due to market dictates. For instance if an item is saleable, ie the market is readily meeting its price, then reducing it by tax won’t last long, it will just revert to what the market was paying. This was proven way back when the Kirk Labour government introduced MRP (maximum retail price stickers) which quickly became the price across the board.
I really despair for NZ.
Our politicians are gutless, not strategic and show no leadership.
As the article correctly points out the tax system should be aimed at productivity (and mitigating environmental impacts).
Our land values are going to fall by at least 50-60% over the next few years and (except for the fall in worldwide interest rates since the 1980s) it’s a complete own goal scored by our incompetent politicians.
NZ is a rentier society - a bunch of cartels lobbying to earn without toil. Residential landowners are the biggest rorters - the numbers are mind blowing - $billions of unearned wealth gains. Perhaps if we rebalanced the economy away from landowners and towards workers and businesses then as a society we could tackle some of the other rentiers...
Bernard wrote an article somewhere over the last few years about CGT revenue. He may be able to enlighten us where to find it. I think from memory he calculated what revenue could have been generated over the last 30 odd years if we had a CGT. It makes me laugh at this country when ever a CGT is mentioned,the country collectively shits itself. It’s not hard to see why. Don’t touch those unearned free capital gains that I’ve worked my arse off for.
By the end of 2021 residential property in NZ was valued at $1.72 trillion - up from $1.35t a year earlier. Virtually all of that change would have been land value increasing.
A 0.5% LVT would collect nearly $2b annually just from the 2021 property price increase!
LVT in NZ's current economic situation would be a very effective wealth tax.
Increasing access to debt via leveraging on a small tax will save the day...lol . Id like to think that local and larger government run tight books but they dont. I'd like to think that RE market values generate the appropriate rates charges but they dont. Debt everywhere and most folk pretending they have loads of liquidity but they dont. Roads in disrepair , Hospitals run down and under pressure, Retail dependent likely on whether the customer has strong credit, GST and income tax not cutting it. Tells me nobody has a clue what a real budget means. Its spiraling out of control and has been for sometime now. 5 million people want to think that NZ has solid oil and gold reserves. A while back some here touted NZ as a rip off country...a country where Kiwis rip off other kiwis... Im thinking they may have made a valid statement...Generating more debt will solve nothing. When growth comes and debt reduces we will know we have real number crunchers pulling the strings...
I said a long time ago on interest.co that a capital gains tax is like taxing a thief on their stolen property. The principle hasn't changed. Now an annual land tax makes more sense.
However I also said the system we operate at the moment doesn't go backwards. It either keeps working and then breaks, since it is a parasitic system. It won't break until credit dries up, when no one is credit worthy and you have to have capital to buy. But the same break up with cannibalise capital too.
Thank you Bernard for highlighting the problems with our "economy", yet again. With gutless politicians in charge, nothing will change.
One of the big reasons we should be doing it is to broaden the tax base. I think we should go higher than 0.5%, double it to 1%, but then reduce GST to 10% at the same time. Rebalancing the tax take in one swoop to ensure it doesn't punish everyone the same. Hopefully people will start to see the TOP parties policies as part of the remedy, but I suspect most are still captured by recency bias and group think.
Really though the entire tax/immigration/R&D/education/government investment/infrastructure building systems need looking at, it's all completely skewed away from productive investment and enterprise. You only need to look at the companies heading off shore time and again to know NZ is not a good place to do business.
"For 30 years, Aotearoa-NZ’s households and businesses chose to invest in residential land, rather than in businesses."
The neatly elides the role that government policy and banks have played in creating this problem. Individuals respond to incentives.
Successive govts have definitely screwed up in (i) penny-pinching when awarding contracts, rather than ensuring support for local outfits as entry criteria and (ii) chronically under-incentivising R&D while at the same time offering significant handouts to established sectors (looking at you tourism, agriculture, film) and individual players (looking at you Xero, Rio Tinto).
Basically, politicians are either arrogant fools who have let themselves be gamed or venal crony-capitalists, and it's a cross-party problem.
Banks have also (largely) not lent to small business without seeking outrageous collateral requirements, in most cases bricks-and-mortar. They're simply not inclined to take commercial risks when there is easier money to be made gouging mortgagees.
That's true in a sense, but that merely demonstrates political cowardice of doing a thing that will get you re-elected into a cosy sinecure by people who have already benefitted, rather than looking to serve future voters who have to pay the price.
It effectively the same as caving in to the screaming toddler who wants more lollies to mitigate against them throwing future tantrums, knowing you're probably giving them diabetes.
That's not good governance; it's a moral and ethical failure.
Agree it takes moral strength to enact a policy that will be unpopular. Perhaps the closest we've seen is the enacting of the changes to date - Bright Line to ten years, removal of interest deductability etc. It ran squarely against the tantrum-throwing toddlers out there.
But then we face the same issue over again - the opposition campaigning on giving a free ride to speculators once more while making working Kiwis fund the bulk of society.
(It certainly looks that part of the problem too is the self-interest of politicians who talk the talk on productivity but invest in...property. They'll never do what's better for more NZers when they are so personally invested in the opposite.)
It doesn't just take moral strength, you need to sell the idea to the people that short term pain is long term gain. We have PR person in charge now, I am actually surprised she hasn't gone down that path. Wait, no I aren't, because we have such a short term political cycle, no party will enact change for the future, because there is a good chance by the time they get to the benefits part of a "short term pain, long term gain" policy, their term will be up, with the population only experiencing the pain part of the exercise and the opposition promising that they will stop the pain when they are re-elected.
This is WHY the political terms need to increase to 4-5 years. The politicians are only interested in short term goals because WE gave them the mandate of governing for short periods. It is at the heart of why our politicians govern so poorly.
“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years. These nations have progressed through this sequence: From bondage to spiritual faith; From spiritual faith to great courage; From courage to liberty; From liberty to abundance; From abundance to selfishness; From selfishness to apathy; From apathy to dependence; From dependence back into bondage.”
― Alexander Fraser Tytler
Hence the rise in all things spiritual the past decade.
Hopefully this time round we can step off the hamster wheel?
It would appear we have bondage, apathy and selfishness all occurring together. We've always had abundance and an extraordinary amount of it at this point in civilisation, only we don't recognize it with everything apparently influenced by scarcity. With enough abundance you can have liberty, or is that freedom?
Its hard to train and upskill your local population.
Its easier to import other countries 'skilled' labour.
When I did my apprenticeship in 2002 there was a labour skills shortage in the trades. Two decades later nothing has changed. If anything it has become worse, people don't know how to walk let alone swing a hammer or paintbrush.
Indeed, but it will take people to vote against their short term best interests, which people simply never do unless it's sold to them properly and governments are given the time to implement their policies, which again is impossible under a 3 year cycle for any meaningful change.
I believe that land taxes have a lot to commend them. Because our economic system requires an ever growing economy, the inescapable result is that more money is competing each year for a finite and essential resource … which means that land prices will always keep rising over the long term (despite the occasional speed bump).
But I don’t think we’ll ever get a land tax because of the numerous political problems they would create. As an example, consider what will happen to any Government that attempts to tax Māori to retain ownership of their ancestral lands on threat of dispossession.
The article omits perhaps the most significant contributing factor in our wage/labour shortage challenge - Australia. We are unique in that we have a high wage nation on our doorstep together with a permanent work visa. Our employers compete with Australian firms, I mean there are >600k of us there working.
We have to import cheap migrant labour that does not have the right to emigrate to Australia like we do.
I like the RSE scheme it's a win-win for both NZ employers and Pasifika workers. We just have to clean up our act in terms of the fair treatment of those workers - addressing current exploitation which (according to John Campbell) is worse than slavery - "at least slaves got free accommodation";
Sunday programme: LABOUR PAINS - RSE Workers abused & exploited
.
And yet when the Prime Minister of Samoa was here she was expressing major reservations about the scheme. Initially it was meant to draw from the unemployed but it's ended up taking their most motivated workers leaving them short of labour as local businesses can't possibly compete with NZ wages (even allowing for widespread exploitation).
I don't think using the tax system to achieve a housing affordability goal is right-headed. To my mind, the tax system needs to be re-set away from taxing labour and profit - to taxing land - but for the reason that the efforts of our labour and profit (i.e., our social efforts) should be incentivised/rewarded through lower rates of tax for those efforts.
So, I'm for a land tax but only if there is a corresponding offset to taxation of labour and profit.
To address our housing affordability issue - just address that via regulation of the specific market for residential accommodation. That market is currently skewed by the accommodation supplement - a form of "welfare trap" we have to release ourselves from.
Regulate rents. It's that easy. My petition to Parliament:
- Title – Regulate rents via introduction of a universal 'weekly rent maximum' formula
- Request – That the House of Representatives regulate residential rent via a formula where: (RV/1000) - x% = weekly rent maximum. The variable 'x' is calculated based on median property value (RV) equating to a rent maximum of 30% of median household income in the district; and applied as a constant to all rental properties districtwide.
Reason – The formula-based approach aligns median income with residential rent prices - such that renting a median-valued property in a given area/district is affordable based on rent prices being no more than 30% of median household income in that area/district. The variable is then applied as a constant to all properties rented in the area/district to ensure fairness of the residential rental market across all income brackets and property-types. Accommodation supplements could then be abolished.
Why is it that every economist seems to think increasing taxes is the solution to multiple ills? Do they come from the communist bent which says the Government owns everything and the people just need to be grateful for the crumbs they're thrown?
In this case Bernard does reference immigration, but doesn't seem to understand that if the government persists in driving towards population growth, then land must be provided to house them? Releasing sufficient land would be one factor that would help keep land values down. Let's not get into the population size debate here, although that should be the dominant debate.
Plus with the gold standard no longer relevant, perhaps the Government could look towards a model of 'deficit' spending, where every budget line is attached to a cost-benefit analysis that identifies the economic gain from spending?
My concern is that economists are too wed to conventional models, and cannot look forward to alternative options with any sort of vision.
The problem is that we have a bad tax approach currently. We are taxing productive work the most, which has too many negative effects. Thus the discussion is about fixing the problem we have created through overtaxing productive work while undertaxing other sources of income (e.g. unearned).
Can't just rely on working folk to be grateful for the crumbs they're thrown while they carry the rest of society.
The trouble is Rick, an upwards change in value is not 'unearned income', unless and until some thing is done to realise that change by selling it or borrowing against it. It is just a BS term stemming from jealousy. An example a house owner occupier bout their house in 2004 at $295k. Early this year mrket value suggested that house might be worth close to $1 mil, now it is apparently worth maybe $800 - $900k. But those changes in value did not put any money in the owners pocket. He has increased liability from it though as his rates and insurance have increased. They have not put it on the market, nor borrowed against it's value. They expect the 'value' to fall further as the housing market drops but don't care as they have no intention to move in the foreseeable future. Should the increase in value be taxable, and the decrease claimable against tax?
'Should the increase in value be taxable, and the decrease claimable against tax?'
Simply yes, but if instead, we had a stamp duty, then there would be nothing payable until the seller had the funds to pay it. But it still does not solve the problem of incentivizing Govt. to artificially increase the value so they gain more tax.
The reality is the capital price (value) is artificially too high, and the operating budget (rates) is too low (Govt. bureaucratic waste aside).
I have to disagree Dale, with no further income coming in the owner occupier is just being bled drier in taxes without any real benefit except to a Government which is increasingly unaccountable to its constituency. "Value" is a BS measure that means nothing other than being someone's opinion, no matter how they support it. What would you do if you thought your house was valued at $500k but the Government decides that for the purposes of tax it is valued at $750K?
If you start off with the premise that value is BS, then in your example if the owner of the house 'thought' their house was valued at $500k then that is just as BS as what the Govt. 'thinks.' The reality is that there is some clear methodology to establish value, part of which is that value needs to, at a minimum, equal cost otherwise there is no incentive to build anything if the value is lower than the cost.
If there was any debate about anything it is what the REAL cost to build is, ie without the non-value added costs that are only there because of restrictive Govt. policies.
Also, I said stamp duty, ie paid at the time of selling, so there is no bleeding dry as you mentioned.
But as mentioned, I would sooner see the removal of bad policy, rather than see the addition of more policy in the form of taxes to negate the initial bad policy,
Income tax is as much just a BS thing stemming from jealousy. When it was first introduced - in the UK - it was only supposed to be temporary. A more balanced tax system addresses some of the negative effects of our too great a focus on taxing productive work over all else.
Just because someone hasn't spent wealth yet does not mean they haven't received it, just as money received into a bank account as wages is not realised until something is done with it. Either can be realised. The problem is we've been over taxing earned income from productive work and undertaxing other money-making. That's leaving working Kiwis carrying too many others, both poor and wealthy. They can't be bled dry ever more.
Exactly - people forget this about income taxes in that, historically, they have been established to fund wars, not provide services.
Simply, the answer is to tax wealth and wealth generating assets, not income. The incidence of taxation should fall on those most capable of bearing it.
Under a fully progressive system, a person's labour should attract no tax and thus, the individual would be fully incentivised to become more productive with their working time.
But those changes in value did not put any money in the owners pocket.
Wrong, murray86. The unearned income did give those owners the ability to generate 'notional' deposits on other properties (i.e., leverage).
Appreciate your point that not all owners used it, but many did - and it was a proxy for savings/cash.
Hmm. I find it strange that we always end up talking about tax as a solution. always the stick and not carrot.
If you want to fix the overweighted investment into housing ( and consequently high prices ) you need to adjust our Australian owned banking system. They need incentives to lend for non property related projects and currently they have none. Access to leverage is the real reason why we all invest in housing. Make a rule saying 50% of lending by any Australian owned bank must be for nz business at the same interest rate as housing. You would then see many potential property investors try something else.
I applaud you, Bernard, for continuing to hammer away at the nub of one of the most important issues detracting from our economic & social success..... over-inflated land values. A tax, rate, levy (call it what you will) raised on ALL land values (residential, commercial, industrial, agricultural, etc) would be a total game changer... for all the reasons you discuss. To wean the "addicts" off the speculation dope in a politically winnable way it might be worth offsetting every $ brought in by a land value tax by an equal $ reduction in GST. Afterall, that's how they sold GST in the first place...... to be offset by an equivalent reduction in income taxes. They just (conveniently) forgot to mention that the greatest beneficiaries would be the rich.
And conveniently the tax goes into bureaucratic empire building. A tax is an added cost. It is difficult to make things more affordable by adding costs into the system.
How about we rejig the system so without taxation there is no incentive to landbank, and thus our land prices would be more affordable.
Hickey & Baucher seem to believe you can tax people into prosperity - you cant - neither will leveling down by taxing the productive, giving some to the deliberately non productive and wasting the rest will not improve productivity, quite the opposite as the dead weight of taxation and bureacracy remove all incentives so people just do the minimum - check out how sucessful the communist economies were/are and ask your self do you want to join them and if so vote Labour/Greens /Maori and you can then rename NZ New Venezuela.
Neither taxation or borrowing have anything to do with financing the governments spending. All government spending is made by creating new central bank reserves. Taxpayers never hold central bank reserves so how can they finance the government? Taxpayers only hold commercial bank created deposits which the government has no ability to spend.
Government bonds are just another form of central bank reserves but which pay interest.
"Neither taxation or borrowing have anything to do with financing the governments spending. All government spending is made by creating new central bank reserves."
Not quite. I guess it depends on how deeply you want to delve into MMT.
In a practical sense, the ability to service the debt associated with core government spending (effectively, Crown opex) is funded by taxation, and the 30% ratio limit is derived as a function of taxes collected.
It is more accurate to say that taxation is funded by the governments spending, while taxation only allows the government to delete its central bank reserves. Taxation has other purposes such as helping to reduce inequality. Issuing debt is not even necessary for the government, it is mostly just a charade to give the impression that the government is financially dependent upon the private sector to finance it. It can also be classed as welfare for the finance industry.
I moved from back to NZ from Sydney in 2018 after Labour got voted in and was about to introduce a capital gains tax. After seeing how CGT worked in Australia and how well it is accepted, I thought NZ was going down the right track by introducing one, but we know what happened.
In Australia you have lower GST and a tax free threshold for the first $18,200, examples of things the CGT could allow, and help reduce the inequality we have. And importantly in could encourage more investment in business and innovation rather than property. We should be striving for so much more than just looking after the existing asset holders.
This is the most disappointing thing about coming back and while at least Labour has made some helpful changes, National will just reverse them and the country will become even more made up of Kiwis that are already rich and the immigrants that will serve them without compliant.
I agree that when Jacinda didn't go ahead with a capital gains tax, New Zealand squandered an amazingly precious opportunity to re-balance tax and investment for NZ Inc. Given the timing, she could have been lauded as a true nation builder for our greater good, but with our three year election cycle it came back to short-term politically expedient thought and action.
I personally love your plan Bernard, except rather than ring-fencing the fund for housing and climate infrastructure, I would extend the plan to pay for accelerated depreciation and amortisation rates on technology and related software assets and training, to really power up New Zealand Inc...
To me it seems we have a clear choice. To rob our children of their rightful future here in New Zealand (and the ability to repatriate some our ever enlarged diaspora) or make the hard decisions to avoid hollowing out New Zealand and continuing on our current trajectory to 3rd world status outside the OECD - we're almost there!
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