Reforming the tax system. The solution to our housing crisis? - TOP

Labour and the Greens are both talking about closing tax loopholes around property.  For Labour, it is by outlawing negative gearing, and in the case of the Greens, it is via a capital gains tax. Their intent is right; our tax system is a part of the problem, and the solution requires more than building additional houses. It is ‘great’ to see other political parties accepting that fact. 

When their policies are criticised, they respond by pointing out the vested interests of property developers. However, there is some truth to the criticism. Both Labour and the Greens have chosen solutions that are piecemeal and deal with symptoms, rather than the cause of our housing-sector woes. The reason they have chosen to go with second-best solutions is clear – they simply will not confront the voting public on the culture of home ownership as the path to wealth.

Establishment parties cynically see more political mileage in targeting rapacious investors as the villain of the piece. This tactic is based on the assumption that the public is either dumb enough to agree, or in its heart of hearts doesn’t really want to confront the problem either and the parties are happy to just pay lip service.

This lack of political will from establishment parties is the only impediment to addressing the long-term housing problem in New Zealand. Tax review after tax review has pointed this out, and every time the politicians reject it. They simply do no have the guts to provide leadership on the issue – they reject the expert advice, and the problem around housing affordability gets worse. There is a clear and oft-repeated way to make a difference, but it doesn’t involve any villain; it simply acknowledges the biggest loophole in our income tax regime.

Once more, let’s just demolish these partial solutions these career politicians from establishment parties keep dishing up, in their craven efforts to appear to be doing something.

Negative Gearing

Earlier this week, Labour released a plan to remove the ability to write off losses on investment properties against other income. The idea is that some high-income earners deliberately leverage their property portfolio as much as possible, to maximise untaxed capital gains and claim any write-offs against their income tax bill. Having rejected a capital gains tax (see below), Labour has opted for targeting this ‘loophole’ instead.

Andrew Little struggled over his claims that his policy would target speculators when all investors potentially benefit from the tax break, including small investors and people living in their own property with flatmates. Labour also met criticism from the Property Institute that the changes would discourage new building, thereby pushing up prices and rents. Like any business, being able to access write-offs is a big part of the incentive to make the initial investment in the first place. Kill that, and you kill investment. The deliberate uncertainty Labour has thrown into the mix, so that investors now don’t know whether they’ll be able to recoup those losses in future years, will cause all the problems pointed out by the Property Institute.

Capital Gains Tax

Other countries such as Australia and the UK have a capital gains tax similar to that the Greens are proposing. The evidence is clear that this kind of capital gains tax is bad for growth, and has completely failed to control house prices overseas for three reasons:

Firstly and most importantly, it exempts the ‘family home’. Given that this makes up a large percentage (60%+) of house purchases, it won’t act as a disincentive for those continuing to bid up the price of housing – we’ll just move to flasher houses, rather than own multiple ones so casually. Exemptions also cause all sorts of problems in the working of the tax system, as we can see overseas. The fact is that rich people can afford an accountant, so they are much better at exploiting exemptions than you or I. As the previous Prime Minister John Key said, a capital gains tax would only work if it included the family home, and no establishment political party is prepared to do that.

Secondly, capital gain is only one of the tax loopholes that encourages overinvestment in housing. The main loophole is imputed rental – the value that an owner-occupier gets by living in their own house, free of rent. If you put money in the bank, you get paid interest, which you have to pay tax on before you pay your rent. Alternatively you can buy a house, and because you pay rent to yourself, no cash changes hands and there is no tax to pay. Taxing capital gain won’t prevent speculation; the driver for increased prices will still be there (every first-home buyer is chasing the tax break of imputed rental), and while there are profits to be made the speculation will continue.

Finally, a capital gains tax is horrifically inefficient. The tax is levied on the sale of an asset, so it provides a strong disincentive to sell any asset – whether that be a business or a home. This reduces the efficient working of the economy and impacts on growth.

If the Greens were to push for a comprehensive capital gains tax, including the family home, and make sure it was levied on an accual rather than a realised basis, it might be a reasonable proposition. But by allowing their political expediency to rule, the policy will not have much impact on house prices, and will be more of a hindrance than a help. They’re simply happy to corrupt the economic integrity of the policy for politics.

Playing Politics

The reason both Labour and the Greens are choosing such sub-par solutions is because they are playing politics. After all, it is far easier to gather support for a policy that blames someone else – a rapacious speculator or landlord for example. It is far more difficult to sell a policy that deals with the real issue; the fact that we are bidding up the price of houses because we get a tax break to live in our own house – the imputed rental we talked about above.

This is exactly why the establishment parties need the voice of smaller parties – their fear of a voter rebellion makes them weak on policy, but if they have the support of voices for reasonable policy in parliament, they can make real progressive change.  It may not look as shiny as election-year futile promises, but these policies will have a real positive impact. 

A fair tax system would make sure all equity in assets paid at least as much as a bank deposit. That is what TOP is proposing, which is why we are the only party that can guarantee to restore housing affordability.

But of course, such a solution would involve admitting that we are all part of the problem. It is much easier to single out foreign buyers, rapacious landlords and sinister speculators. That’s the politics of envy, and it isn’t ‘great’.