Some comments on social media have expressed concern at the impact of our tax reform package on the frail and elderly. However, the package is designed so that it won’t impact on their lifestyles in the least. Here’s five reasons why.
1. House prices won’t fall
Firstly, some are concerned that the tax reform could collapse house prices. Of course, under the current system house prices can always collapse for other reasons, given the cycles of boom and bust. However, our tax reform package will smooth out those cycles. It will be introduced gradually to ensure that prices remain stable over time, to avoid increased speculation but also the damage that can be caused by putting house owners in negative equity.
2. Lifestyles won’t need to change
Our tax reform package ensures that any major asset pays a minimum level of tax, and recycles the revenue to people in income tax cuts, leaving at least 80% of people better off. Most people will therefore be able to afford to pay any additional tax on their assets through their income tax cuts. The elderly will also receive these tax cuts, so depending on their income may be able to afford to pay their bill that way.
But of course some elderly live in an expensive home and are on a fixed income (NZ Super) so would face a higher bill overall. One confusion is that they would have to pay this bill in cash. TOP’s policy is that the elderly can defer that payment until their property is sold, effectively running down the equity in their house. Think of it as akin to an estate duty.
3. Younger generations won’t need all that inheritance
Of course, that will dampen down the inheritance people can leave to their children. But in exchange those children will be living in a much fairer society, and so won’t need those inheritances so much to prosper. They will face lower income taxes, and much more affordable house prices. They will have higher incomes, as people will invest more in business rather than trying to get rich buying houses off each other. For most, this will be better than any inheritance they might have expected.
4. Our approach is fairer than inheritances anyway
It makes sense to want to look after your own flesh and blood more than the rest of society. But does that make it fair? Inheritances are unearned, and over time lead to increased inequality in society. For these reasons, many countries in the world try to tax inheritances. Of course, rich people can afford accountants so can usually avoid them.
At the moment many New Zealanders can’t afford to leave their children anything. Around 40% of New Zealand families have no assets at all. They are locked out of the housing market, with no prospect of getting ahead no matter how hard they work. Instead of relying on inheritances to give your children a fair go, how about we just make society fair?
5. The equity in houses won’t fall below what people put in
Some people think that it unfair that they can’t benefit from all that equity that has accrued on their house. Again, some of that wealth is unearned and untaxed, so why do people feel entitled to it? Our tax reform policy will, when fully implemented cost the owner(s) around 1.5% of the equity in a house every year. That means it would take several decades to run down the equity in a house. It is extremely unlikely that any elderly person would see the value of their equity reduce below what they put into the house when they first bought it.
In short, our tax reform package will not force the elderly into poverty as some claim. But it will make our society fairer and more prosperous.