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Rising rents – another symptom of tax break on housing

Stories of the impending rental crisis in Wellington have reached fever pitch in recent weeks. A perfect storm of mismatched supply and demand, short-sighted Government policy ( such as the tertiary policy driving more students into the city), and the overarching inability to fix our tax system has led to a situation where rents are predicted to rise around 20% relative to this time last year.

We can finger point and lament poor Government policy (past and present) all we like, unfortunately this will not help us drag our property prices (and along with those, rents) back to affordable levels. Yes, the new Government is barely dipping its toes into their first term, but they have already thrown away their biggest asset in achieving housing affordability having hamstrung their tax working group with a long list of terms that makes any real improvements hard to envisage. 

The reality is these continued price hikes are felt most acutely by the poorest in our society and continue to widen the ever-growing inequality that we have. We already have a situation where more New Zealanders than ever are spending over 30% of their income on housing (the percent that is considered the threshold at which housing is considered as being ‘unaffordable’), and as far as we can tell, things are only getting worse.  

What are we doing about it? 

Some of the policy changes that we have seen, in an isolated sense and to varying degrees do alleviate some pressures. Building more houses will help, and even bright line tests ensure that at least some of the financial gains from housing speculation are taxed. The problem is that most are incremental fixes and are focused on the symptoms rather than the cause of the long-term housing disequilibrium (we have written about here).

So, what is the answer?

Under our tax system, owner-occupiers of houses do not pay a cent on the effective income they earn each and every year. Yet those working the 9-5, the double shift, or two different jobs, just to make ends meet, pay by far the highest portion of their income to tax. And, once that money is in the bank, they are taxed on the interest gain too. Meanwhile, those who have their wealth in property pay next to nothing and as a result get to enjoy semi-permanent tax-free capital gains because of that tax loophole! The average New Zealand house rose in value $48,142 in 2016. If that was earned through wages, they would be required to pay around $10,000 in tax. Teachers, doctors, lawyers, checkout operators, none can escape being skimmed by the swipe of the tax brush, yet property owner-occupiers are exempt. The worst part is that investing in housing is actually costing our society income – in the form of a crippling drag on productivity that such low-returning investment engenders.

By closing these loopholes in our tax system and making owners of assets (not just those with owner-occupied housing, but all owners of capital assets that continually declare lower than market income) pay their fair share we can lift the tax burden from wage earners. This will allow us to reduce every single New Zealander’s income tax rates by around one third. For the average Kiwi, this works out to be around $3,000 a year in your back pocket. Not only is this great for the vast majority of us, it also means house prices should steady and become more affordable as there is no longer any incentive to bid the prices up against one another – as we scramble to enjoy the tax advantage of ownership. Meanwhile, all that money that was once stored in housing gets funneled back into the productive economy, helping kick start our stagnant wages and productivity levels.

It’s human nature to dislike change, but often the greater evil is to do nothing. Yes, we should build more houses, yes, we need better rental standards, all these things help. But, unless we address the crux of the issue that is a tax loophole, expect little to change.

 

Andrew Courtney

Andrewc@top.org.nz

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    • Andrew Skerrett
      commented 2018-02-06 11:54:48 +1300
      Whoops bad maths on that – 48% rather than 53% Doh!
    • Andrew Skerrett
      commented 2018-02-06 11:53:18 +1300
      I’d be very interested to know what Gareth thinks of GST at 15%. I feel this tax is at this level is huge.

      For example I recently did a property development building townhouses. There is quite a big risk in this type of thing and a very long lead time where you are heavily commited. It worked out well but the combination of Income and GST put the tax effectively at 53% of the profit. This has made me wary of further projects as when combined with the risk and timeframes it is hard to make a project stack up.

      Similarly we now find our retailers paying this level (53%) and trying to survive against Amazon, Google and China.

      GST is highly regressive and it encourages things like foreign holidays and online purchases unfairly in some ways.
      What is the TOP view on GST?
    • Andrew Skerrett
      commented 2018-02-06 11:45:08 +1300
      I agree about taxing assets. However TOP needs to be strategic about how it presents this. The key is the UBI. The UBI prevents situations of hardship where the cashflow of retired or sick people is impacted by tax.

      TOP should be arguing for a UBI – Asset taxes are one of several means of paying for it.

      I have been struggling a bit with Gareth’s asset tax and lack of focus on Capital gains tax. However the comments he makes below convince me he is right. There is an overall distortion that the combination of a UBI and asset tax can address.
    • Andrew Skerrett
      commented 2018-02-06 11:26:01 +1300
      Its a regulation issue – TOP is evidence based and here it is;

      Rising rents are a Wellington problem. Christchurch rents and real estate prices are falling. In our case a massive increase in the supply of land on the periphery was made possible by simple rule changes in the council. Private sector developers have done the rest. The CBD now has 60ha of vacant land zoned for high density business and residential thanks to an earthquake reducing the old building stock of junk to rubble. The price boom is over and will stay over for years. Christchurch will gain economically and I am seeing this as young couples arrive to take jobs where they can afford housing.

      Developers are building flatsick in the centre and will keep going. The baby boomers Wooden dungas with lawns to mow are probably not going to be the choice of the coming generation and certainly not of renters who want good heating and low running costs.

      An earthquake in Wellington will be a way to fix things but not something I would wish on anyone.

      Instead Wellington and Auckland should just deregulate the land supply. Zone the whole of Wellington to high density with ultra stringent Earthquake strength requirements. Bingo the problem is gone. They won’t do it though because the rate payers are a vested interest group. Christchurch was never going to either despite living on a flat plain with hundreds of square KM of empty land.

      It has to come from the TOP! Overrule council planning in the main centres.
    • John Robson
      commented 2018-02-04 15:14:19 +1300
      Michael,

      Plus ca change, plus ca meme chose.

      I am not being obtuse, and certainly not deliberately obtuse – I was being ironic – very, very, very, deliberately, ironic.

      In response to an absurd rhetorical question from you that fails the tests of reasoned argument at almost every level.

      Please… and, I’m now not being ironic… please go and Google, and read, and take time to reflect on the meaning of, logical fallacy…

      And then make like Elsa… and let it go!.

      While Gareth may have been slighly more ‘personal’ in some of his initial posts, when he directly engaged, he at least engaged in a reasoned way, and got a reasoned response.

      You started your engagement with no ‘personal’ ( a better start), and we traded (mostly) reasoned responses, but having failed to move me, as I failed to move you, you appeared to accept, as did I, that we were wasting each others time, and we both agreed to move on.

      But, as Vic Reeves said, you wouldn’t let it lie.

      A straight question: do you really think there was anything of value in your most recent post?

      If you, with a straight face, can publicly declare that you want me to answer the following question, viz. your question: “If some can make a living from capital gains, why can’t everybody?”, let me know.

      And after I finish drafting a post to Gareth (on a different topic to ‘Is capital gains income?’), I’ll give you the courtesy of a straight response.

      Cheers,

      John
    • Michael Roberts
      commented 2018-02-04 07:22:35 +1300
      Hi John

      I think it is you who are not “getting it”. If some can earn a living in this way, why cannot everybody? Or are being deliberately obtuse?
    • John Robson
      commented 2018-02-03 20:13:05 +1300
      Hi Michael,

      That is exactly what some people are doing…

      You finally get it…

      Happy days!

      Cheers,

      John

      PS: You don’t really want to relitigate this topic here… surely… come to Tauranga… and let us talk over coffee… Gareth could join us… he has a nice little pad (aka capital gainer) here… and I’m payimg!
    • Michael Roberts
      commented 2018-02-03 18:34:40 +1300
      Hi John

      It occurs to me that if capital gain is income then we could all make our living selling houses to one another, and none of us would have to work, or actually produce anything.

      Just a thought !
    • Oliver Krollmann
      commented 2018-02-03 17:11:48 +1300
      Barbara, that’s what I’m hoping for, too – but it can probably not work without restoring fairness first, with some tough new legislation, if required. As long as the “what’s in it for meee” attitude prevails, and as long as we can rip off each other by selling that ramshackle hut to the next guy for $50k to $100k more than we paid for it, there won’t be much appetite for working for the good of all.
      But there’s hope. The fact that TOP was founded, and that I’ve read and heard (here and elsewhere) from so many people who are like-minded is proof that at least some of us care and think. You can feel it, here and there, be it about climate change or rubbish or inequality or whatever issue we’re facing right now, that slowly but constantly more and more people start to listen. It’s a long game.
    • Barbara Hay
      commented 2018-02-03 14:38:28 +1300
      I’m hoping there is a developing public appetite to face up to unpalatable truths and know that the solution may directly affect those of us who have a comfortable life… but understand that we need to look beyond ourselves and work for the good of all, which ultimately works to improve the quality/happiness of society as a whole, including ourselves. When did we become so self-centred? We all have the personal power to change this downward spiral.
    • John Robson
      commented 2018-02-02 19:35:54 +1300
      Hi Gareth,

      Thanks for the response.

      I explicitly and deliberately used the words “productive assets” when referencing DCF as a valuation system. I accept that there are other ways of valuing productive assets such as PE, but PE only reinforces my point that the value of productive assets is intrinsically related to income – after all, that is what the E in PE is referencing.
      That there are assets that generate no cash flow (actual, imputed or any other kind) is a different issue – they are, by definition, excluded from my argument as they are not ‘productive’ assets.
      They do however provide a challenge for those that advocate some form of asset/wealth/equity tax based on the assumption that it is reasonable to expect that all assets should generate at least the risk-free rate of return – and might be taxed on that basis.
      But to avoid conflation, I’d like to park the discussion of asset/wealth/equity taxes for later – and stick with the issue of capital gains and whether it is income.
      Which leads to your response re GDP accounts. I understand how GDP accounts are created, and what their purpose is, and also how they are used and mis-used I have a ‘well-thumbed’ copy of Understanding National Accounts (Lequiller & Blades) on my ‘desktop’. I note that on page 195, they state in relation to capital gains (and losses), that “these amounts may therefore be included in the economists’ definition of income, but they are not included in the national accounts definition of income”.
      The point of the preceding paragraph is that I understand the definitions used in, and the purpose of, producing National Income Accounts, but reject your argument that the definition of income for the purpose of calculating GDP is the only definition of income. Most trained economists (is there any other kind) recognise this. As do the authors of Understanding National Accounts, Lequiller and Blades. So why do you deny this so vehemently?
      Gareth, if you and I were arguing over some aspect of GDP, and I insisted that GDP included gains and losses, then I would be wrong and you would be right to berate me for being wilfully ignorant.
      But this discussion is not about defining GDP, it is about defining taxable income. And it is not about putting a value on ‘total domestic output during a specific period’, it is about ensuring fairness in the valuation of the income, and associated taxation, of individual entities.
      I will not repeat the arguments, but to define capital gain, in that context, as income is neither fringe nor a function of ignorance. Indeed, on the basis of empirical evidence, it is mainstream. Which isn’t a slam-dunk argument in my favour (the mainstream has been wrong before), but it certainly must give a fair-minded person pause.
      All the above being said, I’m guessing I’m unlikely to have moved you, and I don’t want to waste your time, so, I’ll leave this topic here.

      Thanks for engaging.

      John
    • nigel meek
      commented 2018-02-02 19:30:10 +1300
      Hi Andrew. It appears your argument has tried to inextricably link the dearth of available housing stock with the need for a capital gains tax when, in my view, no such link can be made. A CGT will of course create Government revenue that has hitherto been unavailable. It will not however magically materialise sufficient housing stock to balance a market which has too much demand and not enough supply. If four times average income is seen as an ideal level at which a mortgage can be serviced and some form of accommodation eventually owned then the ten times average income price prevalent in the New Zealand housing market is certainly not. This price floor is only sustainable while there continues to be too much demand and not enough supply. Of course tax regimes, price of building materials, prevalence of land banking, lack of trained building technicians, planning rules, need for new networks of reticulated water, electric, sewage, roads, paths etc,, all impact on the capability or willingness to make supply balance demand. BUT supply will remain insufficient because none of this list and more can be addressed as fast as additional people continue to move from rural areas to city areas and from a less safe country to a more safe country. This is not a tax problem it is humanity’s greatest failure on a global scale.
    • Oliver Krollmann
      followed this page 2018-02-02 18:07:40 +1300
    • Robert D
      commented 2018-02-02 17:36:21 +1300
      Hi Gareth
      How do you see this example.
      Purchase house in 2010 for $400,000. Sell in 2018 for $800,000.
      Maintenance and upgrades in the eight years amount to $400,000.
      Does the owner ultimately pay tax on $400,000 gain, or $800,000 gain?
      The question applies to both an owner-occupier and an investor.
      However, with the owner-occupier, there may be no financial record of the maintenance and upgrades.
      Thanks
      Rob
    • Gareth Morgan
      commented 2018-02-02 16:20:47 +1300
      MY RESPONSES ARE IN CAPSGARETH

      Not all ‘assets’ are ‘productive’.
      Productive assets derive their value from the discounted value of future cash flows. Those cash flows are income. In short, productive assets derive their value from income. An increase in asset value (capital gain) is simply an increase in the capitalised value of the future income. To say that there is no relationship between income and capital gain doesn’t make sense.

      DCF IS ONLY ONE OF THE VALUATION METHODS USED TO VALUE CAPITAL. ANOTHER IS PE AND ANOTHER IS SIMPLY LAST SALE PRICE. IT IS QUITE COMMON TO HAVE A CHANGE IN MARKET VALUE WITHOUT A CHANGE IN EITHER DISCOUNT RATE OR CASH FLOW. SOME ASSETS HAVE NO CASH FLOW, AND NONE EXPECTED. THIS DOESN’T MEAN FOR ONE MINUTE THAT THEY ARE WORTH NOTHING.

      CAPITAL VALUATION METHODS ARE IRRELEVANT TO ANY DISCUSSION OF INCOME AND INCOME TAX. IT’S ARISING HERE BECAUSE OF YOUR CONFLATING OF VALUATION CHANGE WITH INCOME.

      Re capital gain as income, discussion of “GDP accounts” (aka National Income Accounts) is a red herring. Capital gains are recorded the Revaluation Account. That being said, the treatment of capital gain in National Accounts is getting increasing attention from economists (not least in the OECD) because of the effects of their exclusion from the Income Accounts – e.g. issues such as the wealth effect, and the understatement of savings.

      GDP ACCOUNTS ARE TOTALLY RELEVANT. VALUE ADDED IS THE INCREASE IN NATIONAL WEALTH AND IT IS THAT WHICH FORMS THE INCOME TAX BASEWHETHER IT IS EARNED BY THE BUSINESS, HOUSEHOLD, NON-PROFIT OR GOVERNMENT SECTOR.

      I’m sure that you are aware of these issues and the associated discussions. FWIIW, IMHO there is a degree of intellectual masturbation associated with much of the discussion. The problem is an issue of practical effect – but too many economists are fighting ego wars over whether the macro, micro, or behavioural economists (and their respective models) have it right.
      The truth is while they are fighting over how sunny it is outside based on their models, a quick look out the window shows that it is pissing with rain!
      To use an old saw, if it walks like a duck, quacks like a duck, craps like a duck, it is a duck. The same applies to capital gains – it is income.

      THERE IS NOT POINT IN FURTHER DISCUSSION ON WHAT INCOME IS GIVEN YOU REJECT THE CONVENTIONAL DEFINITION OF THE CONCEPT AS PER NATIONAL ACCOUNTING FRAMEWORK. PLEASE CONSULT ANY TRAINED ECONOMIST FOR CLARITY ON THIS POINT.

      And with regard to taxing capital gain – you are the one with the fringe position. My position is in line with the views of the IMF, the OECD, most OECD tax systems, NZ’s own Treasury, the IRD, the Council of Trade Unions – and, of course, many of the economists working therein.
      My question is why are you (and TOP) so against the taxation of capital gain? And, in your answer, I’m looking for something better than simply saying you are against taxing capital gain because it will not solve NZ’s housing issue. That is like a doctor denying the value of penicillin because it doesn’t cure cancer.

      IT DOESN’T MEAN THAT THERE IS NOT A DISCUSSION TO BE HAD ON TAXING CAPITAL GAINSINDEED IT’S A VERY OLD DISCUSSIONBUT THE CASE MUST REST ON ITS MERITS IN TERMS OF THE IMPACT ON PRODUCTIVE AND ALLOCATIVE EFFICIENCY. POINTEDLY IT CANNOT BE JUSTIFIED ON THE GROUNDS THAT CAPITAL GAINS ARE INCOME AS IS YOUR PROPOSITION BECAUSE THEY CEALRY ARE NOT. INCOME HAS TO BE MATCHED BY PRODUCTION BY DEFINITION IN THE NIE ACCOUNTS. CAPITAL GAINS DO NOT. IT’S A SEPARATE SUBJECT, WHICH ANYONE WHO IS LITERATE IN ECONOMICS WOULD KNOW.
      YES SOME COUNTRIES HAVE CAPITAL GAINS TAXES. THEY USE THEM IN STEAD OF TAXING THE YEAR BY YEAR INCOME WHICH ACCRUES TO THE OWNERS OF ASSETS BY VIRTUE OF THEIR OWNERSHIP. TOP’S PREFERENCE IS TO INCLUDE ALL YEAR-BY-YEAR INCOME WITHIN THE INCOME TAX BASE. THE RATIONALE IS PRIMARILY NEUTRALITY, BUT SIMPLICITY AND EQUITY ALSO SUPPORT THE CASE. CAPITAL GAINS TAXES, PARTICULARLY THOSE LEVIED ON A REALISED AS OPPOSED TO ACCRUALS BASIS ARE HUGELEY DISTORTIONARY, AND FIND THEIR WAY INTO THE SYSTEM BECAUSE OF THE RELUCTANCE OF POLITICIANS TO STAND UP AGAINST THOSE WHO REJECT THEM ON CASHFLOW GROUNDS. THEY’RE AN EXTREMELY POOR SUBSTITUTE FOR A COMPREHENSIVE INCOME TAXWIDE TAX BASE, FAR LOWER RATES OS ALWAYS THE BETTER TAX REGIME FROM THE ECONOMY’S PERSPECTIVE.
    • John Robson
      commented 2018-02-01 23:12:17 +1300
      Hi Gareth,

      In response to your last three posts, I will try and address the salient issues separately, to avoid conflating topics. And I’ll start with capital gain.:
      Not all ‘assets’ are ‘productive’.
      Productive assets derive their value from the discounted value of future cash flows. Those cash flows are income. In short, productive assets derive their value from income. An increase in asset value (capital gain) is simply an increase in the capitalised value of the future income. To say that there is no relationship between income and capital gain doesn’t make sense.
      Re capital gain as income, discussion of “GDP accounts” (aka National Income Accounts) is a red herring. Capital gains are recorded the Revaluation Account. That being said, the treatment of capital gain in National Accounts is getting increasing attention from economists (not least in the OECD) because of the effects of their exclusion from the Income Accounts – e.g. issues such as the wealth effect, and the understatement of savings.
      I’m sure that you are aware of these issues and the associated discussions. FWIIW, IMHO there is a degree of intellectual masturbation associated with much of the discussion. The problem is an issue of practical effect – but too many economists are fighting ego wars over whether the macro, micro, or behavioural economists (and their respective models) have it right.
      The truth is while they are fighting over how sunny it is outside based on their models, a quick look out the window shows that it is pissing with rain!
      To use an old saw, if it walks like a duck, quacks like a duck, craps like a duck, it is a duck. The same applies to capital gains – it is income.
      And with regard to taxing capital gain – you are the one with the fringe position. My position is in line with the views of the IMF, the OECD, most OECD tax systems, NZ’s own Treasury, the IRD, the Council of Trade Unions – and, of course, many of the economists working therein.
      My question is why are you (and TOP) so against the taxation of capital gain? And, in your answer, I’m looking for something better than simply saying you are against taxing capital gain because it will not solve NZ’s housing issue. That is like a doctor denying the value of penicillin because it doesn’t cure cancer.

      Yours in anticipation,

      John
    • Michael Roberts
      commented 2018-02-01 08:52:13 +1300
      Hi John
      Thanks for the debate. Though I think you rely too much on “authorities” and principles where concrete argument would be more appropriate. For example, I think the question of whether a land tax can co-exist with rates should be decided on its merits rather than on the application of some “principle” involving jurisdictions. Also, I do not think that, when it comes to the question on whether or not to apply a capital gains tax, it matters whether a capital gain is income or capital; it is just that I object to people saying that such a gain should be taxed “because it’s income”. My objections to CGT rest on other grounds.
    • Michael Roberts
      commented 2018-02-01 08:37:55 +1300
      I think there there is a difference, with respect to imputed income, between a residence and a business. In the former case we would taxing a palpable benefit viz: the accommodation that the resident is enjoying, and which in fact represents income. In the latter case we would be taxing something which does not exist.

      It may be true sometimes that investors will not invest in a business which makes insufficient profits, but investments, once made, do not always live up to expectations. And of course there is nothing “altruistic” about paying wages. And besides NZ is supposed to be a free country, so if someone chooses to operate a business making less than ideal profits, perhaps relying on wages for justification, I do not think he should penalized for it by having to pay tax on non existent income. Sometimes of course resources employed in such a business may be employed more profitably elsewhere, but I wouldn’t bet on it.

      It may well be true that there are businesses which, because of transfer pricing etc, do not pay their fair share of taxes, and perhaps an imputed tax may be applied in these cases, provided you can do so without penalizing the innocent businessman as well.

      I think the idea of applying a tax on imputed income has merit where untaxed income can be clearly discerned, but I do not think that taxing non existent income is really justified.
    • John Robson
      commented 2018-01-31 16:56:21 +1300
      Hi Michael,

      Below is my response to your last two (and two last?) posts (part 2):

      Land tax:

      I agree with you that land (and the taxation of land) are just as relevant as they ever were when looking at the issue of fairness at a Nation (national) level. Those that speak of national accounts should remember that ‘national accounts’ aren’t just about income, they are also about a country’s balance sheet.

      Signing off…:

      Michael, I get that you feel our conversation is done, so, thanks for engaging. I’ve enjoyed it, and, while occasionally (obviously) frustrated, I’m grateful that you have taken the time to ‘argue’ the various issues that we have traversed – rather than simply assert ‘facts’ and hurl abuse as some are prone to do. And, I think it is worth noting, that there were some points of agreement. Michael, I don’t know you, but if you are ever in Tauranga – and bored, I’ll happily buy you a coffee. My number is ‘in the book’. Cheers, and thanks.
    • John Robson
      commented 2018-01-31 16:55:52 +1300
      Hi Michael,

      Below is my response to your last two (and two last?) posts (part 1):

      Arbitrary:

      I agree that the discussion re ‘arbitrary’ has become semantic’. From my perspective, I objected to your use of the word to describe the process by which tax rates are set. I argue that tax rates are not set arbitrarily, they are the product of reasoned thought backed by sound arguments and (ideally) evidence. As an example, the tax rate suggested by TOP for their #1 policy. I think that the use of the word arbitrary is pejorative and dismissive. And the ‘rate’ is important – for example, in TOP’s case, the rate, and therefore the amount collected, is the basis for promising 30%+ cuts to personal income tax.

      ‘Messy’.

      I agree that ‘messy’ is subjective, and a ‘casual’, rather than a ‘formal’ description, but the principle still applies. The fact that NZ had a (Central Government) land tax while Local Government taxed land also does not invalidate the principle that, ideally, in a tax system, there should be no overlapping jurisdictions.

      Capital gain – Is it income? Is it fair?

      I accept that we differ in our views. I obviously don’t accept that your views are correct. I have made significant efforts, by citing various sources, to show that others (individuals, organisations, etc.) share my views (i.e. they are not fringe), and make you aware of the arguments that support my views (i.e. they are not without foundation). I have clearly failed to move you.

      I was wrong:

      I was clearly wrong in assuming the Gareth would agree that capital gains are income.

      Acknowledgement:

      Just to be clear. I did state that “I do not assert that a CGT will solve NZ’s housing affordability issue” but I also stated “it may be part of a solution”. I think that selectively quoting me is (or should be) beneath you.
    • Gareth Morgan
      commented 2018-01-31 14:57:16 +1300
      Is there a case for businesses that permanently make near-zero profit or losses? In other words is the fact they provide employment for income tax-paying employees, sufficient, as Michael suggests? I’d argue such firms are not rational, that nobody invests in a business to make nothing or run losses. More likely such a firm is that provides its owner with a return that’s less than they could enjoy investing for no risk in the bank or with government bonds will be a sham – providing a tax shelter for its owner who is likely to be illegally claiming expenses. If as you suggest Michael there could be a legitimate altruistic motive, then the owner would be declare the enterprise as a charity so tax on its income is not an issue.
    • Michael Roberts
      commented 2018-01-31 08:28:39 +1300
      Land taxes may have emanated from an earlier age but that fact alone does not make them
      an anachronism. We all still have to reside somewhere – the change in the mode of production over the last 1000 years hasn’t changed that – so I would think that a land tax would still be pretty relevant in today’s world. Where property is concerned a tax on imputed rent may be OK (though I think a land tax may be just as effective) but in the case of commercial firms you seem to be overlooking the fact that that, from an economic point if view, its income is not just the amount recorded on its “bottom line” but also it’s employees’ remuneration. Most commercial firms would, from this point of view, be making a pretty decent return on assets employed even if their profits are less than the risk free rate of return.
    • Gareth Morgan
      commented 2018-01-30 18:35:32 +1300
      Capital gains are not income – if they were they’d be in the national income accounts. They are a change in valuation that buyers and sellers agree to transact at. This is what I mean when I say that those who are in essence illiterate in the differences in income versus capital , need to educate themselves before having anything to seriously contribute.

      Next, a land tax emanates from the middle ages when the economy was agrarian only. It is no relevance to a world of manufacturing, services and internationalisation of production and income generation – let alone intellectual capital and earnings. Has nobody noticed that the actual income generated from land is an ever-decreasing element of national income? So in this discussion it is nothing but a distraction, a straw man constructed to avoid the issue about equitable tax impost on income.

      Finally the two last TWGs have covered all the stuff TOP has brought together and provided a wider umbrella of coherence and context to. Further, the tax loopholes we talk about have been the subject of much discussion in the international economics literature. While I’m more than happy to deal with genuine questions and help with education in this area what I can’t stand is uninformed opinions parading as what they’re not. John Robson is a Green Party troll of the worst kind – he pretends he’s actually informed when he proves time and time again he’s whacked – no choice/theoretic basis underpinning his views at all, persistent denial in the face of evidence and the cited literature, and of course his resort to abusing those who are informed and literate in this area, speaks volumes.

      When I don’t know anything about a subject I shut TFU. That discipline is beyond party partisan trolls. They truly are the trash that block the sewer of political waste
    • Michael Roberts
      commented 2018-01-30 15:18:55 +1300
      Hi John

      I fear this debate is getting somewhat long-winded and we may just have to agree to differ. However, I would like to make a few final comments:

      In respect of “arbitrary” I was quoting from the Concise Oxford Dictionary, 7th edition. If you have managed to find an alternative definition, so be it. I do know the meaning of the word and I stand by what I said: tax rates are arbitrary to the extent that they are not based on exact calculation. You seem to be quibbling over a point of semantics.

      You have not shown that imposing land tax along with rates is “messy”. We used to do just that until land tax was withdrawn, about 1990. It didn’t seem to be " messy" in those days as I recall.

      On the question of whether capital gain is income or capital, the “authorities” you have cited have simply made bald statements, unsupported by evidence. The problem is that capital gain does not fall within the usual definitions of in income. ie:
      “Income is what an enterprise can pay out, by way of dividends or drawings, without reducing its capital.” Since capital is embedded in assets and capital gain is an increase in the value of those assets it is clear that capital gain does not fall within this definition.
      Also:
      “Income is what an enterprise receives, usually in the form of cash, in return for carrying out its normal operations, eg from producing and selling a product, or providing a service.” Obviously capital gain is not included in this definition either.

      We both know, apparently, that “out of pocket” refers to a loss of cash. So, unless you were reading into my words a meaning that was not present in them, you must have known that I was not referring to a loss in the value of a capital asset. Your comment seems to me pernicious.

      I believe that capital gains taxes, except in the limited area covered by the bright line test, are unfair. I have given reasons; I would suggest you address those reasons.

      At the end of the day it does not matter whether the non taxation of imputed rent is the “primary cause of the housing affordability issue;”; it clearly is a factor.

      I am glad you acknowledge that a CGT will not solve the housing problem, but of course there are also otp
      her reasons for not introducing it. (1) It operates unfairly, as I have shown, and (2) there are better ways of taxing property ie land taxes or imputed rent taxes.
    • Gareth Morgan
      commented 2018-01-30 14:19:25 +1300
      I’ve just perused this discussion and a few points come to mind

      (a) If you tax all income then there is no need to have capital gains taxes as proxies for income taxes where they are absent. All capital gains is after all is a change in the market’s valuation of an asset. They have nothing to do with income which, as per the GDP accounts definition, is earned in the production of goods and services. Indeed it is synonymous with production as far as the economics literature is concerned. So the priority is to ensure all forms of income are taxed.
      (b) With respect to owner occupied housing the income is the roof over your head each year – as recognised in the national income accounts. Now as Ben and Michael have noted, there are two ways to approach assessable income on this (or any) asset – deem the market rent as the income and allow all deductibles as is normal – or deem the assessable income as only applicable to the equity owned in the asset. The latter is far simpler. Further, it should be remembered that we’re only assigning the risk free rate as the taxable income – not the higher, market rate. So it can easily argued that we’re only forwarding a partial income tax on this asset class.
      © The tax loophole also applies to businesses that in net terms do not average the risk free rate (that available on government bonds). These of course are not businesses at all, they are tax shelters. Clearly if a business doesn’t average more of a return than one can get without risk, it is not a legitimate business. Closing the loophole on these will force the “business” to either shut down and free up resources for profitable deployment or to raise productivity so it is profitable. Both are better outcomes than allowing persistent sheltering of income. Businesses that exceed the risk free rate of return aren’t affected at all by closing the loophole, they are already declaring their profit.
      (d) Yes the loophole applies to all assets that households own, But for reasons of practicality we only propose property be included – or if not a minimum threshold per item would exclude almost all other assets – maybe expensive cars, boats might be caught but even they depreciate to nothing in time. Property does not.
      (e) Overall closing the loophole in the income tax regime is all about economically efficient deployment of the nation’s capital stock – rather than seeing its deployment driven by tax privilege
      (f) Estimates of the increase in the tax base from closing the loophole can be simply derived from public records of the value of the housing capital stock less the value of outstanding mortgages. To this should be added the tax that low profitable or loss making business would accrue.
      (g) Finally I would warn people that John Robson is a particularly nasty piece of work – if you haven’t noticed it already. His economics literacy is low and as often is the case with habitual commentators who come from the fringe, the ability to follow logic is limited while the appetite for ad hominem attacks as soon as the flaws in their arguments are raised, consumes them. Robson’s stunning inability to separate an argument from the person forwarding it, makes it better to ignore him. A little knowledge is a dangerous thing but persistent ignorance has nothing to commend it.
    • John Robson
      commented 2018-01-30 02:28:44 +1300
      Hi Michael,

      Thanks for your latest post – my responses to your various points are as follows:

      Arbitrary:

      Michael – are you now making stuff up? The definition of ‘arbitrary’ on the Oxford Dictionaries site does not mention the word “opinion”: The definition is, and I quote: “Based on random choice or personal whim, rather than any reason or system”. There are two other definitions, but they are not contextually relevant. See: https://en.oxforddictionaries.com/definition/arbitrary

      ‘Messy’:

      It creates a need for co-ordination between two separate taxing authorities. Best practice separates taxing authorities’ jurisdictions so that there is no conflict or perverse consequence. This separation is so fundamental that it is not uncommon to see it in a country’s constitution – e.g. Germany.

      “A capital gain is income”:

      I put the above sub-heading is quotes because it is one. It comes from advice to the Minister of Revenue from Inland Revenue in 2014. I know that you disagree with this statement – but you have given no evidence, nor cited any reputable authority to justify your position. You clearly have chosen not to read the links I have provided so could be reasonably described as wilfully ignorant. But I am known for my patience, and being passionate about education, so I will try again. From the background paper titled “The taxation of capital gains” prepared for the last TWG: “a large component of economic income is not taxed – capital gain”. Please read the quote again. Capital gain is income. Please read: https://www.victoria.ac.nz/sacl/centres-and-institutes/cagtr/twg/publications/3-taxation-of-capital-gains-ird_treasury.pdf

      Arguments against a CGT:

      You claim, somewhat laughably, to have demonstrated that “capital gains taxes operate unfairly”. I don’t believe in wasting time rewriting the acceptable work of others, so to both respond to your claim, and broaden and deepen your understanding of the issues relating to CGT, I suggest you read: https://www.victoria.ac.nz/sacl/centres-and-institutes/cagtr/twg/publications/3-taxing-capital-gains-burman_white.pdf

      Out of pocket by 15%:

      “Out of pocket” means “having lost money in a transaction”. Your words were “out of pocket to the tune of 15% of the property’s value”. If the property in your hypothetical transaction was $1,000,000, then your statement would suggest that CGT would result in the loss of $150,000. How else can your statement be interpreted… here on planet Earth?

      TOP’s #1 policy:

      I understand Top’s #1 policy better than most. The policy is driven by the assertion that the non-taxation of imputed income is the primary cause of the current housing affordability issue. There is no evidence provided to support this assertion. The core element of the policy is the imposing of a tax on a deemed rate of return on the net-equity value of all productive assets – including housing. The revenue raised would be used to reduce income tax. The intent being that the fully implemented policy would be fiscally neutral. It is asserted that this will not only solve NZ’s housing affordability issue, but also increase NZ’s productivity. Again there is no evidence provided to support this assertion. Which makes sense as no empirical evidence to support TOP’s assertions exists.

      All those in favour of a CGT:

      The IMF, the OECD, the majority of OECD countries, Treasury, Inland Revenue, the CTU, …

      Michael, I do not assert that a CGT will solve the NZ’s housing affordability issue – but that IMHO is not the test that CGT or any other tax (Capital, Land, Inheritance, whatever) should have to pass before its inclusion in the NZ tax system is properly considered. I do assert that the failure to tax capital gain is a major source of unfairness in NZ;s tax system – and as a corollary, the taxation of capital gain would make for a fairer tax system.
      Regarding solving the housing affordability issue, as stated previously, I’d be happy to share my views on that topic if you were interested.
    • Michael Roberts
      commented 2018-01-29 16:20:10 +1300
      PS:
      My last sentence included a typo. I should have said “no such justifications”.
    • Michael Roberts
      commented 2018-01-29 16:15:44 +1300
      Hi John

      I do know the meaning of “arbitrary”; but in case I was wrong I consulted my dictionary (The Concise Oxford). Apparently it means “dependent on mere opinion”, so I think the proposition I stated in my previous comment must stand.

      I can see no reason why it would be messy for a land tax to co-exist with local authority rates. Please explain.

      You seem to have knowledge of NZ tax law, but apparently no understanding. Thank fact that the IRD taxes gains covered by the bright line test is not an admission by them that capital gain is income, but that it should be treated as income for tax purposes only. The decision to do so does not affect the status of gains not covered by the test.

      The question of whether capital gain is income or not is a question of fact not of law.

      I did not say that a CGT would " cost 15% of a property’s value". I said that an investor would be “out of pocket by 15%” in terms of cash despite there being no change in his investment.

      A land tax does not have to be the same rate as an income tax because it is a tax on land not on income. A capital gain on land builds into the value of the land; and since land taxes are calculated on that value, a capital gains tax is automatically taxing that capital gain.

      The discussion may have started as a criticism of how Gareth’s imputed rent tax, albeit a criticism based on a lack of understanding of how such a tax would operate. But it then moved to a criticism of Andrew’s failure to endorse GGT. Your argument seems to be that capital gain is income and, since it is normal to tax income, capital gain should be taxed. However capital gain is not income, so the argument fails. Another justification will need to be found; however, since capital gains taxes operate unfairly – as I have demonstrated – and as they seem pretty innocuous as far as the housing market is concerned, I suspect that such justification will be forthcoming (except in the very limited area covered by the bright line test).
    • John Robson
      commented 2018-01-29 13:54:06 +1300
      Hi Michael,

      Thanks for your latest post – my responses to your various points are as follows:

      Arbitrary:

      You do not seem to understand the meaning of this word. You assert that something that, in your own words, depends on judgement, can be arbitrary. This is not possible – by definition. In the words of Elsa – let it go.

      Local Authority Rates:

      I agree that “a land tax, or any other property tax, levied by central government” can co-exist with Local Government’s taxation of the same. Who would suggest otherwise? But it would be potentially ‘messy’ – and would be at odds with best practice tax policy.

      Taxation of capital gain in NZ:

      You seem to have little or no knowledge of NZ’s tax system. Where there is intent to make a capital gain when purchasing a property, then any capital gain on that property is taxable as income. That is the law as it currently stands in New Zealand. This fact is referenced in the background to the Taxation (Bright-Line Test for Residential Land) Act 2015. You should read the Act. And it is not the only instance where capital gain is taxed in NZ

      Bright-Line Test:

      Just to be clear: We agree that the Bright-Line Test taxes capital gain. And we agree that the gain is “returned as income” as stated in the Act. But you will not accept that capital gain is income.

      Asset vs Income:

      Land is an asset. An asset is not income (Accounting 101). It follows that a land tax is not an income tax. Capital gain is income: Taxes on income are returned as income tax. The fact that, in a minority of tax jurisdictions, capital gain is not subject to income tax does not mean that it is not income (to argue such would be a logical fallacy). Land taxes in NZ are typically at rates of less than 1% – income taxes in NZ are typically at rates exceeding 10%. Q.E.D. – the application of a land (asset) tax will not tax capital gain (income) “as you go”.

      Housing:

      I do not think it is fair that “a part of the population is unable to access the housing market”. I think the housing situation in New Zealand in 2018 is an example of market failure – or certainly the failure of successive governments to effectively regulate the market to ensure that all have access to housing of a reasonable standard. I have a view on how to solve the housing issue in New Zealand and am happy to share if you are interested.

      CGT:

      You make repeated references to the cons of a capital gains tax. And I accept those that are valid. But I don’t accept those that are not (e.g. your argument that a CGT will cost “15% of the property’s value” – which is either a simple error or reflects a fundamental lack of understanding of CGT. You also make few references to the pros of a capital gains tax. Why the bias? If it is a function of lack of knowledge, can I suggest that you read a paper by Robin Oliver, Capital Gains Tax – The New Zealand Case. Googling the title provides a link.

      Recap:

      Michael, this conversation started because I rejected the unevidenced assertions by the writer of a TOP blog that suggested that the housing issue was primarily caused by the non-taxation of imputed income and could be solved by a capital tax. I still reject the writer’s proposition – which is not to say that I reject the concept of imputed income or its taxation – nor do I reject the concept of capital taxes. Both may be part of a solution, as may a CGT and a land tax.
    • Michael Roberts
      commented 2018-01-28 10:09:33 +1300
      Hi John

      Tax Rates
      I know that tax rates are not completely arbitrary but the question of what to tax, and how much, is not an exact science. It depends very much on the tax authority’s judgement, so it is arbitrary at least to that extent. Also, I am well aware of the factors involved in designing a good tax system.

      Local Authority Rates
      This question is probably irrelevant to the questions we are discussing since rates are not a central government tax. There is no reason why a land tax, or any other property tax, levied by central government, cannot co-exist with a local body rating system.

      CGT
      There is no capital gains tax on property in NZ at present. If you are thinking of the bright line “tax”, you should be aware that this is not a CGT, but a recognition that capital gain should be treated as income in certain limited circumstances, ie when a property has been purchased specifically for the purpose of resale. It is certainly not evidence that capital gain is income. I agree with the tax authorities on this point, and the fact that such gains can be taxed by this means reinforces my belief that capital gain should not be taxed in more ordinary circumstances.

      Your assertion that a land tax does not tax capital gain automatically because it is not levied at the same rate as income tax is a non sequitur.

      Banking Practices
      You say that you are concerned with fairness. Do you consider it fair that a part of population is unable to access the housing market because of of overpriced houses? I assume you do, and therefore, since bank lending policies can be assumed to impact on house prices, I think the question of what tax policies a bank favours should be a matter of concern. At any rate the impact of bank lending itself should be.

      I also am concerned with fairness in the tax system, but because capital gains taxes are levied only on properties that are sold, and not on all properties enjoying a capital gain, I hardly think it qualifies as “fair”. Secondly, if a person sells one property and purchases another of the same value, is it fair that he should be out of pocket to tune of 15% of the property’s value when he is in fact no better off in real terms. Another thing to consider is that capital is what one invests to generate income. Is it not better to tax the income so generated rather than the capital itself? Is it really fair to tax a person’s capacity to earn income?

      A land tax can be considered fair because land belongs ultimately to all of us, and anyone claiming private ownership, however that ownership is acquired, should pay for the privilege. Secondly most capital gain on property resides in the land, and is usually brought about by communal investment in infrastructure and amenities etc rather than by the landowner’s own efforts. Land is a scarce resource and it usually makes sense to tax scarcity.