Closing Tax loopholes

Tax, Dogma And Economic Illiteracy

We’ve had a few questions from our members about Green Party candidate Robin McCandless’ piece entitled Tax, dogma and The Opportunities Party. It was published in the Green Party members magazine, so wasn’t public and we can’t link to it. It took us a while to get hold of it but there is a scanned copy of it here.

The piece generally reveals a complete lack of understanding of economics on McCandless’ part. Firstly he doesn’t discuss at all what tax should people pay, what tax is fair and efficient. Then he dreams up 3 completely unrealistic scenarios and uses them to compare The Opportunities Party (TOP) Fair Tax reform with the Green Party proposal for a capital gains tax excluding the family home. Finally, at no point does he stop to consider what the driver of capital gains on housing is.

Little wonder he ends up favouring the Green Party proposal despite the fact it hasn’t prevented out of control house prices overseas, and has even been shown to be a handbrake on growth.

Fair and efficient tax system

A fair tax system should tax all income the same, but our tax system doesn’t do that because it ignores imputed rental. Imputed rental is the rent we pay to ourselves when we own the house we live in. Confused? If you put your money in the bank, you would have to pay tax on the interest before you paid your rent. If instead you use the same money to buy a house, you don’t have to pay the tax or the rent. If you don’t believe us Robin, imputed rental is in the GDP accounts, acknowledged as income; look it up.

The reason house prices are rising so fast is because everyone wants to own their home so they can benefit from this tax free imputed rental. Investors know this, so they put all their money into housing too, knowing that you and I will keep bidding up house prices as we exploit the loophole of tax-free imputed rental. This is what causes such strong demand for the asset. So long as we all do it, the outcome is self-fulfilling – house prices rise, way faster than the demand for accommodation. The capital gain that results is in effect the present value of the future tax benefit that ownership confers. Rather than have to wait years for that benefit, the owner can simply sell now and realize the benefit. The fact that they get the capital gain tax-free is simply an added bonus. In other words the problem isn’t that the capital gains are untaxed as the Green Party are claiming, the problem is that the capital gains are happening at all.

We need to decide if we want to deal with our property obsession or continue to simply fiddle around the edges; because like the other Establishment parties, that is all the Green Party are doing. For starters they exclude the bulk of the property market by excluding owner-occupiers. And secondly they simply tax the capital gain without dealing with the root cause of why prices are rising. And to make matters worse because they advocate that a capital gains tax be levied on sale, it discourages selling assets like houses and businesses. That means that people will just hold on to assets longer to avoid the tax. This type of impediment in any market hurts growth.

The Three Scenarios

McCandless sets out 3 scenarios, where each house is worth $500k and each person has invested $500k:

  1. The first person invested in the house they live in, with no debt.
  2. The second invested in one rental property with no debt, returning a 6% yield.
  3. The third invested with five properties with 20% equity, returning a 6% yield. 

McCandless mourns that TOP will tax the homeowner, but ignores the fact they’re getting an effective income from owning the house; the imputed rental. After all, why do people invest in housing, rather than put their money in the bank as is so commonplace in Europe, and just pay rent? The tax advantage in New Zealand makes it a no-brainer. He also overlooks that the revenue gathered by closing this loophole will be recycled into income tax cuts, making 80% of people better off.

McCandless bemoans the fact that since the investors in the examples he presents are already earning taxable return of 6%, they pay no more tax under our regime. Of course they shouldn’t – if they are already paying that much tax why would you want to tax them more? Ours is not an agenda to double tax them just because they are investors – which he’s implying should be the agenda. That’s just Far Left drivel.

But being a little realistic here, what investor in real estate is getting a 6% yield from rent? It is a ridiculous assumption. According to Infometrics the average gross rental return in New Zealand is around 3.5%, and that is before rates and other costs. If an investor is getting a 6% taxable return in this market, there is no case to argue they’re tax dodging.

The loophole argument only arises when they’re not getting a return commensurate with a bank deposit rate – which is the common case in fact. Why would anyone invest in an asset that yields less than the risk free rate? The answer of course is they don’t – it’s just that a significant portion of the return they seek lies beyond the taxable income, it’s the capital gain component which is driven by owner occupiers’ demand as they chase the tax break.

Capital Gain on Housing

McCandless then proceeds to assume all house prices in his example rise 80% (the same as in Auckland over the past five years he points out) to $900k and looks at how that increase in value is taxed.

At no point does McCandless stop to understand the cause of house price inflation – because everyone is chasing the tax-free imputed rental. Why haven’t shares risen the same amount as houses have? After all they don’t face a capital gains tax. The answer is that the real return on shares (dividends) is taxed in much the same way that bank deposits are. The problem with property is that the main source of return - imputed rental – isn’t taxed. It is a massive loophole in our tax system worth around $11b pa. Close that loophole and there won’t be much in the way of capital gains to speak of. That is what our Fair Tax reform does, but where the Greens’ capital gains tax falls short.

Besides, our Fair Tax reform is based on a proportion of the capital value of assets – so any capital gain in those assets will end up being taxed eventually. The only way to get untaxed capital gain under our Fair Tax reform is to increase the taxable return that an asset delivers, and if someone does that then they are paying more income tax anyway.

The truth is that the Greens Party proposal for a selective capital gains tax on property that excludes the family home will be unwieldy and have little or no impact on house price inflation. If you don’t believe us, just look overseas. They need to go back to basics and consider the causes of the capital gain rather than be so politically expedient and attack just some of the symptoms.

Showing 37 reactions

  • Chris O'Halloran
    commented 2017-07-25 12:59:54 +1200
    In reply to the previous post.

    Why would you want to tax a single house valuations, up or down?
    If you invest 500K in bonds or bank deposits you pay tax on the interest you receive.
    If you invest 500K in a house that you live in, you pay yourself the rent which incurs no tax. This shortfall is covered by income tax and GST.
    Combined with poor tenancy laws, property is a strongly favoured investment. While this is good for the individual, NZ Inc has become one of the most indebted OECD countries. What should be happening is what makes good economic sense for the individual should also be good economic sense for the country.

    What happens when there is a massive house market value crash …
    The equity people hold in housing would go down. This would decrease the tax they have to pay on their property. The CCIT assumes you hold the property for a benefit so always assumes a minimum return of ~5% on capital regardless of actual cash position. Intermittent losses can be offset against future years.
    As far as the government is concerned, there would be no refunds for the reduced equity in people’s property. The variability of tax received by the government is no different to the variability of income and corporate tax during a recession.

    Secondly there is no advantage in rising house prices except the govt receiving GST, unless you use the capital gain, which really is only book value gain,…….
    Not sure you what you mean but “there is no advantage in rising house prices” is exactly the problem aspiring home owners suffer. But a rising CCIT tax would certainly make home owners seriously consider if there was a true benefit to rising house values and vote accordingly.

    Thirdly for Mr and Mrs public who are not speculators. By owning a single house as their home or shelter would be disadvantaged.
    Yes and no. By increasing government revenue by introducing the CCIT, income tax would be expected to fall by 8-10%. This means if the assets you hold in property exceed 8-10 times your annual income, then yes, the home owner is disadvantaged. But 80% of NZrs are not expected to be in this position, hence most people would benefit – including the highly productive with assets not heavily invested in property.

    Fourthly taxing them, and they choose during a…
    I think you misunderstand how the CCIT is supposed to work. The CCIT is an annual tax bill based on the equity held in all assets. If those assets include property, then a minimum return of 5% is used to determine the annual tax bill on the property assets.

    If the owner is retired and cannot afford to pay the tax, the tax is accrued as a liability until the property is sold. There is no intention to turf people out of their houses. If you get a feel for the other policies TOP is promoting, I think you’ll find them quite benevolent. Moreover, many societies have death and gift duties, NZ used to have them. Think of the accrued liability like that. And by the way, when you do the maths, if you are retired for 20years after 65, ie you make it 85, you’d still be passing on 78% of it. It’s hardly a rort.

    Your first home you buy is the only time that you make a real capital gain as I have said you buy and sell at the same market values. I was told by a investment officer to buy the largest house possible all though it will be well above your usage…
    And this is precisely the disaster of the present housing situation – a very poor allocation of capital in favour of housing due to its tax-free status. Good economic signals should be telling the individual to buy the smallest house that meets their needs (or desires) and invest the rest in bonds, shares or your own business.
  • Friend
    commented 2017-07-24 14:29:12 +1200

    As, what has been stated in all the arguments this is to intellectual for me to grasp.

    Why would you want to tax a single house valuations, up or down?

    What happens when there is a massive house market value crash as happened in the usa property market / share market crash. The Government would be cash strapped and possibly bankrupt assuming you would refund the tax on a downward slide.

    Secondly there is no advantage in rising house prices except the govt receiving GST, unless you use the capital gain, which really is only book value gain, for collateral purposes as there are increased costs such as rates, insurance and disaster fees which have been increased by 5% per $100 value [ disaster fees ].

    Thirdly for Mr and Mrs public who are not speculators. By owning a single house as their home or shelter would be disadvantaged.

    Fourthly taxing them, and they choose during a period of several years to change their residence several times, depending on how savage the tax would be, they would not have sufficient cash value to purchase a home for the third, 4th 5th time as you always re purchase on the same market, at the same market values as you sold. Sell for $600K you re buy at $600k a same size, style house at a different address the same day, same market, could be 2 years or 10 years later, how are they going to pay for your tax at say 15% on $200, 000 value gain on original purchase price, which equals $30, 000. 10% $20,000 5% $10,000. They are suffering a loss, going backwards. They would have to engage with a bank over draft and we all know their interest rates and how governments can give short notice to reduce your overdraft to regulate the economy as Muldoon did or a third mortgage as they probably would have had a second mortgage when they originally purchased the house. Its only when you come to retire or not repurchasing by renting, or your children have left the nest and you down size your living pad / home, that there ‘s actually, for Mr and Mrs average, to actually get a cash gain. Raise a third mortgage on the increased capital value and with the cash invest in the share market as they did in the 1990’s and have a share market crash and not only did they lose their homes they lost their shirts on their backs.

    Your first home you buy is the only time that you make a real capital gain as I have said you buy and sell at the same market values. I was told by a investment officer to buy the largest house possible all though it will be well above your usage needs to gain the maximum financial gain as when you come to sell your first home / pad you are going to have to buy your second home on the same priced market hence no additional capital gain..

    The quote re the share market having to pay tax on shares is misleading as you say they are taxed but you put in brackets the word dividends. The average person the very people you are trying to obtain their vote that are not conversant with tax regs would get the wrong interpretation as [ correct if I’m’ wrong ] capital gain on shares is not taxable unless share trading is your main source of income.
  • John Robson
    commented 2017-07-05 19:55:20 +1200
    Steven – my position is a little less ‘harsh’ than yours.

    I think that, in principle, a CCIT is a good idea – but it is certainly no silver bullet.

    And despite TOP’s/Gareth’s/Geoff’s repeated assertions, I am struggling to find any country which has a tax like TOP 1. Every country that I have heard mentioned in the context of a CCIT seems to have a significant exemption and/or allowance and/or exclusion.’.

    Which begs the question – why?

    I think Gareth and Geoff could learn a lot (directly and indirectly) from Robert McNamara. I would like to see them pull back on the arrogance – and offer a little more by way of engagement.

    Indeed, I (and others) have asked directly and via facebook for them to make public the model which underpins TOP 1 – and had zero response.

    Perhaps our would-be Empeor has no clothes.
  • Steven Peters
    commented 2017-07-05 18:17:19 +1200
    Well said John You are correct in your the three points you make. Its actually quite a stupid idea, and it doesnt address the rising cost of housing as you say, nor does it address the unequal tax burden shouldered by those who gain income from either labour, or capital. The policy does not only lacks nuance and detail, it doesnt have any, nuance required in today’s complex world of professional tax dodgers and avoiders. This is the sort of policy dreamed up by a room full of smug economists, imagining our diverse and unequal political community is one of their organisational clients. The policy has as much relevance to the lives of most New Zealanders as, well, a roomful of smug economists. As such it will go down like a lead balloon with the electorate, as it should.
  • John Robson
    commented 2017-07-05 17:11:59 +1200
    Hi Christopher – I’m noticing a pattern in responses to people questioning TOP 1.

    Either the questioner ’doesn’t get it’ or they are ‘selfish’ – these responses IMHO smack of arrogance and/or intellectual laziness.

    To make my position clear – in principle:
    1. I’m in favour of a Comprehensive Capital Income Tax (CCIT)
    2. I’m in favour of a Comprehensive Capital Gains Tax (CCGT)
    3. I’m in favour of a more progressive Income Tax regime with a lower bottom rate and a higher top rate than current
    4. I am in favour of an inheritance Tax

    But I’m not in favour of TOP 1 – because:
    1. I want to see an increase in tax – not ‘neutrality’
    2. I do not accept the [evidence-free/light] assertions that a CCIT will address the housing issue
    3. The policy lacks nuance and detail

    Christopher – I note that in the MF blog of 3.8.16 on CCIT, Gareth first discusses, then includes, in his examples, an exemption (or a personal allowance).

    I believe that Gareth’s ‘exemption’ is evidence that for reasons of practicality and/or fairness and/or the acheivement of social objectives, the [devilish] details of a CCIT are up for ‘discussion’.

    Bring it on..
  • Chris O'Halloran
    commented 2017-07-05 14:33:40 +1200
    Don’t give up Oliver. People are allowed to have different opinions. The good thing about a democracy is you don’t have to crack every nut (no pun or disrespect intended).

    The key thing is for TOP is to persuade the people that readily get the logic of a Comprehensive Capital Income Tax and aren’t restrained by acknowledging its merits “in light of or spite of” its potential effect on their own circumstances.
  • John Robson
    commented 2017-07-05 10:03:34 +1200
    Hi Oliver – to address your points in order:

    1. It is not about winning – so please don’t “give up”.
    2. I also am drawn to the concept of TOP 1 – or to be more specific – I am drawn to the idea of fairly taxing “income” from assets.
    3. But I am not convinced by the reasoning – too many logical fallacies
    4. Nor am I convinced by the evidence – too little, and that there is seems to suggest failure rather than success

    To go back to basics, we need to understand what is driving house prices – and it is simply (thanks to William of Ockham) supply and demand.

    It is generally accepted that there are supply side and demand side factors that can be addressed by Central Government. The choice of interventions proposed by various parties and luminaries is, not surprisingly, driven by their ideologies – and in this I see no difference between TOP and any other party.

    So cards on table – in my ideology;
    • Incomes and wealth are a function of luck – Mr Minchin, Mr Johnson, and I agree on this
      So I have no problem, in principle, with redistributing income and wealth.
    • The ‘market’ is amoral and intervention may be necessary for ‘fairness’ – Mr Smith and I agree on this
      So I have no problem, in principle, with ‘interfering’ in the market

    From here, it is not hard to come up with a set of actions that will deliver the desired outcome – a set of actions that would effectively replicate the situation in Germany – where, according to both you and TOP, they have acheived what we are seeking.
  • Oliver Krollmann
    commented 2017-07-04 22:02:03 +1200
    John, I give up. You win. I just find the concept, evidence and reasoning for a simple net asset tax convincing, and I’m willing to give this a go. And I also believe that it would be more efficient than the complex set of property taxes and rules that are used in Germany and elsewhere. I’m aware that TOP’s asset tax is different – I already said so in my previous reply. Anyhow, good discussion, I enjoyed it.
  • John Robson
    commented 2017-07-04 18:22:26 +1200
    Hi Oliver – to address your points in order:

    1. I am familiar with the chart – but it is not germaine to my point.
    2. TOP’s asset tax is totally different to 4, 5 and 6 – in both concept and impact
    Re ‘4’ – Both Gareth and Geoff repeatedly make the point the TOP 1 is not a capital gains tax – calling people idiots for confusing the two
    Re ‘5’ – The real property tax in Germany is not a NET asset value tax
    Re ‘6’ – Neither Gareth nor Geoff have, to my knowledge, advocated a sales tax
    3. Your assertion re “common mistake” requires further explanation to be accepted – the similarities are:
    • Both are taxes
    • Both are revenue sources for the municipality – the tax is a smaller share of municipal revenue in Germany
    • Both are levied on a gross (not net) property ‘value’ – the valuation calculation is more complicated in Germany

    Oliver, my point is that if you believe that “property taxes in Germany (among other policy instruments) have helped keep the house prices stable”, then why not advocate those taxes (and those other policy instruments) rather than something completely different.

    Especially when there is nowhere where a net asset/net wealth/net worth tax as per TOP 1 has been shown to acheive the house price stability you wish!
  • Oliver Krollmann
    commented 2017-07-04 17:04:25 +1200
    John, please see the graph called “Real House Prices: NZ vs Germany” on page 1 of the TOP 1 policy document (link below)
    Germany was also mentioned in one or two blog posts, but I have trouble finding them because there’s no way for us to search the content of all of the published TOP blog posts.
    TOP’s asset tax is a much simpler approach to the multitude of property-related taxes you listed in your reply (#4 to #6). Please do not make the common mistake to compare the German property taxes to our local government rates. There are property rates in Germany as well, on top of the property taxes. In a nutshell, the property taxes in Germany (among other policy instruments) have helped keep the house prices stable, hence the proposal to do the same (but simpler and more effective) here, to restore the market to a stable state.
  • John Robson
    commented 2017-07-04 16:47:41 +1200
    Hi Oliver – I expected you might choose Germany – but the tax system of Germany is very different to that proposed by TOP. According to Deloitte/Wikipedia/GTAI/Worldbank, the German tax system includes the following components:

    1. Income tax – progressive up to 45%
    2. Solidarity surcharge
    3. Church tax
    4. Capital gains tax – with a 10 year ‘white line’
    5. Real property tax – similar to local government rates in NZ
    6. Property sales tax
    7. Inheritance tax
    8. VAT – like GST but a rate of 19%

    Germany does NOT have is a net wealth tax or a net worth tax.

    So, how does the example of Germany support TOP’s tax proposals?’
  • Oliver Krollmann
    commented 2017-07-04 16:33:15 +1200
    Sorry if that was confusing, Steven. I’m not a native speaker.
    Germany has both a property (asset) tax, similar to the one TOP proposes, as well as a 3.5% property sales tax which is paid by the buyer in a property sale. There is also a capital gains tax for professional property investors, as well as for property sales in which the property wasn’t owned for at least 10 years by the seller. It might have changed since 2009 – I haven’t paid much attention since I moved to NZ.
    What I was trying to say is that all the cost of owning a property – taxes, rates, energy, water, rubbish etc. (excluding mortgages) – for our current home in NZ in the year 2017 is less than half of the cost we had to pay for our former home in Germany at the beginning of the century. Our home in Germany was slightly larger, but on a slightly smaller section, so the two homes are roughly comparable.
  • Steven Peters
    commented 2017-07-04 16:12:32 +1200
    Oliver. Could you re write that last sentence about house costs in nz/germany. Its nonsensical, like aspects of TOP housing tax.
  • Oliver Krollmann
    commented 2017-07-04 15:13:44 +1200
    Hi John, yes, we’ve had quite a few good discussions here in the TOP blog, particularly regarding the TOP 1 policy.
    Germany has been mentioned a few times by TOP as the shining example, and because I grew up and owned my first home there I can confirm that the assumptions and data presented here are correct. My wife and I built in 1992 for almost half a million DEM, and sold in 2009 for less than 400,000 (converted back to DEM from EUR), before we moved to NZ. And it was ok, because by then the house needed refurbishment and the odd repair, and it wasn’t meeting the latest and greatest energy saving standards anymore. Also, nobody in their right mind would expect there that they should be able to buy or build an affordable home in Frankfurt or Munich or Berlin when they are just 25 years old and have two small kids. This is something most Germans wouldn’t be able (and expecting) to do before their mid-thirties or early forties – and many are happy to stay life-time renters because a good tenant and a good landlord often bond for a long time.
    We actually never wanted to be home owners again, but after 4 years of renting in Wellington and another year near Whangarei we decided to build, because under the current tax regime you would be stupid not to. Our cost of owning a home here in NZ (i.e. rates and energy) is less than half today than it was 15 years ago in Germany, mostly because there’s no property or sales tax.
  • John Robson
    commented 2017-07-04 14:04:27 +1200
    Hi Oliver – I’m enjoying this thread – not least because it brings to mind Tim Minchin’s “separate tennis courts” metaphor.

    I’ll keep this post short – to which country/countries were you referring in your post of one day ago?
  • duncan cairncross
    commented 2017-07-04 13:31:39 +1200
    Hi Oliver
    We did the same – 160m2 3 bedroom house with underfloor heating by ground source heat pump – and it’s “worth” over $100K less than it “cost”
    And that was with me doing the underfloor, the ground source heat pump and the polished concrete floor
    Kiwi’s build to sell – they shiver in under insulated difficult to live in monstrosities because they think that they will sell better
  • Oliver Krollmann
    commented 2017-07-04 12:24:38 +1200
    Thanks again for replying, Steven. My example is not as anecdotal as it sounds – it is indeed very typical and symptomatic for the problem TOP is trying to tackle. The buyers told me that nothing much had been done by the sellers in and around the house since it was built – no garden, no shed, just some grass and weeds that had been mowed, and it needed new carpet and paint inside. Virtually all of the seller’s profit was due to rising house prices in my area, not because of good upkeep or improvements.
    I agree that building is preferable to buying, and that’s what we did for ourselves, however, we also did a very unusual thing – we designed and built it to suit us, not the market. Most NZ-born Kiwis who’ve seen our house don’t like it – it’s small (just 3 bedrooms and 150 sqm), it doesn’t have any lawn outside or carpet inside, it has a heat pump instead of a fireplace, and it has small rooms that can be warmed up quickly and wide hallways to make it wheelchair-accessible if needed. It doesn’t look like any of the homes you see on real estate agency websites, and most people have been telling us that our home “won’t sell well”. That tells me that many of us go into the property market – buyers and builders alike – with selling in mind, not having a home for shelter and comfort. If that is how we do it – approach it as an investment – then it has to be taxed as such.
    Some will probably respond that this is why we only need a capital gains tax – but that’s taxing a symptom, not the root cause. In the example I provided, a CGT of 33% would have dropped the profit from $150k to $100k, which might slow down the market, but there’s still a decent profit in it, and we’re still stuck in the same vicious circle.
    You say that the well-off will move the equity out of their home because of the tax, and that’s exactly the plan – drive investments into other areas that are already taxed but desperately needed to keep us competitive as a country, not tie it up in housing forever.
    By the way, the TOP 1 policy taxes equity, so any increased value because of improvements made as well as any capital gains because of external influences will be taxed accordingly. That’s the beauty of it.
  • Steven Peters
    commented 2017-07-04 09:49:11 +1200
    Oliver Krollman. The anecdotal example you use of your neighbour illustrates the shallow nature of your policy. Who is to say that these homeowners have much equity in their property subject to tax? You assume it – and it ain’t necessarily so. Indeed, the sensible investor, under your regime, will remove their house equity (if they have it) and put it elsewhere (on the Australian property market for example). Secondly, arguably it is desirable that people are building homes, rather than competing for existing stock, because this adds to the supply. The “profit” that they made from the house, while your disparage it, may have been the result of improvements made. Regardless, it will not be taxed under your policy, so why criticise it. The well off will move their equity out of their home, whereas those who just want a roof over their head and a place to call home (ordinary NZers) will not because they are not chasing fast tax free bucks constantly. Finally, the assets of ones own home plays an enormous role in social well being and cohesion – taxing peoples equity in their homes goes against this unless adequate provision is made to ensure people of modest assets and means are protected.
  • Allen Cookson
    commented 2017-07-03 12:33:20 +1200
    First: What about a couple who by frugal lives now have, despite lifetime low household income, a humble freehold home which needs maintenance and upgrades (improved insulation)? The TOP policy on imputed income would be disastrous for such people, particularly if their section is in a fast-growing city where the land and house value is sky rocketing.
    Second: The TOP policy takes no account of economic profit. (Economic profit = Accounting profit minus Best alternative investment.) If economic profit <0 the home is loss making. TOP needs to consider whether the imputation tax applies in situations which are manifestly unfair.
    Third: Home and land price inflation in most places exceeds CPI inflation (Headline inflation). We must remember to allow for headline inflation to get real home inflation.
    Fourth: By opening housing to the global market, the government has increased land and house prices. Earnings from foreign investments go overseas. The proposed tax would intercept some of that.
    Finally: The problem of housing hyperinflation and risk of collapse will remain until supply meets demand.
    Footnote: I drafted this unaware of Christopher Cookson’s interest in this subject, and before reading Olliver Krollman’s response.
  • Oliver Krollmann
    commented 2017-07-03 11:40:56 +1200
    Christopher, for these exceptional situations TOP have already provided options, like deferring or mortgaging the tax to the IRD. Thresholds or exemptions won’t do it – the tax has to be simple to calculate and needs to be applied consistently, to have the desired effect. Other countries have proven that house prices can remain stable, so let’s stop trying to find excuses and reasons why that wouldn’t work in NZ.
    Also, if someone was on a low income, the asset tax would also be lower, because of the income bands. Let’s say someone earns just $14k, that person currently pays 10.5% income tax ($1,470) on that. Now let’s assume TOP 1 becomes a reality, the imputed rent is set at 2.5% (which is even slightly higher than the current government bonds rate), income tax cuts of 8% are provided across all bands, and that same person owns a mortgage-free home of $450k value, that person would pay 2.5% income tax of $14k ($350) plus 9.5% (17.5% for the next income band minus 8% tax cut) TOP 1 asset tax of 2.5% of $500K ($1.068.75), in total $1,418.75, so even in this extreme situation (income in the lowest band plus fully paid own home) nobody would be worse off, and that is certainly not the majority of people in NZ. And from April 2018 that same person could even earn up to $22k and still be in the lowest income band. You have to factor in all elements of the policy, not just look at the new tax component only and then try to make it look bad, like some of the other parties seem to be doing. And let’s not forget that someone with little or no taxable income and a mortgage-free home is not a financially vulnerable person – that person has an asset worth a few hundred thousand dollars. If someone else invested the same amount in shares and term deposits, instead of their own home, they would have to pay income tax on the interest and then pay the rent for their home or flat out of the net income, plus the landlord would most likely pay at least some income tax on the rent received (unless mortgaged to the hilt), whereas the homeowner currently doesn’t pay anything. Where’s the fairness in that??
  • Christopher Cookson
    commented 2017-07-03 09:44:34 +1200
    Olliver, I understand that theoretically, 80% of people should be better off due to income tax cuts, but the assumption is that people are actually working and have a taxable income.
    One of TOPs other policies – the argument for a UBI – revolves around the fact that in future, there may be a lot fewer jobs to go around.
    As it is, people can experience unexpected redundancy, physical or mental health issues, or some other situation that puts them in a situation where they have limited taxable income, so the income tax cuts may not apply to them, but they may have managed to acquire a reasonable amount of equity in their homes.
    Imposing additional financial stress on people who are already vulnerable hardly seems to fit with what TOP stands for, and I think that’s where a threshold where the CCIT kicks in would make if fairer without removing the intent behind it.
    Ultimately, if house prices and wages eventually adjust so that the majority of houses end up within a threshold, that’s not necessarily a bad thing. It would certainly reduce tax take, but it would also mean more people would be able to afford houses, so accordingly government should need to spend less on social housing and accommodation supplements.
  • Steven Peters
    commented 2017-07-02 13:36:04 +1200
    Yes Duncan I agree the cost of building materials in NZ is a rort, and urgently needs sorting. I notice that it is not even on the agenda – should be. However, it is a separate issue from housing price inflation in some areas. TOP seeks to do this by taxing all equity held in houses across the country – yet peoples equity in their homes does not cause house inflation. Expectations of tax free profits probably would, as would large numbers of people buying multiple properties for tax free capital gain as well as rent. Out of the total housing stock, over 30 – 40% are owned by landlords and or speculators – and they are wanting to buy more (competing with genuine homebuyers for the existing stock – pushing up prices). Indeed, I have seen very high figures that the majority of homes in the AK property market are fast turn around resells. This issues of tax free capital gain made from buying and selling houses, and owning multiple properties, and are best addressed through removing the tax write for owning houses tal property, removing tax free status of capital gains for these, This would incentivise ‘investors’ to build new properties, not buy existing ones. They would actually create something. I have nothing against taxing property equity of private homes, as long as there is a threshold under which tax is not accrued. I am all for asset or wealth tax – and the idea should be extended – but to the well of, not those already struggling. .
  • Oliver Krollmann
    commented 2017-07-02 13:17:24 +1200
    Steven, thanks for replying to my earlier comment. The multi-house owning landlord already pays income tax, so under TOP 1 he would most likely not pay MORE tax, not no tax. And yes, TOP 1 targets (among others) home owners who are not paying tax on imputed rent yet, because that’s where a big part of the loophole is. I’ve seen it in my own neighbourhood. A house that was built for about $500k five years ago was sold two months ago for $650k to a family with three young kids, and the sellers are now building a McMansion nearby because the tax-free profit enabled them to pay a larger deposit. I guess they’ll do the same thing again in five years, taking it close to or even past $1M, if nothing changes.
    Those who own their modest home and are on a low income will pay a modest asset tax that is very likely offset or even exceeded by their income tax savings on their wages or salaries. Throw a few examples at me and I’ll walk you through the math.
    Also, please keep in mind that TOP 1 would be phased in over a number of years, so people who might actually be worse off eventually have time to adjust their investment strategy. The full policy document explains mitigating steps and options on page 4, have a read.
    As for the security of the home and of savings invested – if it is seen as an investment, then you pay tax on the income the investment provides to you, simple as that. It has only become sacred because we’ve all become used to (if not indoctrinated) thinking that way, and now we can’t seem to see the flaws in it and let go. It might feel politically foolish, but that doesn’t make it wrong. In fact, we have enough political correctness and play-it-safe already, provided by the Establishment parties. An idea that sounds foolish (like having a computer in every home, which nobody believed in 30 to 40 years ago) might turn out to be just the right thing to do, and if we can’t or don’t or won’t see the wisdom in it, then we are foolish, not the idea.
  • duncan cairncross
    commented 2017-07-02 12:45:32 +1200
    I don’t like the idea of a “multi house owning landlord” – but I am not at all sure that having such beasts actually drives up prices

    Apart from Auckland – and possibly some other cities I see house prices in NZ that are less than the cost of building a decent well insulated home
    House prices are also too expensive
    The solution is to go for the actual reason why they are expensive to build – the costs of materials in NZ

    If materials here cost the same as in Australia (instead of double) THEN it would make a LOT more sense to build decent houses
  • Steven Peters
    commented 2017-07-02 12:24:28 +1200
    Oliver Krollmann That’s a bit of a side swipe Oliver. I do actually ‘get it’ thank you – you and those who ‘get’ your policy are not the only bright shiny stars in the universe. . I am not responding in a knee jerk fashion, and I do not regard home ownership as a ‘holy cow’ (this is in your head not mine) You haven’t addresses the very real issues pointed to by Robyn McCanless, that a multi house owning landlord pays no tax, and a single home owner does. Ludicrous. They keep buying up houses and increasing demand pressure on supply and maximising rental income. Second, those who own their modest home and are on a low income, (which would be a large cohort) will be paying more under your scheme, money they haven’t really got. .Also Ludicrous. You say that these people who will be worse off, wont care? I can assure you they will. Finally, you should be addressing the issue of property wealth and taxing that (including high value family homes) not every dollar of home equity. By doing the later, you do indeed attack something that is seen as ‘sacred’ – the security of the home and of savings invested. Politically foolish.
  • Allen Cookson
    commented 2017-07-01 11:50:14 +1200
    First: What about a couple who by frugal lives now have, despite lifetime low household income, a humble freehold home which needs maintenance and upgrades (improved insulation)? What about an unemployed or sick home owner? The TOP policy on imputed income would be disastrous for such people, particularly if their section is in a fast-growing city where the land and house value is sky rocketing.
    Second: The TOP policy takes no account of economic profit. (Economic profit = Accounting profit minus Best alternative investment.) If economic profit <0 the home is loss making. TOP needs to consider whether the imputation tax applies in situations which are manifestly unfair.
    Third: Home and land price inflation in most places exceeds CPI inflation (Headline inflation). We must remember to subtract headline inflation from nominal home inflation to get real home inflation.
    Fourth: By opening housing to the global market, the government has increased land and house prices. Earnings from foreign investments go overseas. The proposed tax would intercept some of that.
    Finally: The problem of housing hyperinflation and risk of collapse will remain until supply meets demand.
  • duncan cairncross
    commented 2017-06-30 18:49:29 +1200
    I agree with the idea of taxing houses despite the fact that as a pensioner with a nice house house it is likely to cost me money BUT I’m not so sure about the idea that this will do anything to house prices – other than Auckland

    I built my house – or at least I added a fair bit of sweat equity – and there are no frivolous extras
    But it cost a LOT more than it’s present value – building houses in NZ is bloody expensive – nothing to do with council or regulations – just the costs of materials – we seem to have a small number of suppliers with a monopoly, and priced accordingly

    So with houses presently costing more than they are worth I don’t see a reduction in house prices
  • Oliver Krollmann
    commented 2017-06-29 18:24:22 +1200
    Christopher, that sounds about right (it’s a bit more complicated because of the taxable income bands, but it’s approximate enough). Unfortunately the fact that income tax cuts accompanying the TOP asset tax would make 80% better or at least no worse off is conveniently ignored, forgotten, misunderstood or misinterpreted, to vilify the TOP asset tax. And comments like the ones by Steven Peters below prove that even after half a year of explaining this flagship policy again and again many of us just don’t get it, and keep reacting in a knee-jerk fashion and complaining that TOP has the audacity to target the holy cow of home ownership. The 20% worse off won’t care and can pay the asset tax easily – which means you and me and Steven and the rest of the 80% should support this policy wholeheartedly because it will save us money, or at least restore fairness.
  • Oliver Krollmann
    followed this page 2017-06-29 18:06:08 +1200
  • Chris O'Halloran
    commented 2017-06-28 17:58:59 +1200
    Correct me if I’m wrong.
    By establishing a tax on the imputed rent, the additional government revenue means the income tax rate can reduce from roughly 30% to 20% (reading other TOP literature)

    If a homeowner has $500K equity in a property, the tax on the property is 5% (imputed rent) times the tax rate (now 20). Effectively 1 of the equity in the property. This translates to $5K per year as tax.

    Given the homeowner is also likely to have some form of taxable income, that household would have to earn less than $50k to be worse off (30-20%= 10%*$50K = $5K). That is, the equity in assets must exceed ten times the household income to worse off.

    If the median household (by income) is $90K, the equity in property assets of this household would need to exceed $900K before being worse off under this tax policy.

    Does this sound about right?