TOP’s Fair Tax Reform – Expert Reaction

Our flagship policy is tax reform. The problem we’re solving is that there’s a huge loophole in the income tax regime that leads to a number of problems;

• wage and salary earners pay way too much of the tax burden, owners of assets too little;

• one result of this is that investors invest far too much of our scarce national savings into assets that provide a tax break (e.g. housing, land)  rather than assets that provide the greatest economic benefit (e.g. business);

• consequently business in New Zealand is starved of the money they need to invest because we’re too busy speculating on property – this hampers economic growth and employment;

• this speculation also pushes house and land prices up, making them unaffordable for many average people;

• our dependence on foreign capital is ridiculously high making us far more vulnerable to global shocks than we should be. If we save and invest more of our own income in our own businesses, that vulnerability will diminish.

Our Economy is Lopsided

The size of the distortion in our economy is plain for all to see. As Bernard Hickey has pointed out, the value of our housing stock is equal to four times our GDP, and 10 times the value of our stock market. Contrast this with the United States where the housing market value is 1.6 times GDP and only slightly larger than the stock market value. Another piece of work by Andrew Coleman has clearly showed the impact of this distortion on our economy in some detail, including making our houses larger.

In short, New Zealand has some of the greatest differences in the way we tax housing and land compared with other assets in the world. Little wonder that we have had the highest house price growth, and have the largest proportion of our assets tied up in housing. This ain’t rocket science people.

Our tax reform is something that would need to be introduced in stages because the last thing we want to see is any massive shock to property values. How long it takes to fully implement depends solely on the property market reaction. The type of tax we are suggesting was introduced in Germany many years ago and was so successful in killing speculation in housing it hasn’t been touched since, so now the tax is tiny. That is an encouraging precedent.

Our tax reform package was released late last year, and will be familiar to those who know the work of the 2001 Tax Review and the 2010 Tax Working Group. However, broader public awareness around what has been driving property prices so high over several decades has been low. And that awareness is still not widespread. Many people feel (wrongly) that our housing problems are all about immigration, or lack of supply.

Expert Reaction

Since the release a our tax reform package has been reviewed by several tax experts including KPMG, PWC and Andrea Black.

While each of them pointed out some tricky issues in the finer points of implementation, none could really pick holes in our proposal. The greatest barrier each of them pointed out was political – whether or not the people will accept taxes on housing, particularly the family home.

All the countries that have solved this problem ensure that housing is taxed in a similar way as other assets. Some, like Germany, Switzerland and the Netherlands do that by taxing housing. Often the tax is imperfect; what we are suggesting is definitely simpler, fairer, more efficient, and better for the economy.

As Coleman points out, other countries have solved this problem by taxing housing or land a little bit, and dropping the taxes on other assets. For example, we could not tax the inflation on bank deposits, or we could not tax Kiwisaver payroll deductions. This would also solve the problem – making it relatively less appealing to invest in housing.

The problem with this approach is that while it would remove the distortion over where we put our money, it is very expensive and incredibly regressive. That means the rich would win – big time. The reason we have put forward our tax reform in the way we have is that our fair tax package is fiscally neutral and would improve fairness at the same time.

We can have it all – a better economy and a fairer society. All it takes is some political will to challenge the sacred cow of taxing housing.