Comment

Why a land tax is the best tax reform

New Zealand's wealth is now vastly owned by older property owners, while young renters will have to pay for their elders' retirement and health care. Bernard Hickey argues for a land tax to unscrew the economic scrum.

Comment: The Tax Working Group laid out the options for reform and steered the debate towards wealth taxes, given New Zealand's workers, companies and spenders are already highly taxed relative to other countries.



These charts show how those on high incomes are already highly taxed and how those taxes are already well spread to those on lower incomes. They also show just how high New Zealand's GST receipts are relative to other countries.









Corporate taxes are also relatively high, not just in terms of New Zealand's rate, but in terms of the collection of corporate taxes relative to GDP.



New Zealand companies are very compliant with our tax rules. Our broad base and low rate approach with few exceptions or exemptions means our collection rate is relatively high. This means increasing corporate taxes is also less attractive, particularly for New Zealand resident companies.Taxes on international companies operating here have room to rise, but the amounts collected and difficulties involved mean such a move is unlikely to move the dial much.





It's clear from the Tax Working Group that the clearest path to solving the problem of which tax to apply and where to target it is to start to tax capital gains and wealth.



The briefing paper stuck with its brief of saying any such tax should not focus on the family home - to avoid scaring the property-owning voter class unnecessarily.



But the conclusion is inescapable. The easiest way to change the incentives in the bowels of the economy is to impose either a capital gains tax or a land tax.

A capital gains tax remains difficult to apply cleanly and raises thorny questions about how small businesses are funded and just what is a family home. Shops under houses, houses on farms and houses owned by small businesses are in a difficult grey area. Are they the owner-occupied home? Or a business asset?



I think a low rate and broad-based land tax would the simplest and fairest way to raise the revenues needed to run a balanced budget over time. It would also change the incentives in the economy that currently favour owning bare land or lightly populated land. The funds could easily be hypothecated or dedicated to housing infrastructure, which would also solve a funding constraint and make it easier to build more first homes for renters.

The rate would have to be higher if the family home is excluded, but so-be-it.



Land used for farming and rental properties would have to be included.



The last Tax Working Group estimated such a broad-based and low rate land tax would cause an immediate drop in prices of the order of 10-20 percent. It recommended just such a tax to then Prime Minister John Key. He refused in 2010, arguing it was politically impossible and could shake the then-bruised and battered banking system.



The Reserve Bank did stress tests last year showing today's more capitalised banks with fewer highly leveraged loans could easily handle a 30 percent plus fall in property prices. A 10-20 percent price fall would reduce prices back to where they were in 2015. That's five years after the last Tax Working Group report.



Yet the idea of a broad land tax (even if it excluded the family home) would still be deeply shocking to property-owning voters. For now, the constituency of young renters who might support it are not voting in high enough numbers to force it through an MMP system that requires politicians to be led by voters, rather than the other way around.



A constituency of the young and enlightened older voters would need to push for it for Labour and the Greens to adopt such a suggestion before the 2020 election. But as the electoral mathematics change and the pressure builds, a proposal for a land tax looks more and more likely for either 2023 or 2026.