Tax Reform: It’s Time To Investigate A Land Tax

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imagesA full five years down the track, I am convinced that this government’s lack of a serious, well thought out plan on how to grow the economy at a time when a plan is most needed, is how history will judge Key’s tenure. This government came into power with a real mandate for change and, with the global financial crisis, a perfect excuse to implement wide-ranging policies that could transform the country in a way that only Labour governments have done in the past.

While the fifth Labour government addressed a lot of the social inequities created by the Richardson legacy, lets be honest, they were helped by a very strong global and local economy. And despite a strong economy, the lack of private investment in the productive sector during the good times may have had great short term labour market outcomes (evidenced by record low unemployment), but it has had disastrous consequences for our economic productivity.

The high cost of money in this country (highest interest rates on business lending in the OECD three years ago – assume not much has changed) has meant that the private sector has tended to delay or ignore much needed investment in capital that would increase productivity and instead employ cheap labour.

I remember when the F&P factory in Mosgiel closed in 2008 with the loss of over 400 jobs, my first reaction was what a blow to that town; the second reaction was ‘why is there a production factory employing 400 people in NZ?’ In a modern thriving economy, such a factory would employ 100 skilled workers producing three times the output; the factory would still be open and workers still working. Instead of investing in plant to improve productivity, F&P had simply employed people until it became more economic to close the factory and export the work to Mexico.

This is a problem that bedevils our economy, and it is certainly not helped by our globally high interest rates. Many of our global competitors can borrow money for around 2%, whereas ours is closer to 8% for a business loan; and often the banks require personal guarantees, thus negating a number of the advantages of a limited liability company and removing incentive to take business risk. People talk about increasing interest rates to stifle the housing market: well, the impact on the productive sector would be a whole lot worse [my next post will be about an innovative way to address the issue around high interest rates on business loans]. Interest rates are not the way to slow the housing market: taxes are.

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While I consider Sir Michael Cullen a visionary (paying off debt and leaving the country in an incredibly strong position at the onset of the GFC, starting the super fund, kiwisaver, etc etc), I cannot understand why he didn’t go further and reform the tax system. In fact, for me, it remains the one point where Labour failed to take advantage of their own mandate for change upon reelection in 2002.

As Labour’s revenue spokesman last term (and as someone who disagrees strongly with the contention that, for all his faults, at least Dunne was a competent Revenue Minister) , I undertook a wide ranging study of a number of jurisdictions and policies and wrote three substantial discussion documents containing ideas designed to optimize government revenue while targeting economic growth. I was looking through one of these papers last night and, apart from digging deeper in an attempt to further justify positions, I would not change one recommendation.

First of all, we need a capital gains tax. This is a no-brainer. Only Switzerland and Turkey in the OECD don’t have a CGT. Not many people know that Phil Goff actually approached Key directly and said that Labour would be prepared to work in a bi-partisan way in order to develop a CGT free from political interference that is always associated with the introduction of a new tax. Key, of course, said no.

Fully implemented, such a tax would raise around $4.5b per annun. But one cannot simply introduce such a tax in isolation. The introduction of a CGT would necessitate a full review of the entire tax system. I agree with Gareth Morgan when he says we overtax labour and undertax capital. While I don’t agree with his ‘big kahuna’ solution, I do think we need to start with the realization that our 20th century tax regime is not suited to a 21st century economy.

Key’s tax reform has been disastrous in the sense that he has taken money out of the economy by increasing GST and reducing the top tax rate. The wealthy don’t spend in times of economic downturn; they either save or retire debt: the poorest are the ones that spend (simply out of necessity) so a pragmatic solution is to give money to those who absolutely need it, as opposed to reducing top tax rates for those most advantaged. The consequence was further economic depression at a time when stimulus was required. Unfortunately, the political decision won out over the pragmatic.

I think that if we seriously view investment in housing as an economic / structural problem, then we should at least investigate a land tax. This is an idea recommended by Key’s own tax working group, but rejected by English. Evidence and modeling shows that such a tax would have the effect of depressing the housing market slightly, but it is a very easy tax to collect and administer, and it does only target those who own land.

As mentioned, however, no government could implement such massive tax changes without taking a good hard look at all taxes. I am personally in favour of a tax free bracket; but not only $5k: go as far as Australia: they have an $18,200 tax free threshold; from $18,2001 to $37,000 the rate climbs to 19%, from $37,001 to $80,000, the rate is 32.5%, $80k to $180k the tax is 37% and over $180k it rises to 45%.

So a land tax and a CGT would raise around $10b in the fullness of time, which could then be used to overhaul the personal tax regime and give money back to everyone through a decent tax free threshold. Result is more money circulating in the economy, reduced reliance on income and corporate tax (the highest reliance on these two in the OECD), spreading the tax burden across all sectors, and, most importantly, equity across investment classes.

There were a number of other reforms I recommended, but that is a conversation for another day.

19 COMMENTS

  1. Stu,

    Good to see you thinking outside the Square!

    We already have a land tax, except we call them rates. Increasing rates will only hit the elderly on a fixed income who own their own home. It will of course also trickle-down to the poorest in the form of higher rents.

    A capital gains is a must, but why must you exempt the ‘family home’? This will simply encourage people to build bigger and better “family homes”, rather than investing in productive assets. We’ll end up with twice as many Remueras and Fendaltons, and no affordable housing.

    Rather than a pure residential property tax, what about a wealth tax? Or a carbon tax?

    • A land tax isn’t a ‘residential property’ tax, its a tax on all land based on value (also known as a location tax) so applies also to commercial and rural land whether or not the land is utilised. A land tax would replace ‘rates’. I agree that there are consequences for the elderly and the poor by having a land tax – but that only applies if we retain income tax. There are proposals overseas that consider a transition period so start tax on land at a low rate (and increase incrementally) but compensate by lowering income taxes until income taxes are phased out. Although, I suspect no political party in NZ would consider phasing out income tax.

      Its a fascinating topic, I hope it makes its way into general public debate.

  2. The only way to sort out our tax system is to write a new one from the ground up. This saves having to find all the holes in the existing tax code that is allowing multi-millionaires to pay very little tax. It would also mean that the tax code could have full logic implemented into it rather than it being based upon what some people think should be tax deductible and what shouldn’t.

    Take PAYE. Why doesn’t someone on PAYE get to deduct travelling expenses from their taxes? They’re in business as much as the employer and getting to work is a necessary business expense. Of course, once we go that route then we have to accept that their housing is also a necessary business expense because they need it so that they’re healthy for work. And their food as well…

    See, if we follow the logic that presently applies in their would be no tax take as all expenses would be tax deductible. This brings up the question: Why are there tax deductions at all? The answer would seem to be in who gets the tax deductions and that’s a class of people which happens to be a minority – the bosses. this would indicate that the purpose of tax deductions wasn’t to encourage anything but simply to reduce the taxes that a minority had to pay and increase the taxes that the majority has to pay.

    If we applied logic to the tax codes there wouldn’t be any deductions. The codes would be determined around what was taxed and by how much.

    Make taxes fair – get rid of the deductions that allow the rich to avoid paying their fair share.

    • To be honest, I actually agree that we need to start with a blank sheet and completely redesign the tax system in a way that provides equity across investment classes and income streams, is extremely difficult to avoid, that rewards hard work, doesn’t unfairly penalise those who are successful but ensures that everyone pays their fair share. Avoidance and evasion has become a way of doing business in this country and it has to stop.

    • Perhaps, but what about making the first $20k of interest earned on bank deposits tax free if on the National Super?

  3. Great, another liberal apologist. No wonder your doing so bad in the polls. What a load of rubbish – simper and keep mediocre coming – blah blah blah – same old shit for the last 30 years, just polish it up a bit and expect working stiffs to suck it up. Well here the bad news – were not that stupid, and your not as smart as you think you are.

    Get some real policies – get the rich to pay the bloody taxes they avoid, get rid of flat taxes, charge a luxury tax, and 18k may sound good to you, but $350 in the hand a week is bugger all mate. People are suffering and your income means your out of touch with reality – how about you cut your income down to $350 a week and do that for the next two years, then will talk.

    That said your probably going to lose your seat – so you can go back to your la la land of middle class liberalism and moan how hard it was and that you tried.

    • I think your missing the impact of the $18k tax-free bracket. If your earning stuff all, that is a massive amount of your tax to get back, and far more than any other political commentators (excluding Hone, who I would love to see have more sway post 2014, but cannot see policies the MSM consider too radical to make it past negotiations) are offering. I think you are right though with the enforcement of the top tax bracket on avoider’s, remove GST, and I would also like to see a big (say 50%) inheritance tax on estates over, say, $500k.

      • I like that idea of heavy tax on inheritance. My personal desire would be to remove inheritance all together – but the middle class will moan like blue bloody murder over that idea. And the upper class would find some way break it.

    • Hmmm. Interesting comment Adam (not really actually…). Not too sure what it relates to as it doesn’t seem to talk about the ideas mooted or relate to the post. I agree, $350/wk in the hand is very difficult to live on, and I have been a vocal supporter of both the living wage concept and increasing the minimum wage, but neither of these were part of the theme of the post; in which I dipped my toes into the tax-reform puddle to see where the ripples led. I am in favour of total tax reform; however, this would not include a wealth tax, but it does include ensuring that all pay their fair share; the wealthy included.

      That aside, I don’t actually have a seat; am not an MP, but have never ever moaned about ‘how hard it was’ when I did spend a term in parliament. Quite the opposite in fact; I enjoyed it and the chance to perhaps ‘make a difference’. Yes, I am middle class, but more of an arch pragmatist than a pure liberal: its about quality not quantity Adam.

      • You ideas are soft and limp Stuart, I got your point – but felt you needed to hear that your ideas were of the kind – that is a rehash of the same liberal crap that limits debt. Oh wait are you the type of labour flunky who espouses TINA?

        So me saying remove the flat tax (g.s.t) is a step to far for you?
        Or indeed a luxury tax – do you say better to bow down to the interests of greed and avarice?
        Fair share you say, how? I’m confused – you liberal pragmatism is tinkering waffle.

        So what about capital gains – really will it help? – probably bugger all. How about we build more houses, I think it better to house people well, rather than worry about people buying them. Silly me – all that over crowding and really I should have been worrying about a CGT.

        Oh wait I’m a working stiff who sees quantity as a quality all of it’s own.

  4. Looking at this article What about introducing a land tax?, these paragraphs stand out:

    There are winners and losers from any change in tax policy. If we were to introduce a land tax and reduce income taxes, people who hold a significant amount of land would lose out, while young people with their working lives ahead of them would gain.

    Furthermore, individuals that own land but have variable income year-to-year may suffer from cash-flow problems under a land tax.

    So who owns significant amounts of land and have variable income from year to year and would be the significant losers under a land tax regime? The answer is, of course, farmers. The section of New Zealand which, thanks to the inept governments of the last 30 years, is virtually all that keeps New Zealand afloat.

    Any analysis of farming incomes shows that the rate of return on the money needed to buy the farm is very low.

    So now that you politicians have destroyed most of New Zealand’s sources of income, you may as well go the whole hog and destroy the last source by making sure that it is not viable.

    • Farming needs to be seriously curtailed so as to protect the environment. That said, there are better ways to produce an international income than farming and we need to be putting a lot more research into those. As an example IT produces a hell of a lot more income per person than farming.

    • @Richard: There are land value tax proposals that don’t target farms, these are location based, for example, the owner of a building in Queen Street Auckland would pay more tax because the value of the land is higher than say a farmer in Opotiki. I reiterate the point I made above, a land tax as an extra tax is unfair. A land tax with the intention of removing income tax is not. In my view, its unfair that people profit from what belongs in the commons (e.g. property speculating), but productivity is heavily taxed.

      @DracoTBastard: I agree farming can be environmentally hazardous, but farming is still important for growing food. I’m not sure why the Greens aren’t advocating for subsidised fencing to assist with cleaning the waterways – it would seem in line with their subsidised insulating of homes.

    • ellippsister is right: when talking of land tax don’t automatically assume that everyone gets taxed the same rate for land across the country and land class. There would be lower rates for land-based industries like farming and forestry, but any land tax would be based on capital value of land and not the amount of land held (even though in some places there is a correlation, but not really, for example, with a property in Herne Bay and a farm in Woodville).

      • Yes, it would be based upon the lands local government classification (residential, industrial, rural) but it would have to be a square metre fixed amount (which would probably go up in line with the CPI) within those classifications and not based upon value. The reason for this is two fold:

        1.) A land tax could then be used to encourage intensification in residential areas. A land tax of $1 per metre^2 would cost $600 per year for a 600m2 section for a single residence. If that land had 4 residences on it and the value had gone up in proportion then each family would still be paying $600 whereas a fixed amount would then be split between the four families.

        2.) In a rural setting it would discourage land being used for things that it’s not really suited for and even discourage its use at all allowing for highly marginal land to remain as a native conservation area.

      • When you think about it you should pay for what you use from the commons, like land and not pay for what you make, as in income tax. Income tax doesn’t seem logical if we want to encourage work. The problem with taxing land on land value is that it is effective. It reduces the value of the land. So the next year you have to charge a higher percentage in order to raise the same revenue. So it becomes difficult to administer. The last thing a government wants is for homeowners to find themselves with negative equity.

        Instead we should be thinking in terms of ground rent because if a proper ground rent is applied, it stays stable. It only rises if the community around it develops e.g. it will rise in central Christchurch when building starts. My belief is that we need to gradually move towards government leasehold land (provided the lease is fair to both parties and the rent is reviewed annually). That way no one will profit from owning what nature provided – the land. Start, for instance, by leasing out the land in the Christchurch green frame at a full ground rent (found by auctioning the ground rent). Entrench this in law so it doesn’t get reversed by greed or cunning of a conservative government intent on winning an election (as happened in Canberra) by reducing the rent to 5 cents a year, thus handing banks, central city businesses a huge unearned capital gain.

  5. How would a proposed land tax compare with a stamp duty. Say if a stamp duty, of variable amount, even varying by region, could be charged on non owner occupier property purchase, would generate returns from day zero, and not have to build up like cgt. If the rate of the stamp duty was set by the reserve bank, independently of government, then for example, speculation driven property prices in Auckland could be addressed by increasing stamp duty, just in that region, without changing the optimum setting for interest rates?

    Property speculation is the main form of reliable income from capital. If you turn down the tap on this, then money is more likely to directly or indirectly go into more productive areas, without the need for a cumbersome complicated cgt, in a tax system that is already unnecessarily overcomplicated. You virtually have to be a QC just to understand it.

    I have noticed that some developing country governments seem to impose virtually no income tax, and presumably get revenue from indirect taxes and state owned businesses. Could this be applied in NZ as an extension of the mixed ownership model. Say if a large percentage of listed companies became up to 49% owned by the government, through a vehicle like the Cullen fund, what revenue would that give, and how much lower would income tax and gst then be required.

    Could a department of government directly start new businesses in the productive sector with a view to selling them down to mixed ownership level, once well established. Targeting localities that need it. There must be at least one person, hiding somehow somewhere within the public service, that would know how to start a successful business in the productive sector, assisted by the might of government behind them.

    Is there a place for Mr Morgan’s universal basic income, amongst the various ideas for a revamped from the ground up, tax system? Universal basic income, coupled with low flatter income tax, with the simplicity of the income tax rate set at the same rate as gst/company/trust tax, could be enabled by increased revenue from listed companies. It may reduce avoidance, allowing a greatly decreased ird, and virtually do away with the ministry of social development, giving smaller government.

    Low flatter income tax may attract more wealthy immigration into NZ. Up to the reader to decide if this aspect would be good or bad? The birth rate alone will not sustain the population. Unfortunately words like cgt/flat tax/immigration/mixed ownership model, are heavily clouded by political ideology. Gee, there are just too many variables to have to consider, in this crystal ball gazing.

  6. […] A social advantage of the LVT is that it obtains support from across the political and economic spectrum, that is, its not strictly left, right or centre. For example, David Farrar (right wing blogger/National Member) recently commented that he supports a land tax and Stuart Nash (left wing blogger/Labour Member) did the same earlier this year on the Daily Blog . […]

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