Good Policy is rarely done on the run


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After years of neglect John Key now thinks a selective land tax just might be called for to curb the tearaway housing bubble. The best that can be said is that he has opened a window of opportunity for debate.

As a baby-boom beneficiary I can see the injustice in how my generation has creamed off the housing wealth.    We need to put self-interest aside and support the greater good by supporting change.

Piketty in Capital in the 21st Century suggested solving inequality with wealth taxes.   On RadioNZ National this week Gareth Morgan suggested that the heart of the problem is the taxation of housing and that this has been a longstanding issue.  I agree.  It has been far easier to make money out of property in New Zealand than working at a proper job. And I also agree that the answer is not a capital gains tax.

A capital gains tax is an inadequate tool to address the disparity of wealth now apparent in New Zealand.  One problem is that a well-designed capital gains tax would take years to develop and be very complex. Even if a capital gains tax came in tomorrow it could not capture all the excessive gains to date.  Neither would it deal with the ability of landlords to generate rental income losses while making capital gains.

Rather than a narrowly focused land tax as John Key apparently is contemplating, a better way is to recognise that an imputed income arises from real estate asset ownership.  Why should this large part of income from capital escape the tax net?  We should reconsider the Risk Free Rate Method (RFRM) first proposed in the 2001 McLeod review of tax in New Zealand.

The RFRM takes a person’s total equity (real estate value less mortgages), and taxes it as if it were money they had on deposit at the bank. Interest from a deposit would be taxed as income.

Take a developer with a $600,000 rental house and a $400,000 mortgage.  Instead of returning the rental income (typically a loss after interest costs are deducted) he would be taxed on the equity $200,000 as if it had been put into the bank and had earned a risk-free rate of say 4%. The developer’s taxable income would be $8,000 regardless of whether the rentals were profitable or the magnitude of mortgage payments. At a 33% personal tax rate this is $2,640.

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The family home would be included in the RFRM but there would be an exemption to reduce the burden on those who have modest property equity.  The majority of New Zealanders should be unaffected

Let’s say Anne and Arthur have a family home worth $2 million a rental property worth $600,000 and a family bach worth $ 1.4 million. Each have property assets of $2 million. With a personal exemption of say $1 million, they would each be liable for tax on an imputed income of $40,000. If they have a tax rate of 33%, they each would pay $13, 200 in tax but they would not have to include any rents as part of their taxable incomes.  There would be an incentive to make sure the rental and bach were generating some rental income and not standing empty.

The burden of the tax would fall on the older wealthy while the young with small equity and high mortgages would be protected. Overseas owners with no family home would have no exemption. Nor would property-owning trusts. By relating the taxable imputed income to the equity held, as property prices increase, future capital gains would be captured.

So is this practical? A full-time dedicated expert independent taskforce is needed to sort out all the fishhooks, not some poor blogger with 20 minutes to spare. We are not doing policy development well in New Zealand. Let’s not settle for a half-baked John Key back of the envelope solution to such a pressing national problem.






  1. The land tax will be hopeless unless a capital gains tax (excluding family homes) is included. I would opt for the current company-rate of CGT for property speculators.

    • Priss the 100million rich listers don’t even pay income tax at the high rate, there are so many loop holes in capital gains taxes and issues with globalism and off shore investors/ part residents/ domicile /trusts then it will just tax the local middle class kiwis and stop income movement up at a local level. The .1% as usual will walk away scot free.

      The government needs taxes that addresses taxation, .1% rich listers and globalism as a holistic problem. It is a world wide problem.

      Inequality is widening. Billionaires are just getting richer and richer with more and more power to control legislation so they can leave lots of loop holes that those with enough money and power can exploit. We now have corporations and individuals bigger than governments. They are pushing through TPP so that they can now have their own Kangaroo tribunals that they can sue governments and local bodies in, (but governments can’t sue them in the same tribunals). It is insane! Unless you are the .1%.

      Labour needs to be careful as the Greens, they were manipulated last election into thinking more taxes on the middle classes was wanted, we all know how that turned out.

      Some times you have to lose the war to win the battle.

  2. Get foreigners out of buying our housing stock as they do in China else we just become tenants in our own land.

    • +1 Clean Green. However as usual there is a fine print clause apparently that as usual nobody noticed in the trade agreement with China.

      Chinese nationals have to be treated the same as Kiwis under the agreements. Chinese nationals can’t buy land in China as can’t Kiwis. Kiwis can buy NZ land so therefore they are interpreting it as Chinese nationals must be allowed to buy Kiwi land.

      So effectively they need to change the wording of the trade agreement to make it fair.

      Likewise how many Kiwis are living in China and working there as a population percentage and how many Chinese are working in NZ as a population percentage? it is easy to see how a small population like NZ can be swamped with foreign nationals if they do not think about the differences in terms of population.

  3. A land or asset tax can only be one instrument of a range of instruments that are needed. What will happen with landlords is, they will simply increase rents and pass the extra costs for them on.

    To address the housing crisis, which is actually more a housing ownership and wealth shift crisis, we need to also look at regulations for how many homes an “investor” may own, and under what conditions. We need to reduce immigration, which also puts on extra pressure on the housing market, and we need to stop any overseas buying full stop.

    Key is only mentioning the land tax as a “possibilitiy” at this stage, because he is feeling the pressure now. Again he will act in usual fashion, that is do as little as possible to make it look as if he and his government are doing something, but to avoid hitting the ones affected too hard.

    It is all half baked stuff that this government comes up with, whether it is to address child poverty, child abuse, tax evasion, welfare reforms, environmental law changes and so forth.

    And as we know, whatever they do usually benefits the middle class, that is the ones that are property owners and run businesses and are well qualified professionals, all doing well.

    This gives the government just enough support to keep going, and that is how they bribe the ones they want to keep supporting them and how they simply ignore the ones who are the working poor, those on benefits and who may be in precarious work.

    But at least we now have a discussion of a possible land tax, which gives the opposition some opportunity to present their alternatives.

    • @Mike personally think the land tax is a bit of a trick to see if Labour go with it, and again look like Nat Lite, while National will drop out at the last minute or make it so narrow their mates are not caught.

      They need to look at how people like Key make money. It is through paper trading of shares or currency. The need to start taxing that like Bernie Sanders ideas with a transaction tax.

      Obviously stopping all the tax avoidance through trusts and similar vehicles would be a decent start.

      Remember property owners do pay a land tax on their rates and many struggling Kiwis can’t afford that. (Especially when rates are now some sort of spending kitty for local government to create Stadiums and so forth and help developers fund Westfield mall in Auckland).

  4. “The RFRM takes a person’s total equity (real estate value less mortgages), and taxes it as if it were money they had on deposit at the bank. Interest from a deposit would be taxed as income.”

    This is an interesting taxation approach, but there will of course have to be the mentioned exemptions, and also should there be exemptions where a person may have no income from a job, a business or capital gains, for instance due to sickness and inability to earn.

    • Mike
      It is not a new idea but one that is not adequately discussed. In the case you mention of some one with assets and no money, the exemption of $1 million equity should suffice. If someone on a benefit has a $2 m house there would be a lean on the home when sold. But this would be unusual – the main thing is to get the policy right for most people and then look at the extreme cases

  5. Thanks Susan and debate we will over most of our PM’s decisions due to sheer lack of trust. He has failed NZ and we need to take back our country from his mega-criminal-corporate and big oil ; lobbyists ; fracking and bankster buddies. Birds of a feather.
    The RFRM sounds like something we need to re-consider.
    Re-distribution of wealth, in whatever form, is needed to be looked at.

  6. I’ve not heard of the RFRM tax before. I really like it. It would upset a lot of people which would be a very good thing.

    • I think it is superior to land tax or a capital gains tax. The 2010 tax taskforce discussed it but did not take it or CGT seriously

  7. I doubt the tax would generate enough revenue to make much of a difference.

    Piketty is right about a progressive wealth tax. I can’t see a fairer way.

    In New Zealand, I think we also need to adjust rates on progressive income tax – reduce it to zero at the low end, raise it slightly at the high end, and perhaps add another tier at the top.

    I think we also need to bring back death duties and gift taxes, and stop negative gearing being written off against other income.

    One of the ways I think we should address the housing crisis is massive investment in state housing. HNZ already makes a good profit, and returning accommodation supplements to the state has got to be much better than subsidizing landlords with them.

    It’s a shame that the Greens aren’t picking up on ideas like this, as my natural sympathies are in that direction. I think they pretty much sold out when Sue Bradford was rejected as a Leader.

    I think the biggest surprise ever for these complacent centre lefties would be Winston picking up on these ideas and becoming our Jeremy/Bernie. He would probably pick up a huge amount of votes, and I doubt playing the racist card would affect him much, as a lot of people think our immigration levels are too high.

    • WAZ
      First The RFRM can generate as much tax as you want by tickling the parameters. But a major outcome is that house prices would not continue to gallop away, they should ease or fall and speculators would not be rewarded.
      Secondly– with an appropriate exemption he tax is very progressive and is of course a kind of wealth tax. It captures past and current capital gains in the definition of a person’s equity.
      Thirdly it does not prevent the reintroduction of death duties. Family contributions to the deposit would be treated as equity.
      Last, Importantly it would totally squash negative gearing. Landlords would no longer return rental income less the hugely inflated costs such as nominal interest on large loans

    • WAZ
      My apologies. I should know you do not dogood policy on the run! The typo in my example of Anne and Arthur may have misled you into thinking it would not generate much revenue
      Of course the tax they each pay should be $ 13,200!! Much more realistic for a high wealth person

  8. It doesn’t seem quite fair if a landlord with 100% equity, whose return may be 10 – 20%, pays tax on 4% only when the income is not returnable.

    • The landlord is paying tax on 4% of equity above the exemption. Typically if say he has paid $800,000 cash for a rental in Auckland-your 10-20% return gross means an annual return between $80,000 and 160,000–but no-one will pay that for a rundown Auckland home.

      Suppose he can rent it for $700 a week that is about $36,000 a year- but then there are the rates insurance maintenance accounting fees etc to deduct for tax purposes. Under the RFRM example if he is above the exemption he would be looking at an income of $40,000 to pay tax on. He would have an incentive to rent the place however rather than just leave it vacant and rely on capital gains on sale. That might be a good thing

      • I think if his actual return is above 4% he should pay tax on that rather than on the 4%. That seems fairer, though I guess there may be may be some advantage in the simplification of the the tax system that might ensue from your proposal.

        • The simplification and fairness is all important. Some rare landlords may benefit from the 4% on equity rule but not many I suspect. It is quite hard to generate a decent return on rentals alone. If a person has a low equity and high mortgage they are bound to be generating low or negative returns. If they have 100% equity in the rental– say for a small Auckland property worth $600,000 then the RFRM would be an income of $24,000 to pay tax on. If the house was 100% tenanted this is the same as a weekly rent less costs of $462. With rates insurance maintenance admin the annual costs could be around $10-20,000. The rent would have to be about $700 a week.

  9. [Comment deleted. Mark, if you have a criticism to make of the author’s opinions, or a contrary view, we welcome such contributions. Do not not post ad hominems simply because you have no other issues-based critique to offer. – ScarletMod]

  10. ‘Nothing Is Real: “It’s All Being Played To Keep People Believing The System Is Working”

    We exist, beyond any shadow of any doubt, in an environment of absolute fakery where nothing is real… from the prices of assets to what’s occurring here with regard to the big Wall Street banks, the Federal Reserve, interest rates and everything in between.

    …All of this is being played in a way to keep people believing, once again, that the system is working and will continue to work.

    …..It’s created a population boom… a population boom has risen in tandem with the debt. It’s incredible.
    So, when the debt bubble bursts we’re going to get a correction in population. It’s a mathematical certainty. Millions upon millions of people are going to die on a world-wide scale when the debt bubble bursts. And I’m saying when not if…

    When resources become more and more scarce we’re going to see countries at war with each other. People will be scrambling… in a worst case scenario… doing everything that they can to survive… to provide for their family and for themselves.

    There’s no way out of it.’

    • I dont agree that we should give up. Given the political will tax changes that are effective could be introduced quite speedily and avert the sticky end. But I agree they have been left very late and time is against us

  11. oops just noticed a typo
    Let’s say Anne and Arthur have a family home worth $2 million a rental property worth $600,000 and a family bach worth $ 1.4 million. Each have property assets of $2 million. With a personal exemption of say $1 million, they would each be liable for tax on an imputed income of $40,000. If they have a tax rate of 33%, they each would pay $1,320 in tax but they would not have to include any rents as part of their taxable incomes.

    That should be $13,200 tax of course! making it correctly more of an imposiiton on high wealth people

  12. What about landlords who are currently renting out their properties at far below the market rate to those in need? There are quite a lot of them. Do they get screwed by this sort of tax? How do you address it?

    • Nitrium
      There may be some who are doing this and also have total equity above the exemption. These landlords should pay tax like everyone else because they also benefit from untaxed capital gains and are part of the problem. Under the current tax rules they may be showing a loss deductible against other rentals because their revenue is being suppressed. Under the RFRM, they cannot have a tax loss but they can rent for whatever they like it and it wont increase their liability. If they are philanthropic they can choose to help with low rents, there is no penalty for that. Once the tax is in place it would be easier to see the fairness of it. Thanks for the question

      • You seem to be saying that untaxed capital gains justify taxing imaginary income. Presumably you would envisage reverting to the present system if the market levels off, or starts to fall, and the flow of capital gains ceases. I realise that at present we have a backlog of gains still to be accounted for but even these could disappear in the event of a sudden collapse.

        Taxing landlords is different from taxing homeowners since, in the case of the latter, we are taxing the untaxed benefits, ie the accommodation that the occupier receives. In this case taxing a blanket 4% makes sense since in the absence of rental payments we don’t know how much this benefit is worth. However, in the case of landlords, taxing their actual income seems more consistent with normal taxation methods.

        • There will be way way way to many losers in a housing market correction that we would be foolish to pop. We haven’t even recovered from the American crises that had nothing to do with NZ.

          Just to save for a deposit average $800k Auckland house you would have to save $400 per week for 20 years. Average wage is $200. With those numbers there is no amount of supply or demand solutions or tinkering with design solutions.

          So what to do? The ideal solution would be to raise the minimum wage so the average wage is over the $400 savings per week you need to buy a house.

    • It seems a bit rough on landlords who despite their best efforts are not able to either make a profit or pass on the tax on as rent. Generally one shouldn’t have to pay tax on non existent profits or benefits unless one is gaming the system in some way, but we can’t assume that all landlords are doing this.

      • Mikesh
        If they cant make as much as putting their money in the bank why are they holding the property?

        • I don’t really know. Hedging against inflation perhaps. Or perhaps they overestimated the property’s profitability, or just had a run of bad luck. Or perhaps they intended to occupy the property themselves at a later date. But the point is that where the actual income can be ascertained it’s preferable to tax that than tax some arbitrary percentage of something.

          • Remember we are protecting modestly well-off people with a high exemption. The whole point it to get at the hidden form of imputed income. It is based on the sound tax principle that equals should be treated equally. Why should you pay less tax because you put $2 million into buying up property than you would if you put the $2 million on deposit at the risk free rate? Yes there are issues around establishing the value of the property and it would relate to the CV -maybe the CV would be annually adjusted between the formal valuations to reflect growth in property prices.

        • Good point, Susan. Why indeed?

          The only reason that comes to mind is that any gain will be a capital gain when the property is eventual sold (usually to the next speculator). It defies belief that a landlord would hold onto a property when their is no profit involved, either through rents or eventual sale.

          Or are they doing it through the goodness of their hearts?

          Yeah. Nah.

  13. Agree Yeah Nah- there is no goodness of their heart

    Unless we have principled based tax regime that taxes income from property more the same as other forms of income we will gyrate in ever more damaging cycles of boom and bust.

    Where is the properly resourced independent Taskforce to design the best solution??
    The McLeod Taskforce who wrote The Tax Review Issues paper 2001 should have been listened to.
    16 years on we are paying the price of letting things drift.

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