Good on the Tax Working Group (TWG)for wading its way through endless submissions on future tax reform from the public. Will they have enough time left over to do the needed work?
CPAG and Oxfam co-presented last Friday in the spectacular offices of PWC overlooking the sparkling Waitemata. We were assured by the chair Sir Michael Cullen that the TWG appreciated that our submissions were clear and to the point and the TWG had actually read them. Whew. Tax can be a turgid topic.
The room was large and the acoustics poor. Around 15 or more members, advisors and officials clustered around a large boardroom table. The process was running well behind time, so we could only answer specific questions. So much to say, so little time. How are they going to assimilate all the views from all the submissions? Will justice be done to this daunting task?
I wanted to really drive home from CPAG’s submission that New Zealand has been in the grips of an extraordinary speculative housing bubble. We are the new Ireland.
There is an ample supply of housing overall, but it is poorly distributed in terms of size and price. Increasingly large gains in house values are accruing for the already wealthy while the poorest households suffer excessive rents or lose housing access to housing altogether.
The inevitable divide between children who thrive and those who don’t is now strikingly along housing lines.
Taking the balance sheet approach required by a social capital lens suggests a grave deficit especially from the child’s perceptive. CPAG submits that the lack of a principled-based approach to the taxation of housing has been a prime driver of the now precipitous state of our housing market which has in turn perpetuated rising inequality and deep child poverty.
Our latest analysis: Will children get the help they need? shows families on full core benefits paying typical rents in Auckland and getting the maximum accommodation assistance, fall well below, not just the 60% poverty line, nor the 50% nor even the impossibly low 40%, but they fall below the 30% line. At these subsistence levels, with no housing security and nothing in reserve, families drift to the outer margins of society. In the meantime, the median housing price has risen to over $2 million in several suburbs and mansions of $5-$20m plus are more common.
A radical rethink of the taxation of housing is needed if the situation is not to devolve into irreversible calamity in the next ten years.
We argue that horse has bolted, and it is too late for capital gains tax. In any case, the history of taskforces trying to design a capital gains tax suggests that the 2018 TWG too will revisit all the old arguments and problems and, in the end, government will walk away from it as happened 1990, 2000 and 2010. It is simply, too hard.
In the meantime, the wealth accumulation of the wealthiest households continues exponentially, and the accruing income is untaxed, apart from easy-to-avoid bright line rules around truly speculative property investment. This growing imbalance will worsen poverty and further undermine the efficiency of the economy and social stability.
Currently landlords can deduct costs including full nominal mortgage interest costs against other income for tax purposes. The present Government’s proposal to ring fence-losses from rental property investment is a very partial and inadequate response. Losses from one property are still able to be offset against others that make profits, or carried forward and written off eventually. There is a five-year ‘bright line’ test that captures short-term capital gains but it is not enough on its own.
CPAG urges that a net housing equity tax is developed.
A person would be assessed on total housing owned, less registered mortgages. This net equity would be treated as if it had been put into a deposit at the bank at say 3-4%. This deemed income would be added to other income and taxed at the person’s marginal tax rate.
The present Government has taken the owner-occupied home off the TWG’s table. The danger is that elaborate owner-occupied housing becomes even more attractive as a result. It would be better to allow a generous exemption for a home, say up to say $1 million net equity per person but to still include owner-occupied housing in the tax net. The young with high mortgages on their own home are protected and modest freehold owner-occupied homes fall outside this net, but very high value owner-occupied mansions are captured.
A net equity housing tax is simpler than the current messy tax situation for landlords. Under the net equity approach any incentive for landlords and property investors to engage in intricate tax avoidance is removed. Moreover, as past capital gains are captured in the net equity base as they accrue with each new valuation, the wealth gap may narrow at last rather than continue to grow exponentially.
Landlords will no longer be subsidised through tax concessions to invest for capital gains, and some may withdraw from this market. While that leaves more houses for genuine first home buyers, a price correction is not to be avoided if the biggest housing bubble in the western world is to be contained. The best to hope for is gradual adjustment, not a precipitous fall such as experienced in Ireland after their strong bubble 10 years ago.
A high degree of political and public acceptability can be expected because of the widespread concern over growing intergenerational housing inequity and an appreciation of the need for radical action. The TWG should delegate the fine details to an expert subgroup, including a plan for immediate implementation post-election 2019.