Marama Davidson has come out claiming that a Capital Gains Tax should be just the start of tax system reform that favours the poor. The trouble is that a Capital Gains Tax excluding the family home actually helps the middle class. It doesn’t help the poor, and will probably even hurt them.
Any tax change creates winners and losers. This can be unpredictable, but modelling can give us some idea of what to expect. What this modelling tells us is that if you care about the poorest people in society – which I do – then a Capital Gains Tax excluding the family home looks like a bad idea.
In fact this proposal looks like more middle class welfare. Given that this Government has already given us Kiwibuild and free tertiary education, we don’t need any more of that.
Capital Gains Tax Excluding the Family Home
What might happen with a Capital Gains Tax imposed only on investors (however you define them)?
House prices should fall – a little bit, because only investors are affected. Some landlords will sell up and leave the market. These houses will be picked up by those people that can afford to buy a first home – the middle class.
So far probably nobody reading this blog is crying into their cornflakes. But stay with me.
This leaves fewer properties for rent. We know that rentals have more people living in them than owner occupied dwellings, so this increases the pressure on the remaining rentals by a lot. Rents will rise, probably by quite a lot.
Here’s the kicker – the Capital Gains Tax excluding the family home doesn’t raise very much money. So there isn’t enough money to compensate poor people for the higher rent costs.
The result is that more than half of new households would be worse off, especially the poor ones.
A large part of our society needs to rent and will always need to rent. They have no hope of owning a home. Our tax system should be helping them first and foremost. The Capital Gains Tax – excluding the family home – fails that test.
Let’s contrast that with what happens if we include the family home.
Capital Gains Tax Including the Family Home
For starters including the family home would make this whole Capital Gains Tax exercise a lot simpler and harder to avoid. That is bad for accountants but better for most of us.
A Capital Gains Tax including the family home would reduce house prices by quite a lot. Investors and home owners would take a hit, but unless they had just bought very recently they would probably barely notice.
Again lower property prices are obviously a good thing for first home buyers wanting to get on the property ladder. Renters meanwhile face slightly higher rents as landlords look to recover the costs of the higher tax.
However, thanks to including the family home the tax change would raise a lot of money. When this is given back to people in tax cuts, most people (75% of new households) are better off. Thankfully that includes the poorest in our society. Win!
Currently home owners get the biggest tax breaks in our society. By exempting the family home from any new tax this Government looks determined to keep it that way. So much for caring about poverty.
So when people ask me if this Capital Gains Tax excluding the family home is a step forward or not, I say no. It will do little to solve inequality or sky high house prices. Worst of all it will probably hurt the poor. The only way a Capital Gains Tax can raise enough money to compensate the poor is by including small businesses. Not only would this be bad for jobs, Winston will never let it happen.
You’ll probably never hear this said on this site but John Key was right – a Capital Gains Tax needs to include the family home or you may as well not bother. Given Marama Davidson’s comments last night about being open to including the family home she may well be waking up to this fact.
Geoff Simmons is an economist and Leader of the TOP Party.