Keith Rankin: In Defence of Equitable Home
The opprobrium heaped onto the 2001 Tax Review committee for suggesting a home ownership tax was so loud and so righteous that it pre-empted any reasonable public debate on both that issue and the other issues raised by the taskforce.
A political cynic (such as one letter writer to the Herald on Saturday) might suggest that the home equity tax was put into the document to distract attention away from income tax recommendations that exacerbate present inequalities. I believe, however, that the taskforce was genuinely following an apolitical mandate. It was not for them to be concerned about the politics of taxation; that the politicians' job. My biggest criticism is that their analysis was too confined by the 110 year-old strictures of neoclassical economics.
The proposed home equity tax is not a capital gains tax. Nor is it anything remotely like Margaret Thatcher's 1980s' UK poll tax. Rather, think of persons paying off a their mortgages. Mortgagees pay tax on the interest income due to them. As the mortgages are paid off, the income progressively transfers from the mortgagees to the owner-occupiers. For no obvious reason, as owner-occupier equity incresaes, taxable income ceases to be taxed.
On the grounds of fairness and equity, the home equity tax simply makes visible a hidden subsidy that generally increases (and increases substantially) as persons' wealth increases. The present home equity subsidy is grossly inequitable.
I believe that a wider reform of the tax system would make a tax on home equity unnecessary. But it's too big a task to present here an alternative public property rights perspective on taxation. (See http://pl.net/~keithr/2001tax.html.) So I will here argue in favour of the suggested home equity tax.
Before doing so, though, I must emphasise that any home equity tax should be no more than a revised accounting entry as far as existing home equity is concerned. The tax would be offset by a subsidy (ie a tax credit) of equal value. For home equity acquired after the cut-off date, there would be no subsidy. The only penalty that existing home equity holders would face would be a correction to the market value of their properties. (They might also get a cut in their rates.) Grey Power need not worry.
The opprobrium towards such a tax exists partly because most of us - including many journalists and politicians who should know better - simply do not realise the extent to which housing is taxed already.
Further, the hue and cry came mainly from professional people, most of whom have substantial equity in their homes, thanks in large part to the inflation windfall of the 1980s (and also to their not having student loan repayments added to their income tax). They purport to speak on behalf of society in general, when really they are speaking on behalf of those with interests similar to themselves.
The most important group of those who do not own their homes are the young. Their access to housing (or at least to ownership of houses in middle- class suburbs) would be increased if a home equity tax is introduced.
The present system of taxing housing is highly regressive, meaning it favours the top (say) 15 percent of New Zealanders at the expense of the bottom 60%, and it heavily favours the old over the young.
So how is housing taxed in New Zealand?
I would argue that housing is not taxed through local body rates. Rating is a form of wealth tax that funds local government, levied on all properties regardless of whether they are let, mortgaged or both. It works on the assumption that the total value (equity and mortgaged) of residential land is proportionate to total private wealth. Rates, being one cost that forms a part of the supply function of rental housing, are largely passed on to tenants. So we all, in one way or another, pay rates.
Housing is taxed when people gain explicit revenue from it, either as landlords or as mortgagees. Rent paid to landlords is taxable income. So is interest paid to mortgagees. So mortgaged rental properties are subject to a double dose of income tax, whereas the equivalent income received by owner- occupiers from unmortgaged properties is not taxed at all.
Residential property values are determined by the after-tax income generated by those properties. Therefore residential properties, which have the potential to generate untaxed income, are overvalued. It costs more than it should to buy a house, thanks to the tax-free status of interest on owner- occupier equity.
The absence of an equitable housing taxation regime that covers leased, mortgaged and owner-occupied properties on the same footing means that housing will be increasingly passed on through inheritance and not through thrift and hard work on the part of the young. Instead of younger generations buying homes from their collective elders, homes in the future will in the main be passed on from elderly persons (when they die) to their middle- aged "children". Those under 40 will prefer to party, rather than save for houses that are just too expensive.
With a home equity tax in place, future generations of older persons will more frequently choose to sell their family homes once their children leave home. And there would be a market of younger buyers.
There are alternative solutions to a home equity tax, even within the neoclassical conceptual framework that the review committee subscribes to. We could pay tenants and mortgagors tax credits equal to the taxes paid by landlords and mortgagees. That would mean there would be no net taxation on housing (except rates, if you choose to call them a housing tax). Such tax credits would mean that the young could better afford to save for expensive homes (or pay of student loans), and that they could afford to service the larger mortgages implicit in an untaxed housing sector.
The home equity tax is not a stupid idea. Nor is it necessarily politically untenable. A political party seeking the votes of the overtaxed and under-equitied young could gain votes by promising to make it easier for them to acquire the existing housing stock.