Capital gains tax key part of house affordability
David
PARKER
Spokesperson for Finance
30 October 2012
MEDIA STATEMENT
Capital gains tax key part of
house affordability
The Government’s refusal to consider a capital gains tax that would help put a lid on property prices and increase wages shows it isn’t serious about making housing affordable in this country, says Labour’s Finance spokesperson David Parker.
“John Key and Bill English dismiss a capital gains tax out of hand. But in advice to New Zealand the IMF and the OECD both say a capital gains tax is important and appropriate.
“The Treasury said in its latest briefing to the incoming minister that the distortions in the current tax system around taxing capital need to be fixed. The former Secretary to the Treasury John Whitehead, free of political constraint after retirement, went further and expressly said a capital gains tax is desirable.
“The Reserve Bank in 2011 said the tax treatment for owners of rental property is relatively favourable to other countries and recommended consideration of policies in Australia where realised capital gains on rental properties are taxed.
“Owning your own home is a dream that’s disappearing for many hard-working New Zealanders, in part because the tax bias effectively subsidises landlords. The OECD has expressly made this very point.
“Housing is unaffordable for too many in this country. National isn’t doing enough, which means homes will remain out of the reach of the many.
“That’s because National is wedded to helping people who own multiple numbers of houses rather than helping those who can’t afford even one.
“A capital gains tax is not the complete answer but it help keeps a lid on property prices. It also diverts precious investment into the productive export sector which brings more jobs and higher incomes.
“A capital gains tax is also fair in that it stops income from property speculation being free of tax while wages and interest are fully taxed.
“Making
housing more affordable in this country requires a bold and
comprehensive package of ideas. A capital gains tax is an
essential tool in helping low and medium income earners into
their first home. By rejecting it out of hand National is
letting Kiwis down, again.”
IMF
“Staff
supported the recommendations of the Savings Working Group
on tax reforms to raise saving and improve the efficiency of
the tax system. They include a further switch from
income to consumption taxation over the medium term, while
maintaining the broad base of the GST, and that interest
income and expenses be indexed at a standard rate for tax
purposes that reflects the rate of inflation (e.g., 2
percent per annum). Staff also advised continuing
efforts to broaden the tax base by looking at capital gains
tax settings and introducing a land tax to fund
growth-enhancing tax rate reductions”
OECD
The Overview of the 2011 OECD
Economic Survey of New Zealand states that:
“Favourable tax treatment of housing and
inefficient regulatory constraints on supply should be
removed. These distortions exaggerated the surge
in house prices, given rise to wider wealth inequalities and
a heavy dependence of households’ long-term financial
positions on volatile property values. The shallowness of
capital markets that results from low national saving also
contributes to the attractiveness of housing as a savings
vehicle relative to financial assets. Despite the slump in
housing demand, property prices remain at high levels
relative to rents and average incomes, keeping affordability
low for less affluent households and intensifying pressures
on the social housing sector. While the government has made
progress in addressing some tax distortions and
inefficiencies in social housing delivery, policy priorities
should include further tax reforms to level the playing
field for savings and investment decisions, while improving
the efficiency of land-use policies and the overall urban
planning system”.
“The exclusion
of imputed rents and capital gains from the NZ tax base
contributes to diverting household portfolios towards
housing. Because nominal interest income and dividends are
taxed, the absence of a capital gains tax raises the
relative returns to assets with good prospects for price
appreciation, which tends to favour property and farm
investments, given their greater leverage possibilities and
a thin domestic equity market. In addition, rental property
investments benefited from generous tax provisions that led
to increasing losses claimed by investors against their
other income in order to reduce overall tax liabilities.
The tax advantages helped to prolong the housing boom,
further inflating property values. They are also regressive
in that they benefit high-income investors more, at least to
the extent that losses can be deducted at the marginal tax
rate, and low earners are priced out of the market. The
government addressed some of these distortions in the
2010-11 budget. Introducing a comprehensive
realisation-based tax on capital gains would further reduce
the bias towards housing investment relative to other
assets. Excluding primary residences from taxation would
diminish the effectiveness of such a tax, but partial
exemption or rollover relief could act as a “second
best” solution so as to facilitate public
acceptance. The government has so far refrained
from introducing a capital gains tax. In such
circumstances, it should consider other alternatives
including reducing the taxation of alternative savings to
level the investment playing field and further limiting the
extent to which property investment losses can be deducted
for tax purposes. Such measures should be accompanied by
higher property or land taxes that could be designed to
achieve the same objectives as a tax on imputed rent”.
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