Land tax looks better than capital gains
Land tax tempting, but for one-off hit to property values, says tax working group
By Pattrick Smellie
Oct 2 (BusinessWire) - A land tax emerges the clear winner over capital gains tax as an option to broaden the tax base more efficiently, simply, and fairly, in documents released today from the Victoria University-led Tax Working Group's third one day meeting, on September 16.
But for the fact that any land covered by such a tax would suffer a one-off fall in value to reflect the impact of the tax, and that this would be most unfair to the elderly, a land tax would beneficial side-effects for the wider economy, according to a paper for the working group by economists Arthur Grimes and Andrew Coleman, from the Motu Economic and Public Policy Research g
"A land tax would be likely to cause home ownership rates to rise slightly, and gross debt to GDP and net foreign assets to GDP ratios to fall due to lower foreign borrowing," the Grimes-Coleman paper argues. It would also bring foreign landowners into the New Zealand tax base in an inescapable way, land being a highly tempting to tax since it cannot be moved.
The working group has no government mandate, but involves collaboration between non-government tax experts and officials from the Treasury and Inland Revenue Department, on the premise that New Zealand must widen its tax base or face much higher rates of income tax and GST.
Excluding government-owned and conservation land, the value of the taxable land base is around $460 billion, so could raise $460 million a year at a 0.1% rate of tax, before the one-off fall in land values caused by the tax.
However, if forestry, agriculture and owner-occupied land were excluded, the total available would be dramatically less, at around $160 million at a 0.1% tax rate.
A summary of the working group's discussions says "a group that would be disproportionately affected by a land tax are retired people as they tend to hold more land, and would benefit less from other tax reductions".
Officials recommended that any land tax should be applied as widely as possible at a single rate to prevent investment choice distortions, and were broadly supportive of its capacity to raise significant sums even if applied at relatively low rates.
By comparison, there was little agreement apparent between Treasury and Inland Revenue Department officials on much of the theory and practicality of options for taxing capital gains.
The Treasury looked on the bright side, estimating that a CGT could raise $1.5 billion a year, with owner-occupied homes excluded. This would "nearly offset the cost of alignment of other tax rates at 30%". It would make the tax system more progressive and improve the taxing of real economic income.
The IRD, however, argued that "the advantages of a real-world CGT would not outweigh its disadvantages". The working group's discussions included both realised and accruals-based CGT regimes. However, the practical reality was that if realised gains were taxed, an accruals system would not work.
Meanwhile, it was generally agreed that no other country has successfully introduced an accruals-based CGT, despite its theoretical advantages over a realised gains approach. While some believed a CGT would create "lock-in" problems by discouraging asset sales, others believed this was not a major problem.
Officials were asked to undertake further work on the economic efficiency of tax capital gains to both risky and non-risky assets, and its impact on savings.
Finance Minister Bill English is watching developments closely and has suggested New Zealand will have to consider a land tax if Australia moves in that direction, as appears likely in a major tax review occurring across the Tasman.