Ardern ‘clarifies’ on land tax

More tax confusion from Jacinda Ardern yesterday, this time on whether some sort of land tax would be considered by their proposed tax working group.

RNZ:  Labour clarifies land tax position

Ms Ardern said Labour’s target was not the family home.

But when pressed by reporters, she suggested that guarantee only covered the building itself and not the land.

“Yes, that’s the complication of those various iterations,” she said.

“That’s why I’m saying to the tax working group – ‘I want the family home to be off the table, please work through the options that remain available to address home ownership and to address affordability and to make sure our taxation system is fair’.”

Ms Ardern was then asked again if she was leaving open the possibility of taxing the land on which the home sat.

“I’m saying that I don’t want there to be taxation applying to a family home,” she said. “The rest is for the working group to work through.”

So news reports came out saying that a land tax was potentially on the table.

A land tax generally takes the form of an annual levy based on the value of the land.

It was one of the recommendations – as part of a broader tax reform package – made by the 2010 Tax Working Group. It was rejected by the National government at the time.

RNZ themselves interviewed someone about how a land tax might work, and what it’s benefits could be:

An expert explanation of land tax

Michael Littlewood is an Auckland University Law Professor and tax expert. He joins Checkpoint to discuss how a land tax would work.

But since then Ardern has clarified.

Labour Party leader Jacinda Ardern has ruled out introducing any tax which would hit either the family home or the land it sits on, saying that’s “completely off the table”.

Ms Ardern has always ruled out introducing a capital gains tax on the family home.

She’s now gone further, saying she’d instruct the working group to stay away from any policies which would affect the home or the land on which it is built.

“My message will be very clear to them – do not bring me any recommendation that includes the family home or the land that a family home sits on.”

Ms Ardern said the tax working group could still consider the possibility of a land tax, but not one which would hit the land underneath a family’s house.

“That will not be up for consideration. It’s completely off the table.”

Some of Labour’s tax policy seems to be still evolving.

The big question is how much more it might evolve should Labour get into government.

Ardern (and Grant Robertson and Labour for a couple of years now) have been pushing the line that they want to wait to listen to experts before making decisions on tax changes, but when they get advice it will be too urgent to wait until the next election to get a mandate for changes.

Over the course of this campaign Ardern has been ruling out an increasing number of possible tax changes, so the tax working group may not have much to work with.

Ardern and Labour have also frequently mentioned the National flip on GST after the 2008 election as some sort of justification for deferring tax policy until after the election as if that would make a surprise tax package ok.

So far Labour have not responded to requests to publish possible terms of reference for their tax working group, nor will the indicate who might be appointed to the group.

Tax continues to be one of Labour’s biggest weaknesses in this campaign.

Tax Working Group on land tax

The Victoria University of Wellington Tax Working Group published their report in 2010. This is what the report said on land tax.

Recommendations:

8. Most members of the TWG support the introduction of a low-rate land tax as a means of funding other tax rate reductions.

And:

1.4 A future tax system for New Zealand

The TWG believes that base-broadening measures, such as a more coherent taxation of the gains on capital or possibly a land tax, are important in themselves and not just for raising the extra revenue required to finance other changes to the system. New tax bases are necessary to ensure that there really is a “broad base” to the system to improve integrity and effi ciency and to improve equity and fairness of the tax system. A broader base can also provide a more sustainable tax revenue base. The current ad hoc taxation of capital, for example, means there are currently areas with zero tax rates that distort investment and behaviour, and undermine both fairness between taxpayers and the system’s integrity. And as discussed earlier, a broad base means there can be lower tax rates across other parts of the system (and therefore generally lower economic costs)

And:

3.3 Ways to broaden the tax base and fund tax reform

These alternatives and their pros and cons are discussed below. These alternatives need to be weighed up as part of any comprehensive tax reform package. The main revenue-raising options considered, along with approximate indicative costs (based on 2009/2010 prices and tax rates and distribution of economic activity and incomes), are summarised in Table 3. These include raising the rate of GST, more comprehensive taxation of capital gains, a land tax, and a risk free return method (RFRM) applied to rental property.

And:

Table 3: Revenue-raising and base-broadening options

Option: Land Tax
Indicative annual fiscal revenue ($ billion in 2009/10 prices): up to $2.3 (for 0.5% tax rate)

Based on an assumed limited fall in land prices due to tax; revenue reduced by about $0.6bn if land tax is deductible against taxable income for businesses

In detail:

Land tax

A land tax can be regarded as a more selective form of base broadening since it applies to one form of capital. In New Zealand, there is currently a low use of recurring land and property taxes. A land tax would impose an annual tax liability on landowners, calculated by reference to the value of land owned by them. As a base-broadening measure, land tax has a number of merits.

Firstly, land is an asset that is in fi xed supply, (i.e. ‘perfectly inelastic’), and therefore cannot respond to economic incentives or disincentives such as taxation. Accordingly, the burden of land taxes would be borne by land owners at the time the tax is announced and cannot be passed on. This makes a land tax an effi cient tax by not imposing any distortions on economic behaviour, provided the tax is imposed at a single rate across all types of land.

Secondly, because of the size of the land base (valued at approximately $450b to $480b, prior to any negative impact on land values as a result of the imposition of the tax) a large amount of revenue could be raised at a low rate.

Thirdly, local government authorities currently levy local ‘rates’ based either on land or property values and it is relatively straightforward to obtain both these values for properties across New Zealand, although there may still be concerns about the accuracy and methodology used to calculate values. This suggests that a land tax may be an administratively easy tax to introduce and administer, whether collection is by the Inland Revenue Department as a new type of tax or whether done so in association with the local authority rates collection processes. While Inland Revenue would need additional funding to administer a land tax, this additional funding should be less than would be required to administer some of the other base broadening measures considered, such as a comprehensive CGT or RFRM based tax.

However, a land tax would be expected to cause an initial fall in the value of land by up to the net present value of the expected future land tax liabilities. Hence, a land tax constitutes a lump-sum tax on those who own land at the date of its introduction. The size of the drop in land values will depend on the rate of tax and the expected fall in net-of-tax real returns from the land.48 This will tend to adversely affect existing land owners and others who have invested directly or indirectly in land. For example, people who currently have heavily geared land holdings may have negative net equity following any land price falls. On the other hand, the introduction of a land tax would be expected to reduce net foreign borrowing.

Given the land value reduction, existing rents may not increase as returns based on land values may not change (where a landlord acquires land post the introduction of the land tax). Alternatively, existing landlords may want to increase rents to cover the additional costs. The drop in land values will put pressure on property developers to develop existing land as soon as possible rather than retaining this for future development.

While a land tax may address current concerns about the New Zealand tax system by causing a rethink by property investors, it will not address the residential rental tax advantage.

The equity impacts of a land tax are also unclear. Firstly, it taxes only one component of wealth, and therefore mainly impacts those people and organisations holding their wealth in that form. Retirees, Maori authorities and farmers could be particularly affected. Tax bases that use broader measures of wealth, income or consumption better meet social conceptions of horizontal equity.

Annual payment of land tax liabilities may also give rise to cashflow issues for some landowners with lower income levels, such as retired people. A possible solution would be to allow these taxpayers to defer the tax (plus an interest charge) until sale or death. However, most estates that seek deferral will have major liabilities for land tax. There would also be lock-in effects for those in deferred payment schemes, although this could be mitigated with some form of roll-over relief.

The significance of some of these effects will depend on the rate of tax set and how far other offsetting mechanisms are used – such as rebates of the type used currently to limit the impact of local authority rates on poorer households.49 Equity impacts may lead to pressure for exemptions, which raises concerns about the sustainability of such a tax.

The Group also considered some options for reducing the burden of a land tax on land extensive activities. One such option is a value-per-hectare threshold below which no land tax is payable. This would tend to shield land extensive activities such as farming and forestry. To the extent there is a positive association between land values and incomes, this type of threshold may also ease the tax burden and cashfl ow concerns for lower-income families. As a result, this proposal might ameliorate some of the equity concerns without accentuating integrity and revenue sustainability problems.

In relation to the ‘riskfree rate of return’ (RFRM) method:

RFRM on property

Under this option, real property, or some subset such as rental housing, would be taxed under a riskfree rate of return (RFRM) method. Instead of taxing the owner on gross rents and allowing a deduction for expenses (including interest and depreciation), imputed income would be calculated by applying a risk free rate to the equity that the owner holds in the property each year and taxing the result at the taxpayer’s marginal tax rate…

…Extending the base as widely as possible would have the merit of raising more revenue and minimising distortions that arise from boundary issues when some assets are exempt from tax. Therefore, including owner-occupied property within the RFRM regime would raise many of the same issues as with a CGT or land tax that includes owner-occupied property.

In relation to a capital charge:

A capital charge

An approach that is similar in some ways to a land tax is to impose a tax of, say, 1% on the value of all capital employed in the economy. Owners of capital derive certain benefits from capital that are currently not taxed such as, for example, greater financial independence and security.

These arguments are also used to justify wealth taxes which tend to be applied more to personal wealth. There are, however, a number of significant issues that would need to be addressed if a comprehensive tax on capital were to be considered. These include ensuring that the tax did not result in capital being overtaxed in relation to labour, determining the scope of any exemptions and developing rules for hard to value assets.

While a capital charge may be less discriminatory in its approach than a land tax, a comprehensive capital charge, in contrast to a land tax, would tax capital that is not in fixed supply, (i.e. not ‘perfectly inelastic’) and therefore can respond to the disincentive that a capital charge would impose on holding capital. For this reason, investment responses to a capital charge could have adverse implications for the rate of investment and productivity growth. For this reason also, estimates of potential revenue are highly uncertain.

From Chapter 4: Conclusions and a Way Forward

4.1 The status quo is not a viable option

The TWG considers that within an aligned or non-aligned system, the efficiency, integrity and fairness of the New Zealand tax system can also be improved by broadening the tax base. Furthermore, in addition to the option of raising the rate of GST, which raises revenue along with improving the efficiency of the tax system, base broadening also provides opportunities to fund reform in a fiscally sustainable manner. The major base-broadening options considered by the Group were: „

  • Capital gains tax. „
  • Land tax. „
  • Risk free return method (RFRM) on residential investment property. „
  • Denying depreciation on buildings. „
  • Removing the depreciation loading. „
  • Reducing the thin capitalisation threshold applying to foreign investment.

And:

The land tax would affect those who own land at the time the tax is introduced, due to its impact on property values, and will disproportionately impact on extensive landholders, and retirees.

From 4.3 a Way Forward:

Most members of the TWG support the introduction of a low-rate land tax as a means of funding tax rate reductions and improving the overall effi ciency of the tax system. However, there are concerns over the political sustainability of such a tax.

References from Tax Working Group Background Papers:

Base broadening – land taxes „

From Endnotes:

47 For more details on this option, see Land Tax, The Policy Advice Division, Inland Revenue, and the Treasury, at http://www.victoria.ac.nz/sacl/cagtr/twg/Publications/3-land-tax-ird_treasury.pdf and Coleman, A., and Grimes, A., Fiscal, Distributional and Efficiency impacts of land and property taxes, at http://www.victoria.ac.nz/ sacl/cagtr/twg/Publications/3-impacts-land-property-taxes-coleman_grimes.pdf.

48 While in principle the expected impact of introducing a land tax would be to reduce the value of land subject to the tax, if introduced as part of a reform of the tax system that involved say reductions in other tax rates (such as corporate and personal rates), these other tax changes could be expected to have some partial offsetting effects. The actual change in land values, which only applies to the land component of property, will also depend on other influences taking place at the time, such as the level of net migration.

49 For more details on this option, see Land Tax, The Policy Advice Division, Inland Revenue, and the Treasury, at http://www.victoria.ac.nz/sacl/cagtr/twg/Publications/3-land-tax-ird_treasury.pdf and Coleman, A., and Grimes, A., Fiscal, Distributional and Effi ciency impacts of land and property taxes, at http://www.victoria.ac.nz/sacl/ cagtr/twg/Publications/3-impacts-land-property-taxes-coleman_grimes.pdf.

Land tax slammed but…

Rodney Hide slams the land tax idea floated by John Key this week so that he appears to be thinking about maybe doing something about escalating property prices in Key fiddles while market burns.

Hide says that the land tax won’t work, and that Key won’t want it to reduce land values – which would risk bursting the property bubble, which would risk annoying a lot of landowners who are voters.

The land tax on foreigners is the perfect policy for John Key: it won’t work, won’t upset voters, shows he’s “doing something” and, just to be sure, he’s floated the policy to gauge reaction and to poll.

Not upsetting voters is crucial. No one likes paying tax. But making others pay – especially “the rich” and, even better, rich foreigners – is a plus. The policy won’t lose votes and will win some. Making foreigners pay for our government is smart politics.

That the policy fails is important. There are more homeowners than home buyers. The expectation is not just that house prices stay high but that they ever increase. No government will survive the bursting of the housing bubble.

And Hide is confident that land tax wouldn’t work.

The Government’s number one policy agency, the Productivity Commission, spent more than a year studying housing affordability and produced a 300-page report concluding against fiddling the tax system as any sort of cure.

The commission spent another year coming up with a 350-page report of policies that would work. Such is politics that policies that won’t work are favoured over those that would.

And as well as being ineffective it would be dangerous – once a tax system is in place it is easily tweaked by governments of the future.

The land tax policy is not just fruitless, it’s dangerous. Key says the tax would be annual and could be adjusted for conditions.

The power to tax is the power to destroy. A tax applying to land to be “adjusted for conditions” is a frightening prospect.

I shudder to think what happens to a tax that is introduced with the promise that it will be “adjusted for conditions”.

A land tax is a dangerous tax because it’s easy to ramp up.

It’s the politicians who are dangerous, not the taxes.

But…

From the Housing Affordability inquiry (New Zealand Productivity Commission, March 2012, 343 pages)

The Tax Working Group also considered taxing capital gains, and introducing a land tax or a ‘capital charge’, without coming to firm conclusions about them.

And:

The 2011 OECD economic review of New Zealand supported introducing a comprehensive realisation based tax on capital gains, but recognised that partial exemption or rollover relief for housing could be necessary to facilitate public acceptance. The OECD further recommended that if housing capital gains were not taxed, then the taxation of other forms of savings should be reduced, and further limits should be applied to the extent to which property investment losses can be deducted for tax purposes.

The OECD also considered that 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 (OECD, 2011).

That’s all on land taxes so that doesn’t say much at all about them.

Another report by the Productivity Commission (September 2015, 401 pages) refers to an ‘idle land tax’ and has this detail:

Box 4.3 Land value tax

There is a long literature in economics on the merits of a land tax, going back to Adam Smith (1776). Most taxes create deadweight costs (reduce economic activity). But a land value tax is extremely efficient, in that it does not deter production, distort markets or create deadweight costs. A land tax would reduce the price of land, and encourage the efficient use of land:

A land tax does not distort investment behaviour as it applies to land which is in fixed supply. This creates a tax liability regardless of whether or how well the land is used. As the supply of land is perfectly inelastic (fixed in supply), market prices depend on what purchasers are prepared to pay rather than on the expenses of land owners. Accordingly, land taxes cannot be avoided or passed on and would be borne by land owners at the time the tax is announced. (IRD and New Zealand Treasury, 2009, p. 2)

Indeed, where a land tax encourages land to be improved and used more efficiently, or where some land is foreign owned, a tax on land value can be beneficial to the economy (creating ‘negative deadweight loss’ or ‘negative excess marginal burden’). A 2015 working paper from the Australian Treasury found that of the major Australian taxes, only a land tax offered net benefits to the economy.

New Zealand’s first tax in 1878 was a land tax. By 1982 it constituted just 1% of government revenue, and it was abolished in 1990. One explanation for its decline was that local government rating of the same tax base had effectively crowded out the benefits of a national land tax (Barrett & Veal, 2012).

From the perspective of supporting the release of land for housing, a land tax imposed by central government is attractive. However, it would also have significant effects on current landowners who would effectively bear a lump-sum tax on their wealth, and consideration would need to be given to the effect on those with low incomes, and ways to mitigate this (similar to those available to local government ratepayers).

A land value tax was recommended by the Victoria University of Wellington Tax Working Group (2010) as a way of improving the overall efficiency of the tax system, and funding rate reductions for other tax classes.

Source: Smith, 1776; IRD and New Zealand Treasury, 2009; Australian Treasury, 2015; Barrett & Veal, 2012; VUW Tax Working Group,2010.

That states that “From the perspective of supporting the release of land for housing, a land tax imposed by central government is attractive”.

So it would help discourage land banking (sitting on land waiting for value inflation ) and free up more land for building houses on, perhaps.

Maybe Hide was referring to different reports.

Land tax too little too late?

Herald: The Land Tax proposal, too little too late?

We haven’t got any land tax yet so it’s not even too little, it’s currently nothing but a possibility.

The Herald also addresses the land tax proposal in their editorial today:

Vacant land the proper focus for tax

The Prime Minister’s talk of a new tax on land is a sign that he is worried by the resurgence in house prices, as he should be.

A land tax, should it be adopted, will need to apply to all investment housing, and arguably it should.

Not just foreign owned property, but this gets a bit complex with local property investments.

Land is the precious commodity, not housing. Land values are the rising element in real estate prices.

The Government has long blamed the scarcity entirely on the Auckland Council’s efforts to contain the city’s sprawl but it was never that simple. A great deal of land zoned residential spends many years lying unused as its value appreciates. Vacant residential sites can be bought and sold and amalgamated and sold again, returning good profits for no investment in buildings or any other improvements. Its value purely reflects the popularity, or potential popularity, of its location, which in turn reflects the investment others have made in that area, individually by building homes, collectively by supporting schools and other public amenities.

An annual land tax could recover some of the added value that owners of idle land are reaping for no effort on their part. Just as important, it could entice them to build on the land in order to obtain more value from it.

Landowners will point out they already pay a land tax in the form of rates to local bodies, which all households pay. But an additional land tax was studied by a tax working group for the Government six years ago as a way of taxing those who can avoid income tax and found its value for that purpose limited because, like capital gains tax which the group also considered, it is liable to be riddled with political exemptions. John Key would exempt houses owned by New Zealanders living overseas – trade agreements permitting – if the tax is to be imposed only on non-resident buyers.

But there is no case for exempting expatriates, or indeed investors domiciled here. If a land tax is to help increase the supply of houses it needs to be applied to all property lying vacant and accumulating unearned wealth.

But it sounds like a land tax is only under consideration so is presumably quite a way off, if it happens at all.

Unless the Government is trying to hide their intentions in next month’s budget.

 

Land tax

Obviously New Zealand has a problem with escalating land and property prices, especially in Auckland. Can anything effective be done about it? If so is it too late?

NZ Herald reports that John Key has suddenly threatened a land tax to foreign based buyers, possibly including Kiwis living abroad.

Key land tax plan may catch Kiwis who go overseas

In a dramatic shift in position, John Key is threatening to apply a land tax to foreign-based house buyers if there is evidence they are pushing up New Zealand house prices – and it could apply to Kiwis abroad.

The evidence on foreign buyers could be just two weeks away.

A land tax to dampen demand by foreign-based buyers would be a complete flip in the Government’s insistence that overseas speculation has not been a problem in the heated property market, and a switch from its focus on increasing supply.

The Prime Minister told the Herald any land tax could also apply to Kiwis abroad with property in New Zealand after an exemption period of perhaps three years away.

“Subject to our capacity to do so, New Zealanders living abroad would be exempt but you could do it for a period of three years at which point if they retained the property, they might have to start paying [the tax].”

“Me, John Key, going off to London like I did, if we continued to own a house in New Zealand, I’m a New Zealand citizen but I’m a non-resident for tax purposes and, in principle, a land tax could be paid there.”

That could ruffle a few Kiwi feathers. Key:

It was all subject to design and whether it breached tax agreements. Mr Key thought any tax would be less than 10 per cent of the value of a property and be charged annually.

Mr Key said there would be no land tax measure in the May 26 Budget and there was no evidence yet that one was needed.

He is waiting on data on the number of foreign buyers that has been absent from the debate on over-heated house prices, data which will be available in two to three weeks.

Mr Key acknowledged he started looking at options when Labour adopted a policy to ban foreign-based buyers unless they were buying new houses.

“There’s so many ways of ducking and diving through such an exemption that in the end they don’t work very well.”

He had looked at other options, including imposing stamp duty on foreign-based buyers – a one-off payment imposed at the time of transfer of the property.

A land tax was the most effective because it was annual and could be adjusted for conditions.

“If you want it to be much more difficult for a non-resident to buy a property, the most effective way to deal with that issue is a land tax because it is annual, it is expensive, it can be ratcheted up or down.

“It is just a far more effective tool.”

Whether offshore New Zealanders are included would be contentious, but if it is to work fairly it would need to cover as many as possible without targeting or favouring nationalities.

Also at the Herald today: Home truths: Buying frenzy puts homes out of reach

Investors chasing big capital gains in the Auckland property market are making it harder for first-home buyers to afford a house.

And from Emmerson:

NZH0556846605

Capital Gains Tax versus Land Tax

A guest post at Kiwiblog suggests a land tax would be more effective than a capital gains tax

However, a capital gains tax would do little to discourage the middle class from continuing to invest in rental properties. A capital gains tax is not payable until way into the future, if ever, in their minds so would cause them little immediate concern. Furthermore, with Labour’s version the CGT rate would only be 15%.

I think Labour’s reason for setting it at 15% was to allow for capital gain due to inflation.

A more effective way to make residential property less attractive and raise revenue would be to impose a tax that immediately hits the pocket and is impossible to avoid.

A land tax set at a small percentage of the value of land owned, payable annually or maybe quarterly, would do this. A tax free threshold of around $200,000 could exempt the land occupied by the average family home while discouraging the pouring of more money into low yielding property.

A land tax would be better at reducing inequality and do less to discourage productive activity than a CGT or raising income tax.

Other taxes on the stock of capital such as inheritance and gift taxes have similar advantages. Such taxes were used in the past to break up big estates and reduce inequality. Any party serious about reducing inequality needs to consider using them.

A land tax is an interesting alternative. If it has a simple threshold it would be far simpler than Labour’s exemption laden Capital Gains Tax.

Local Body rates are already calculated off property values. It wouldn’t be difficult to use a similar system for gathering a land tax.

Despite persistent claims by Labour that a Capital Gains Tax would “fairly” clamp down on property speculators we already have a tax on capital gain for speculators. The difficulty is in ensuring it is not unfairly or illegally avoided. Inland Revenue has been working on improving compliance.

From Wikipedia:

Capital Gains Tax

The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations.

Land Value Tax

There are several practical issues involved in the implementation of a land value tax. Most notably, it needs to be:

  • Calculated fairly and accurately,
  • High enough to raise sufficient revenue without causing land abandonment, and
  • Billed to the correct person or business entity.

More, lower taxes?

The biggest problems with taxes:

  • rate too high
  • too many rates
  • too many  exemptions
  • too complex

More tax types
I think we need a range of taxes, if you narrow it to too few it allows to much advantage to some and disadvantage to others.

Keep it simple
Simple, universal, minimal or no exemptions. Flat rates.

Keep it Low
The lower each tax rate, the less likely people will try and avoid that tax.

GST, PAYE, CGT,  company tax, land tax and transaction tax, fuel tax, and alcohol and tobacco excise tax – reach as wide as possible, as low as possible (except for tobacco and maybe alcohol), and as low administration as possible.

I’m just plucking numbers out of the air, but starting with GST as it is here’s a stab:

  • GST 15% on everything
  • PAYE first 15k tax free, 15% thereafter
  • Company tax 15% on everything
  • CGT 15% on everything
  • Land tax 1% per year on everything perhaps with a tax free threshold
  • Transaction tax 0.1% on everything
  • Fuel tax to cover wider costs
  • Alcohol, tobacco and gambling at levels to discourage overuse

They would need balancing and adjusting to ensure sufficient revenue.

In addition the whole benefit system should be simplified, and a priority should be put on controlling government spending and encouraging business development, employment and productivity.


Simple, comprehensive, low.