Tax house rules and (dis)incentives
It seems fashionable to have a go at people who, while actually following the rules, are doing something that somebody else doesn’t like. Maybe it’s some people not paying what others consider their fair share of taxes.
The message behind this headline is pretty clear: More than 40% of millionaires paying tax rates lower than the lowest earners, Government data reveals (Feb 24).
Or maybe it’s blaming rising house prices on the investors who buy houses. Recently, Prime Minister Jacinda Ardern resorted to trying to tell investors not to buy houses.
In this fickle, judgmental world, made worse by social media outrage, we risk making outcasts of those who are actually not doing anything wrong, and may in fact be doing useful things. Most millionaires are very productive people. Many are wealthy because of the value they have created and the jobs that come with that. Housing investors are part of revealing useful information about the market – we need more houses.
Economists spend a lot of time thinking about incentives, and how those incentives affect behaviour. Rules create many of the incentives in our society. It’s the role of government to write the rules and our part is to all play by those rules. If those rules don’t produce the outcomes we like then don’t take aim at those playing by the rules, aim at the rule makers and the incentives they create.
In the case of taxes, no-one is obliged to pay any more in taxes than what they are legally required to. Inland Revenue used to have the slogan ‘‘It’s our job to be fair’’. No it isn’t. It’s their job to collect the right amount of tax according to the rules. However, the slogan ‘‘It’s our job to enforce the rules’’ doesn’t sound as good, so thankfully they no longer have a slogan.
We need to have grown-up conversations about how much tax different people should pay, and there may well be very good arguments for why the richest people or the biggest companies should pay more in tax.
But, whatever the rules are, don’t blame them for wanting to only pay in taxes what they have to within the rules. If the tax rules have different types of income being taxed differently then don’t be surprised when income gets shifted, quite legally, from one type to another. You and I may well do the same.
When it comes to housing, how did a country of only five million people and lots of land (we rank 75th for land area, ahead of the United Kingdom at 78th and Denmark at 130th) get a housing crisis? Put simply – we didn’t build enough houses.
As a consequence, housing affordability is amajor issue and unwinding this will be a long process. Comments, such as asking people not to invest in housing, completely miss the point and take aim at the wrong people. Maybe some will change their investment plans because the prime minister asks them to, but not enough to make any difference.
While the incentives are there to buy houses for gain, then investment in housing will continue. It’s the rules that create those incentives. We have made it hard to increase housing supply. We have only just reached the number of monthly building consents issued that we were managing in the 1970s. However, our population is now almost double compared to then and our household family size is smaller (smaller household size means more houses to accommodate the same number of people).
Faced with increased demand and restricted supply, the only way for prices to go was up. Investors are simply responding to the incentives created by the rules. If shares or art were better value then that’s where more money would go.
Don’t blame the millionaires or the big companies. Don’t blame the investors, the migrants or the builders. Look at the rules and rule makers, and the incentives they have created.
Stephen Hickson is director of the Business Taught Masters programme and teaches economics at the University of Canterbury.