New tax touted as wealth divide fix

A new tax is needed to help right the increasing inequity between New Zealanders who own property and those who do not, two researchers say.

Terry Baucher, a tax expert, and Susan St John, a director of the University of Auckland’s Retirement Policy and Research Centre, have written a working paper calling for a fair economic return approach to be applied to housing, which they said could generate $1 billion a year in tax.

They said housing had become the prime vehicle for wealth accumulation in New Zealand on the back of low interest rates, readily available loans and taxfree gains.

‘‘Housing is viewed as a tradeable commodity and store of wealth, rather than a human right or a basic human necessity.’’

They said the Government had taken the view that neither a capital gains tax, land tax, stamp duty nor a wealth tax was the answer.

‘‘Yet the widespread unease that the growing wealth divide in housing is socially damaging makes doing nothing untenable. Other tools such as bright-line tests, loan-to-value ratio [restrictions] and non-deductibility of interest for some landlords can be helpful, but they are by no means sufficient on their own.’’

They said a capital gains tax could achieve horizontal equity in theory but only if capital gain was measured on an accruals basis. It was more likely that capital gain would only be measured at sale and there would be questions for Inland Revenue to define when a person had bought and sold outside the bright-line test period.

‘‘Any feasible future CGT has no impact on the accumulated untaxed capital gains in housing that have compounded over years of neglect to date, and is thus limited, if not impotent, to address the root harm of housing inequality.’’

A flat rate tax on land was likely to have more of an impact on those with cheaper houses on expensive sections.

The pair said a fair economic return (FER) could provide a better result. It is based on the deemed rate of return approach, under which money invested in property is deemed to have provided a certain rate of return each year, whether or not that was realised. The tax would apply across all residential property.

Baucher and St John said funds held in housing should generate at least as much return as money in the bank. Under the approach, net equity – the value of the property minus any mortgages against it – is treated as if it was on a term deposit earning a rate such as 2 per cent or 3 per cent. That return is then added to the owner’s taxable income and taxed at their marginal tax rate.

Baucher said there would be an exemption of $1 million of equity per resident, which would mean only the wealthiest top 20 per cent of property owners and absentee landlords would be taxed. Someone earning $150,000 a year, with a $2m house in only their name and no mortgage, would pay about $7800 extra in tax a year.

The FER would use official CV valuations that captured capital gain in the equity base over time.