Tax debate should be about land, not wealth
Irish economist David McWilliams quipped recently that ‘‘it’s very, very easy to burn the house down, if you don’t own a house’’. If you want to know why wealth inequality is back on the agenda, in a way that it wasn’t even during the financial crisis, you just have to look at the way the housing and land markets have been run.
Housing has been run much like the secondhand car market in Sri Lanka. That country is currently going through the worst economic crisis in its history, foreign reserves have dried up, industries like tourism have been cut off at the knees, electricity is available only for one hour a day in some cases, and people are having to line up for hours to access food, water and milk powder.
But despite the cut in incomes, second-hand cars are more valuable in US dollar terms than before the crisis. Agence France-Presse (AFP) reported the going rate for a 2017 Toyota Land Cruiser recently hit US$312,500 – nearly half a million New Zealand dollars.
The reason? Alongside other longstanding restrictions and duties, the Government put a twoyear ban on the importation of cars, slowing down the pipeline of new cars coming on to the market. It meant wealthier people bid up the price of used cars, putting lower-quality cars out of the reach of poorer people. According to the AFP report, the price of a 10-year old car with no working engine has jumped in value to more than twice the yearly income of the average Sri Lankan.
A similar phenomenon has been at play in New Zealand and around the world when it comes to the housing market, where land supply and restrictions on the construction of new and different types of housing, have been the norm.
When the Infrastructure Commission examined the situation earlier this year it found this practice of blocking new and alternative types of housing was the key difference between the days when construction of new housing was able to keep up with population demand, and when it wasn’t.
During David Parker’s 4000-word tax policy speech – in which he announced no new taxes but talked a lot about taxes all the same – he highlighted the situation around housing affordability as having brought the income inequality debate to the fore.
‘‘An important objective of taxes is to redistribute income, as well as the cost of public services, on a socially acceptable basis,’’ he said. ‘‘This objective extends into avoiding extreme concentrations of wealth, most often given voice in New Zealand via politicians concerned about decreases in home ownership rates.’’
However, while inequality and the need to tax wealth is back on the agenda, we shouldn’t lose sight of the fact that in New Zealand this debate is also one about land: who should own it, who profits from it, who builds on it, and who can live on it.
In his speech, Parker referred to people like Elon Musk, Jeff Bezos ‘‘and their ilk’’, but at least these individuals took a risk on something, and are unlikely to get a bailout if they fail.
But New Zealand’s core business has always been land, not producing entrepreneurs like Musk or Bezos. You can trace the history of it right back to early colonial times when the government used the ‘‘right of pre-emption’’ to block Ma¯ ori from selling land to settlers, instead funding government revenues by buying land off Ma¯ ori at a low price and selling it to settlers at a higher one.
While land goes untaxed ... the people who own it face no pressing need to develop it to its highest-value use, such as housing.
Headlines about falling property prices might be in vogue right now, but we all know the playbook: interest rates rise, construction firms go bust or stop building houses, homeowners panic and cut back on spending, the economy dives, interest rates fall, house prices rise as too few houses have been built – rinse, cycle, repeat. You can add in Finance Minister Grant Robertson’s announcement of a debt ceiling as another guarantee of higher future house prices too; it will effectively limit the potential future infrastructure and housing build.
But it is very difficult to debate anything affecting land values or prices in the public sphere. Even councils are increasingly moving from land value rating systems to capital rating ones, with Palmerston North the latest to look at a shift.
While this land goes untaxed, or is under-rated by councils, the people who own it face no pressing need to develop it to its highest-value use, such as housing, perpetuating a cycle of ever-higher prices.
It would be a shame if this effort to focus on the ‘‘wealthy’’ morphed into a focus on income tax rather than land, as it so often has in the past.
Land, unlike mobile young talent, isn’t going anywhere – and encouraging more efficient use of it through land taxes could benefit everyone.