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Came across this a few minutes ago. Makes for interesting reading.
Are we being softened up?
Taxing Residential Property?
05/02/2004 10:44 AM Brian Jamieson - The Independent
Conventional wisdom has it that proposing higher taxes on New Zealand's national pastime - buying and selling property - is political suicide.
But conventional wisdom always looks immutable until the day it no longer holds true. The fact that political parties currently avoid thinking about property taxes should not be taken as a permanent condition.
Despite political unacceptability, there are sound public policy arguments for the view that increased taxes on property would confer benefits outweighing the costs. Although property is taxed, for example through rates, overall it has enjoyed a fiscal bypass in New Zealand. The idea that property should be off limits when it comes to thinking about tax changes and options is a bizarre approach to fiscal policy.
On average, in European Union countries, taxes on property represented about 5% of total tax revenues in 2001. This figure was at 12% for Britain - the highest rate in the EU. Despite the relatively high rate of property taxes in Britain, this does not seem to have curbed the British appetite for property ownership.
Taxation of property raises a wide range of complex public policy issues. The implications of tax changes need to be well thought out. The point is that treating residential property as a "no go" area as far as general taxation is concerned cannot be justified on grounds of either economic efficiency or equity.
When he was governor of the Reserve Bank, Opposition leader Don Brash often chided New Zealanders for their infatuation with property. In his new role as leader of the National Party he is well placed to float some innovative taxation options with the electorate, if he so chooses.
For their part, left-of-centre parties might see justification in increasing property taxes as a way of redistributing wealth from the property-rich to the property-poor.
Looking only at the residential property sector in NZ, and setting aside local body taxation in the form of rates, there is a range of general taxation possibilities:
Stamp duty: This is a transactions levy paid every time a property is sold. Given current volumes of residential property sales, even a modest level of, say, 1% could generate a significant amount of tax revenue.
Capital gains tax: Generally it is assumed that the primary residence would be exempt but countries such as Germany, Sweden and Finland impose capital gains on primary residences.
Estate Duty: (sometimes called an inheritance tax). Payable on the deceased estate, the threshold at which estate duty was applied could be set so as to exempt residential properties with a value around the national average.
At present neither stamp duty nor estate duty apply to residential property in New Zealand. Because of the difficulties in distinguishing the intention behind the purchase of a property - income or capital gain - effective taxation has been impracticable.
In addition, a serious review of residential property tax would have to take into account the range of advantageous provisions applying to rented property such as the deductibility of interest payments and generous depreciation allowances. These provisions also tend to enhance the attraction of residential property as an investment. In practice all sorts of taxation options at a variety of rates are possible. The case for shifting more of the tax burden to property has a number of strands.
First there is the argument that, relative to other activities, residential property in NZ is lightly taxed. As a result this asset class is advantaged compared with other - and potentially more productive - activities.
To achieve the celebrated level playing field the current taxation bias in favour of property would need to be reduced. Increased property taxes would act to reduce the attractiveness of property relative to other investments.
In a period when residential property is booming, increased taxation would also tend to act as a built-in stabiliser. At the very least it might dampen some of the swing.
For most New Zealanders by far their largest store of wealth is in the form of property. This trend has intensified as the value of the equity in residential property has rocketed in recent years.
There is an argument that wealth gained through property should be subject to some redistributive mechanism. Without such a mechanism society faces the prospect of dividing into two classes - the property-rich and the rest. That mechanism could take the form of either a capital gains tax or estate duty.
As with any area of taxation, determing the merits of increased property taxes comes down to a questions of costs and benefits - and often these accrue to different social groups.
Taxes on property are not an all-purpose tool. Many questions would need to be resolved before increasing taxes on residential property. For example, it can be claimed that NZ has an efficient property market and that this contributes to labour mobility and general flexibility in the economy.
Accordingly, a review of property tax options would need to take account of their wider impact such as the possible adverse impact of increased tax on the mobility of the work force.
Greater taxation on residential property in New Zealand is not imminent. But is there a political party out there prepared to start a debate?
Brian Jameson is a Wellington-based analyst and writer.
Regards
Came across this a few minutes ago. Makes for interesting reading.
Are we being softened up?
Taxing Residential Property?
05/02/2004 10:44 AM Brian Jamieson - The Independent
Conventional wisdom has it that proposing higher taxes on New Zealand's national pastime - buying and selling property - is political suicide.
But conventional wisdom always looks immutable until the day it no longer holds true. The fact that political parties currently avoid thinking about property taxes should not be taken as a permanent condition.
Despite political unacceptability, there are sound public policy arguments for the view that increased taxes on property would confer benefits outweighing the costs. Although property is taxed, for example through rates, overall it has enjoyed a fiscal bypass in New Zealand. The idea that property should be off limits when it comes to thinking about tax changes and options is a bizarre approach to fiscal policy.
On average, in European Union countries, taxes on property represented about 5% of total tax revenues in 2001. This figure was at 12% for Britain - the highest rate in the EU. Despite the relatively high rate of property taxes in Britain, this does not seem to have curbed the British appetite for property ownership.
Taxation of property raises a wide range of complex public policy issues. The implications of tax changes need to be well thought out. The point is that treating residential property as a "no go" area as far as general taxation is concerned cannot be justified on grounds of either economic efficiency or equity.
When he was governor of the Reserve Bank, Opposition leader Don Brash often chided New Zealanders for their infatuation with property. In his new role as leader of the National Party he is well placed to float some innovative taxation options with the electorate, if he so chooses.
For their part, left-of-centre parties might see justification in increasing property taxes as a way of redistributing wealth from the property-rich to the property-poor.
Looking only at the residential property sector in NZ, and setting aside local body taxation in the form of rates, there is a range of general taxation possibilities:
Stamp duty: This is a transactions levy paid every time a property is sold. Given current volumes of residential property sales, even a modest level of, say, 1% could generate a significant amount of tax revenue.
Capital gains tax: Generally it is assumed that the primary residence would be exempt but countries such as Germany, Sweden and Finland impose capital gains on primary residences.
Estate Duty: (sometimes called an inheritance tax). Payable on the deceased estate, the threshold at which estate duty was applied could be set so as to exempt residential properties with a value around the national average.
At present neither stamp duty nor estate duty apply to residential property in New Zealand. Because of the difficulties in distinguishing the intention behind the purchase of a property - income or capital gain - effective taxation has been impracticable.
In addition, a serious review of residential property tax would have to take into account the range of advantageous provisions applying to rented property such as the deductibility of interest payments and generous depreciation allowances. These provisions also tend to enhance the attraction of residential property as an investment. In practice all sorts of taxation options at a variety of rates are possible. The case for shifting more of the tax burden to property has a number of strands.
First there is the argument that, relative to other activities, residential property in NZ is lightly taxed. As a result this asset class is advantaged compared with other - and potentially more productive - activities.
To achieve the celebrated level playing field the current taxation bias in favour of property would need to be reduced. Increased property taxes would act to reduce the attractiveness of property relative to other investments.
In a period when residential property is booming, increased taxation would also tend to act as a built-in stabiliser. At the very least it might dampen some of the swing.
For most New Zealanders by far their largest store of wealth is in the form of property. This trend has intensified as the value of the equity in residential property has rocketed in recent years.
There is an argument that wealth gained through property should be subject to some redistributive mechanism. Without such a mechanism society faces the prospect of dividing into two classes - the property-rich and the rest. That mechanism could take the form of either a capital gains tax or estate duty.
As with any area of taxation, determing the merits of increased property taxes comes down to a questions of costs and benefits - and often these accrue to different social groups.
Taxes on property are not an all-purpose tool. Many questions would need to be resolved before increasing taxes on residential property. For example, it can be claimed that NZ has an efficient property market and that this contributes to labour mobility and general flexibility in the economy.
Accordingly, a review of property tax options would need to take account of their wider impact such as the possible adverse impact of increased tax on the mobility of the work force.
Greater taxation on residential property in New Zealand is not imminent. But is there a political party out there prepared to start a debate?
Brian Jameson is a Wellington-based analyst and writer.
Regards
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