Let’s be clear – current tax policies do not tax everything they should. This is a huge problem for the economy, and for anyone but those with a lot of equity in housing. Sorting it is an urgent issue, but the policies are unfamiliar. So accepting the idea of broadening the tax base to include previously untaxed things like housing is certainly a challenge, but it has to be done.
We simply can’t afford to allow a schoolyard scrap between our political leaders discourage us from doing the smart thing. And in case you’re wondering what the smart thing is? Start taxing all assets and that means housing. We might disagree on how to do it (at the Morgan Foundation we want a comprehensive capital tax, the Greens and Labour want a capital gains tax) – but do something.
National has a policy on this issue – sit on your hands and do nothing, and direct attention to something else. And they were very impressive in that this week – in the leaders debate John Key effectively held up the image of IRD dragging the family home away from orphans. Orphans, for goodness sake. How low is this election going to go?
If Cunliffe was on the ball he could have created an equally emotive image: of hard working families being held ransom by fat cat property investors. And in case you think that hard working family isn’t you, there’s a good chance it is. The trouble is that Labour’s solution is far from perfect.
Capital gains taxes are notoriously complex, it was probably inevitable David Cunliffe would be tripped up on it. Like most other capital gains tax regimes around the world, Labour proposes leaving the family home out, which makes it more complex. Whenever you leave something out of a tax regime, all manner of difficulties come into play. When is a house a house, when is a home a home?
Key could easily exploit this complexity and he did so. The complexity of targeted capital gains tax regimes is one of their well-known defects. And the more complex a system is, the more loopholes there are for people to exploit – if they have a smart accountant. Avoiding that complexity is one reason we prefer bringing in a simple tax on all capital.
The comprehensive capital tax Gareth and I proposed in the Big Kahuna simply taxes, at a flat rate, a yearly estimate of the benefits generated by the equity you have in your assets. The estimate is easy too: take the value of what you own (the equity you have in your house, not the house value) and multiply it by 6% Average Kiwis shouldn’t fear taxes on the family home.
If we had a broader tax base – if we taxed housing – tax rates on wages could go down, and by a lot. You may find yourself paying a housing-related tax, but you would get that back, and more, from a lower tax on wages. So you’d be better off. Taxing housing would make it easier for you to pay debts like a mortgage, because you’d pay less tax on your wages.
Taxing housing would also take some of the heat out of house prices. That heat is partly driven by loophole-exploiting investors. Of course, the new revenue could be spent instead, but you get the idea. There is no doubt that the political spin doctors have worked out that tax is an issue that is bothering the voting public. And there is no doubt – given the use of orphans – that the spin-doctors are dictating what is said. But do we really want this sort of banal contribution dictating how we fund the country, given so much depends on how we do that?
Gareth Morgan and Susan Guthrie are authors of the Big Kahuna, published in 2011.