COMMENT: If there’s one thing that the Left and Right agree upon, it’s the role of tax in addressing issues in the economy. But that’s where the agreement ends, because their views on precisely how tax should be used are wildly different.
Left-leaning political parties typically believe that more tax is the solution to many of society’s ills. Traditionally, this has been based on the view that inequality is an economic condition and can be fixed by taking more from those who have more and giving it to those who have less, and this is why the idea of “taxing the rich” features strongly in leftist ideology.
Conversely, Right-leaning parties typically believe that tax should be kept to the lowest level possible. This is based on a view that economic growth (and therefore, prosperity) should be left to private individuals and that taxation should be confined to raising only enough to meet the needs of the most disadvantaged, providing for only as much physical and government infrastructure as is required to keep society happy and efficient, and paying off any previous debt.
The reality is that there is some truth in both of these positions and, to its credit, New Zealand has walked a finely balanced line between both extremes since the 1930s. As a result we have had a system which values private enterprise and rewards risk and innovation, but which also protects the interests of the most vulnerable amongst us. Certainly there has been debate over how far this support should go, but the debate has been around the appropriate level of support, not the need for the support itself.
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All of which gives some context to the current Government’s approach to tax. Its tax policy is by no means the most aggressive in our history (the highest personal tax rate, prior to the 1980s, was 66% against the current 39%), but it is certainly extreme relative to the generally agreed economic consensus of the past 35 years. This is particularly evident in its approach to the housing market where the Government has used tax, not just as a means by which to raise revenue, but as a mechanism by which to try and influence the behaviour of that market.
Ashley Church: "The Government can’t influence house prices over the long term." Photo / Ted Baghurst
Based on the view that all of the ills of the housing market (including house price inflation) can be laid at the feet of greedy property investors, the Government has introduced a range of measures to punish investors and try and get them out of the market. These have included aggressive new rules which go too far in their preferred treatment of tenants, “healthy homes” legislation which holds landlords to a standard which is higher than that to which the Government holds itself, and three significant tax changes: the ring-fencing of tax losses; the removal of the ability to treat mortgage interest as a tax-deductible expense; and a capital gains tax targeted at investors under the guise of the brightline test on property sales.
These latter measures don’t sound exciting, but it’s not unreasonable to suggest that they could cost the owner of just one investment property $10,000, or more, per year once the changes are fully implemented, and hundreds of thousands when a property is eventually sold. Add to this the fact that these changes will make absolutely no difference to house price inflation but could affect the supply of rentals in the medium to long term and you can start to understand why investors are angry.
It also goes some way toward explaining why National, in the first of what is likely to be several major positioning statements, has put a line in the sand over its position on tax if it is elected next year. It has confirmed that it will reverse a full suite of taxes, introduced by Labour, including the brightline test extensions beyond two years and the removal of interest deductibility on rentals.
There’s not yet any word on removal of the ringfencing of tax losses, but I assume this will form part of a future housing policy announcement as restoring interest deductibility is of much less value if ringfencing isn’t also removed.
But would National’s tax changes help the housing market?
Yes and no. They’ll make no difference to house price inflation – just as Labour’s tax changes in the other direction have made no difference – but nor should they. As I’ve said many times, the Government can’t influence house prices over the long term.
What they might do is influence the supply of rentals. Every investor who can be encouraged to invest in, or stay in, the market represents one less rental property that you and I, as taxpayers, are required to provide – and the potential impact of that runs into savings of billions of dollars.
National’s proposed tax changes aren’t a magic bullet – but they’re certainly a step in the right direction.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
