October 5, 2009 10:00am by David Farrar

Tax Working Group

A summary and papers from the third session of the Tax Working Group are online at Vic Uni. Some extracts from the work:

Capital Gains Tax:

Treasury estimate a realisation based CGT on residential property excluding owner occupied would bring in $1.5 billion a year. This would allow the top income tax rate and company tax rate t be lowered to 30c.
CGT would make tax system more progressive as the wealthier benefit more from it (and the wealthier would benefit most from drop to 30c income tax so overall effect on progressivity might be limited)
IRD say an accrual based CGT not viable but an realisation based CGT may reduce economic efficiency as it will distort decisions on land-use decisions
Overall IRD say the benefits of a CGT would not outweigh its disadvantages
Some worry that as a CGT is so progressive, it might encourage wealthy people to leave NZ. Recommended that if there is a CGT, it apply at same levels as income tax for individuals

Land Tax

Very efficient as land is immobile. More efficient than a property tax.We have much lower land and property taxes than most countries.
A land tax would lead to a one off decline in value of land, which would increase home ownership rates.
The taxable land base is $460 billion so a 0.1% annual tax would raise $460 million a year.If you exclude agricultural land, forestry land and owner occupied land then revenue would be only $160 million a year.
Average farm land value is $1 million and average residential land value $200,000 so a 0.1% land tax would cost average farmer $1,000 a year and average home owner $200 a year.
Retired persons might be most disadvantaged as they benefit less from reductions in income tax to compensate
A land tax will bring foreign owners of land into the tax base, and has high degree of integrity as hard to avoid.

Rental Property

The tax revenue from the $200 billion rental property sector is negative and has trended down since the 39% tax rate came in.
An option is to remove income tax from rental of land, and also remove deductibility of expenses relating to the investment, replacing both with income tax on a risk free rate of return on the equity of the property.
Also discussion on whether rental housing and commercial properties really do depreciate, and should such depreciation be able to be claimed off tax. Depreciation on buildings is worth $1.3 billion a year of foregone income.

I am pleased to see the group backing away from a capital gains tax, but more favourable towards a land tax. I think the land tax (so long as income tax is cut to compensate) has considerable merit. I also think there is merit in concluding most buildings do not depreciate (in fact they appreciate massively) and disallowing depreciation in future. Again this is contingent on the overall level of taxation not increasing.

The website above, has papers which go into great details of the pros and cons. One paper looks at a 0.5% property tax if there is elastic supply. It says: