Press Release – New Zealand Labour Party
David PARKER Spokesperson for Finance 30 October 2012 MEDIA STATEMENT Capital gains tax key part of house affordabilityDavid
Spokesperson for Finance
30 October 2012 MEDIA STATEMENT
Capital gains tax key part of house affordability
The Government’s refusal to consider a capital gains tax that would help put a lid on property prices and increase wages shows it isn’t serious about making housing affordable in this country, says Labour’s Finance spokesperson David Parker.
“John Key and Bill English dismiss a capital gains tax out of hand. But in advice to New Zealand the IMF and the OECD both say a capital gains tax is important and appropriate.
“The Treasury said in its latest briefing to the incoming minister that the distortions in the current tax system around taxing capital need to be fixed. The former Secretary to the Treasury John Whitehead, free of political constraint after retirement, went further and expressly said a capital gains tax is desirable.
“The Reserve Bank in 2011 said the tax treatment for owners of rental property is relatively favourable to other countries and recommended consideration of policies in Australia where realised capital gains on rental properties are taxed.
“Owning your own home is a dream that’s disappearing for many hard-working New Zealanders, in part because the tax bias effectively subsidises landlords. The OECD has expressly made this very point.
“Housing is unaffordable for too many in this country. National isn’t doing enough, which means homes will remain out of the reach of the many.
“That’s because National is wedded to helping people who own multiple numbers of houses rather than helping those who can’t afford even one.
“A capital gains tax is not the complete answer but it help keeps a lid on property prices. It also diverts precious investment into the productive export sector which brings more jobs and higher incomes.
“A capital gains tax is also fair in that it stops income from property speculation being free of tax while wages and interest are fully taxed.
“Making housing more affordable in this country requires a bold and comprehensive package of ideas. A capital gains tax is an essential tool in helping low and medium income earners into their first home. By rejecting it out of hand National is letting Kiwis down, again.”
“Staff supported the recommendations of the Savings Working Group on tax reforms to raise saving and improve the efficiency of the tax system. They include a further switch from income to consumption taxation over the medium term, while maintaining the broad base of the GST, and that interest income and expenses be indexed at a standard rate for tax purposes that reflects the rate of inflation (e.g., 2 percent per annum). Staff also advised continuing efforts to broaden the tax base by looking at capital gains tax settings and introducing a land tax to fund growth-enhancing tax rate reductions”
The Overview of the 2011 OECD Economic Survey of New Zealand states that:
“Favourable tax treatment of housing and inefficient regulatory constraints on supply should be removed. These distortions exaggerated the surge in house prices, given rise to wider wealth inequalities and a heavy dependence of households’ long-term financial positions on volatile property values. The shallowness of capital markets that results from low national saving also contributes to the attractiveness of housing as a savings vehicle relative to financial assets. Despite the slump in housing demand, property prices remain at high levels relative to rents and average incomes, keeping affordability low for less affluent households and intensifying pressures on the social housing sector. While the government has made progress in addressing some tax distortions and inefficiencies in social housing delivery, policy priorities should include further tax reforms to level the playing field for savings and investment decisions, while improving the efficiency of land-use policies and the overall urban planning system”.
“The exclusion of imputed rents and capital gains from the NZ tax base contributes to diverting household portfolios towards housing. Because nominal interest income and dividends are taxed, the absence of a capital gains tax raises the relative returns to assets with good prospects for price appreciation, which tends to favour property and farm investments, given their greater leverage possibilities and a thin domestic equity market. In addition, rental property investments benefited from generous tax provisions that led to increasing losses claimed by investors against their other income in order to reduce overall tax liabilities. The tax advantages helped to prolong the housing boom, further inflating property values. They are also regressive in that they benefit high-income investors more, at least to the extent that losses can be deducted at the marginal tax rate, and low earners are priced out of the market. The government addressed some of these distortions in the 2010-11 budget. Introducing a comprehensive realisation-based tax on capital gains would further reduce the bias towards housing investment relative to other assets. Excluding primary residences from taxation would diminish the effectiveness of such a tax, but partial exemption or rollover relief could act as a “second best” solution so as to facilitate public acceptance. The government has so far refrained from introducing a capital gains tax. In such circumstances, it should consider other alternatives including reducing the taxation of alternative savings to level the investment playing field and further limiting the extent to which property investment losses can be deducted for tax purposes. Such measures should be accompanied by higher property or land taxes that could be designed to achieve the same objectives as a tax on imputed rent”.