GST on Housing

August 27th, 2009 at 9:23 am by David Farrar

Brian Fallow writes:

Here’s a suggestion for the tax working group set up to figure out how to put the tax system on a more durable and efficient footing to consider: scrap the provision exempting mortgage payments and rents from .

A brave suggestion.

But remember, any recommendations the working group comes up with are expected to be revenue-neutral, taken as a whole. And the broader the tax base the lower rates can be.

The question I then have is how much extra GST revenue would ending the exemption bring in, which would indicate howmuch in other areas could decrease.

More than 40 per cent of the income tax – much the biggest single source of Government revenue – comes from the top 10 per cent of taxpayers ranked by income, which is dangerous when labour is as mobile as it is and the income gap with Australia and most other developed countries is as large as it is.

It sure is. The top 9% pay 42% of income tax and the top 14% pay 53%.

What is so special about expenditure on housing that warrants exemption from a consumption tax? Other necessities like food, clothing and electricity attract GST.

A fair point.

According to Statistics New Zealand’s household economic survey the average household expends just over $10,000 a year on rents or mortgage payments (including principal).

With nearly 1.6 million households, at the current GST rate and ignoring any second round effects, that would yield about $2 billion a year. That is also about what an increase in the GST rate to 15 per cent would yield and is reportedly enough to fund, for example, a cut in the top income tax rate to 30c in the dollar – an avowed goal of the Government.

Oh I love it when a journalist actually does research and provides the info you need.

It would cost around $800 million to drop the 38c rate to 30c and around $280 million to drop the 33c rate to 30c so GST on housing would easily allow that it seems.

But that is not all. Applying GST to mortgage payments deals with one of the biggest distortions in the current tax system, the problem of “imputed rentals”. Avoiding the need to pay rent is a large part of the return on investing in the roof over your head. An untaxed capital gain is the rest.

My incentive was to stop paying rent. Any capital gain is a bonus.

Compared with a land tax or the McLeod review’s wealth tax, attacking housing through the GST system has the advantage of not relying on what someone from Quotable Value – however professional and incorruptible – estimates a property is worth. How much you pay a bank or landlord is cut-and-dried, not a matter of opinion.

I wonder why Fallow advocates GST on a mortgage only, and why not GST on the sale of a house? Maybe because most sellers are individuals and not GST registered?

The brutal reality is that if politicians set their face against a shift in the tax mix from direct to indirect taxation because they think the short-term distributional effects are too hard to deal with, then they are bequeathing to their successors a tax system that resembles an iceberg drifting slowly northwards. It will just not deliver the revenue required to provide the services people have come to expect from the state.

This is the killer paragraph and one the Government should remember.

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48 Responses to “GST on Housing”

  1. dime (10,212 comments) says:

    it only costs 800 million to drop the top tax rate from 38 to 30??? the price of a train set?? my god! imagine the benefits.

    when i first read the headline in the herald i was filled with rage :P but yea, id certainly be better off.

    the problem i have with adding GST to something, or increasing it across the board and lowering tax rates to offset it, is that eventually we will have another left government. they will whack tax up without removing GST and it will kill us.

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  2. MikeNZ (3,233 comments) says:

    Lets rather reduce the different taxes and rates and make it all much more simpler.
    All we seem to do is make a bigger rod for our back.
    This is not what I voted a center Government for.
    ACT/National

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  3. KiwiGreg (3,278 comments) says:

    If memory serves the decision not to tax residential rentals was largely political, there wasnt a lot of policy behind it (new houses and houses sold by property dealers etc for instance are subject to GST); I recall something about the value of owner-occupied housing but I never really bought into that.

    Mortgage payments are of course in relation to a financial serve (nothing to do with accomodation). The decision to exempt financial services from GST was entirely political (interest rates would go up, at the time by 1 or 2%, would be less now), and in fact the back-office part of financial services has subsequently been bought into the GST net.

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  4. nickb (3,696 comments) says:

    When people talk about tax on income, and internationally mobile people going to Aus etc etc, I always wonder, do many people realise that aussie actually has higher tax rates at the end of the scales than us?

    Taxable income

    Tax on this income

    $1 – $6,000

    Nil

    $6,001 – $34,000= 15c for each $1 over $6,000

    $34,001 – $80,000= $4,200 plus 30c for each $1 over $34,000

    $80,001 – $180,000= $18,000 plus 40c for each $1 over $80,000

    $180,001 and over=$58,000 plus 45c for each $1 over $180,000

    [DPF: But you have to be earning over $200K a year before you may be paying more tax]

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  5. Mattbnz (6 comments) says:

    If you apply GST to “mortgage payments”, that means you are applying it to the service of money lending. The fees for that service is interest – not the total mortgage payment. And the service provider is the lender. Therefore every single person in the country who earning $5 interest pa on their cheque account would need to be registed for GST and serve their bank with an GST invoice for their lending.

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  6. dime (10,212 comments) says:

    nickb – i was paying 47% in aussie + a 1.5% medicare levy! brutal. that was back in 2001.

    the flipside is, the average wage in NZ is lower than freakin inbred tasmania

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  7. nickb (3,696 comments) says:

    Yea guess thats true dime. Nearly 50%!!!! Yikes

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  8. nickb (3,696 comments) says:

    [DPF: But you have to be earning over $200K a year before you may be paying more tax]

    You mean taking into account lower tax on the lower brackets? Sure.
    Its just a bit surprising, not many people realise it, I sure didnt.

    I’d love to see National get the top income tax rate to 30% or under anyway.

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  9. Nigel (493 comments) says:

    So what’s the loop hole for GST on mortgage payments vs a personal loan, seriously that has to be so large you could drive an Truck through it.

    I think kiwigreg nailed it

    If memory serves the decision not to tax residential rentals was largely political, there wasnt a lot of policy behind it (new houses and houses sold by property dealers etc for instance are subject to GST); I recall something about the value of owner-occupied housing but I never really bought into that.

    Remove the restriction on dealers & make everyone pay GST on house sales, combined with GST on rent.

    Make 0-10k tax free buffer to soften the rent GST blow & reduce top tax to 30%, sounds a good deal to me.

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  10. Jack5 (5,274 comments) says:

    Matbnz at 9.59 is right. When GST was introduced at 10 per cent, interest was exempted. That and having a common rate across all goods have made GST a practical tax.

    Those who pay rent have nothing to net any GST against, and for GST to work in the way it does in other parts of the economy, interest components of the mortgages of those who own the houses would also have to carry GST so the landlords can net their GST. If you put GST on landlords’ mortgage interest it will have to go on all interest. That would mean every mum and dad bank account holder would have to register for GST with the paper work that entails. (Yes there is a minimum turnover for GST, but what a complication for we ordinary folk).

    And all so the poor Joe or Jane Blow or rents the flat or house can be saddled with the main GST burden.

    The best capital-gains tax is death duties. They are extremely cheap to collect and administer and come at the end of a productive life. One of the reasons there was hostility to death duty was that it sometimes forced sale of family farms. Look what’s happened to farm prices, they generally sit well above what would be jusftified by the return made from them, and farmers tend to farm with the long-term view of selling out for tax-free capital gain.

    Set to kick in at a reasonable level, death duties encourage philanthropy. They keep the economy efficient and stop the drift to gross wealth inequality. Even Warren Buffett thinks that there should be a reasonably flat playing field for the next generation.

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  11. PaulL (5,446 comments) says:

    Australia: yes, that is the headline rate, but don’t forget that there are many and varied tax deductions. There are very few people with income over 180K who pay the top tax rate, unless all their income is from salary and wages, they have no rental property and no investments. The net tax paid in Australia as % of GDP is lower than NZ, and I think the distribution of that tax across income levels is similar.

    GST on houses: if you apply GST to mortgages and rent, then someone living in a fully paid off house would not get captured. That isn’t necessarily bad, but if the intent is to shift to a more wealth-based tax instead of income-based, then those with lots of assets but low income are the ones we’re trying to bring into the system. This wouldn’t achieve that.

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  12. Jeff83 (747 comments) says:

    “It would cost around $800 million to drop the 38c rate to 30c and around $280 million to drop the 33c rate to 30c so GST on housing would easily allow that it seems.”

    Where do you get those figures. With income tax making up 52% approx of the tax take and the top 9% paying 40odd% I would think it would have more of an effect than $800m to reduce the top tax rate by over 20%

    [DPF: Treasury website]

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  13. Tom Semmens (79 comments) says:

    People now see a house primarily as an investment vehicle. The mindset has to be changed. Unfortunately, you can’t take the candy from this particular baby without providing it with something healthier.

    If you strip away property, where should people invest their money to secure their old age or allow them to retire early? People got into property as much because it allowed them to retain control of their own hard earned capital as the lack of taxation. Who in their right mind would trust their life’s savings to the bumbling, incompetent and downright corrupt wild west that is our financial and business sectors? Blue Chip anyone? Hannover Finance Anyone? Gold Corp? Judge Corp? New Zealanders obsession with property is as much an indictment of our busines and finance sectors as anything else.

    Before we demand the government punish people for simply doing the manifestly right thing with their own money, we need to have serious reform and regulation of the laws governing our sharemarkets, and finance/investment sector.

    What about it righties? Reform? Or will you all just go into bat for ACT’s policies – for the right of business to do what it wants when it wants and keep fucking the little guy over and over again and again?

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  14. gazzmaniac (2,306 comments) says:

    First, if we decided to tax interest on housing then wouldn’t we have to tax interest on everything? (I think that point has been made)

    I have no problem with GST on rent. We pay GST on everything else anyway.

    GST is paid when you get a new house built. It should not be an ongoing cost when you buy a used house, just like it’s not when you buy (privately) a used car or second hand goods. It is still charged on land agent fees etc when you sell as that is the good or service provided. If GST is charged at sale of a property it becomes a stamp duty, not GST.

    I really do think that any increase in the GST take must come with a reduction in income tax, and that should not only be at the top end but also with a tax free threshold like Australia have. It is probably the only way a tax hike could be sold to people earning less than $60k (ie the public at large, who will affected by this the most).

    Why is the government looking at new taxes anyway? I voted for this government for a reduction in tax and for things not to be banned, and less government intervention. So far all I can see is welfare to finance companies, talk about new taxes and banning cellphones, as well as a populist measure to crush cars (which I totally disagree with – they’ll only piss off otherwise fine citizens), and a non populist measure to ignore the public’s opinion about smacking. Pull your heads in!

    One still has to wonder what these highly unpopular measures are a prelude to – I would bet that in the next few weeks they will release a tax hike that won’t sound as bad, and we will be so relieved to see it just so our homes don’t get taxed.

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  15. KiwiGreg (3,278 comments) says:

    @ Jack5 “The best capital-gains tax is death duties. They are extremely cheap to collect and administer and come at the end of a productive life.”

    Can’t agree with that. When New Zealand had estate taxes they only ever really fell on the unlucky (died before they could plan) or poorly advised (didnt plan at all). Whilst they wrre relatively easy to collect (because you couldnt get probate until it was assessed and paid) they were extremely labour intensive to administer, due to the valuation and asset identification issues (as well as the relative complexity of the law). Unlike a regular CGT where value is typically determined by a third party sale, a death duty requires an assessment of value unsupported by an actual transaction.

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  16. Simon (780 comments) says:

    What Tom Semmens said. Cant believe its TomS.

    Who is going to buy into the NZSE 40 it’s a joke. Having a good look through the share page for the first time in five or six years and geez what a shower of shit.

    The companies listed exist so management can charge the poor sucker shareholders huge management fees. Forget shareholder wealth the only people making real money are the management.

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  17. Simon (780 comments) says:

    Anyway GST on rents etc. What a joke just shows you how the state worshipers are running out of ideas on how to tax the fuck out of people.

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  18. wikiriwhis business (4,191 comments) says:

    GST is being raised and vehicles fined for rubnning out of gas on the motorway.

    The police have had untold decades to bring the motorway issue up. They choose the middle of a recession. Plus rising gas prices.

    Govt’s have been very wary of raising GST. All of a sudden in a recession they bring it up.

    THe people really are being persecuted.

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  19. Jack5 (5,274 comments) says:

    Re Kiwigreg’s 11.50 post.

    Good points Kiwigreg, but against that this death duty is a once-only collection compared with typically 45-60 annual income tax collections and potential many hundred GST collections. Some of the legal work required by death duties has to be done any way on death. Valuation of property such as farming land may well still be needed if there is more than one beneficiary to the will. Similar assessments are made for other business transactions such as splitting partnerships or marital settlements. While individually costly they don’t entail the continuing expense of a vast system such as that which covers GST.

    By estate planning I assume you mean giving the money to other people or entities before death. That can be partly counted by scaled gift duties and retrospective inclusion of recent gifts in the estate. People legally reduce assessments for other types of tax, too. Death duties can also bolster savings through insurance etc ahead of death. If the duties encourage estate planning that probably helps economic assets such as farms to be passed on to new, energetic owners sooner.

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  20. barry (1,191 comments) says:

    GST brings in 14% of government tax income. The rest is PAYE and company tax.

    Its a myth to think that applying GST to anything else or raising the GST level will bring in Zillions to the IRD coffers.
    Mind you, if they want to apply GST to residential costs- great – GST on rent also i guess…………….

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  21. JC (948 comments) says:

    From memory the Govt spends about $70 billion. This figure is the result of about a 50% increase above the rate of inflation over the last decade.

    Reduce this figure by 20% and we all benefit by about $14 billion pa..

    Kind of puts various other savings or income ideas into perspective.

    JC

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  22. gazzmaniac (2,306 comments) says:

    JC – Hear, hear!

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  23. ISeeRed (236 comments) says:

    It’s the spending, stupid. It’s not that governments aren’t collecting enough taxes. It’s that they’re spending too much! Just go back to a 2001 level of spending (NZ was hardly a hellhole then) and VOILA, no deficit. Even if you adjusted for population growth and inflation, the government should be spending billions less that it is. But the sheeple of NZ just love their freebies and handouts. Well, you get the government you deserve – and those who don’t, leave!

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  24. bchapman (649 comments) says:

    Simpler to just have a stamp duty tax when a property is sold. Could be collected when the title is changed.

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  25. ovation (239 comments) says:

    Unless they change the registration threshold, you would need to be renting out at least 4 residential properties at a rate of $300 p/week each or have $1,714,285 in an investment paying an average of 3.5% before it affects your tenants / debtor… surely

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  26. gazzmaniac (2,306 comments) says:

    bchapman – Stamp duty has been identified as one of the major drags on the Australian economy. It hasn’t been removed as it is a state tax not a federal tax and the federal government doesn’t have the jurisdiction to do that, and the states are limited in their revenue raising.
    It really is a pain in the arse having to pay additional tax (sorry, duty) when you purchase property, shares, cars and insurance (and I am sure many more things).
    I’m pretty sure we got rid of stamp duty when GST was introduced, and not before time. Remember it was a stamp duty that sparked the US revolution.

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  27. Repton (769 comments) says:

    GST on rents and mortgages? So my landlord’s mortgage payments go up, he passes it on to me as increased rent, and then I pay GST on top of that. 26% increase on every rent in the country in order to finance a tax cut for the landowners. I’m sure that won’t have any negative sideeffects..

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  28. Jack5 (5,274 comments) says:

    Gazzmaniac at 2.06:”….stamp duty has been identified as one of the major drags on the Australian economy.”

    Well it hasn’t held Australia back much, has it. Australia is flying comapred with NZ.

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  29. Mattbnz (6 comments) says:

    Some numbers..
    (1) If I build a house I currently pay GST for the materials & builder say $500,000 + 62,500 GST. If I then take out a 100% mortgage for 25 years at 8% I’ll make total mortage payments of $1,302,440 including $739,940 interest. If we add GST to total mortage payments = $162,805 + original $62,500 = $225,305 of GST
    (2) If I rent the house from a landlord for 25 years at a typical 5% pa on value = $540 per wk + $67.5 GST = $702,000 + $87,750 of GST over 25 years. But this is clearly not enough to cover the landlord’s GST as above so the rent will have to go up from $540 today + 67.5 + another $105 to $712.50 per week to keep things even (ignoring inflation).

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  30. gazzmaniac (2,306 comments) says:

    Jack5 – Australia could be so much better than it is. You really have to live there for a while to know how bureaucratic it can be at times – living in Queensland is like stepping back 20 years. Awesome climate though.
    Bear in mind that Australia also has a better work ethic, a can do attitude (especially towards public works – they never really stopped their road building program), lower income tax, company tax, a better health system and a whole continent full of minerals to support the biggest bureaucracy per capita in the western world.

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  31. KiwiGreg (3,278 comments) says:

    @ Repton – it wouldnt work like that – if residential rental were subject to GST the landlord would get input credits on the costs of supply. Logically your rent would go up by 12.5% but it would actually be a bugger’s muddle as many landlords would fall below the GST registration threshold so only larger landlords would actually have to charge it.

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  32. KiwiGreg (3,278 comments) says:

    @ Mattbnz Even if financial services were bought fully into the GST net it wouldn’t apply to principal repayments (there being no service associated with those). In terms of the landlord see my comment at 2:58 – the landlord, if registered, would get input tax credits for costs incurred. GST is a value added tax not a sales tax.

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  33. Mattbnz (6 comments) says:

    @ KiwiGreg I agree, but Brian Fallow is quite clearly suggesting GST on the principal payments…

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  34. KiwiGreg (3,278 comments) says:

    Well if he is he really doesnt understand what he is talking about. That would be like imposing GST once when you took the cash out of the ATM and again when you spent it.

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  35. gazzmaniac (2,306 comments) says:

    Mattbnz – a land tax will benefit nobody. Besides which, we effectively pay a land tax to the local body periodically, so all we are really doing is increasing rates. Bugger off! It’s my land, not the Government’s.

    I am getting quite annoyed with this government, looking to impose more taxes. That is not why they were elected.

    The best way to get people to invest in things not real estate is to reduce or eliminate taxes on those other things. That includes bank deposits, investments in funds, shares etc. That will put them onto equal footing with real estate and will finally allow people to choose which is the best investment on its merits, not its tax advantages. We could reduce income tax at the same time.

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  36. Mattbnz (6 comments) says:

    Gazzmaniac – You could equally say about income tax “it’s my income, not the government’s”.. but it’s not about imposing more taxes. The working group has to come up with a plan that does not increase the total tax take – but spreads it more fairly and efficiently. We need a system that taxes everyone based on their usage of economic resources today and which cannot be avoided by legal structures etc. Income tax hits the middle class. Lawyers etc continually invent ways for the rich to avoid it – thats why the Income Tax Act is into the 1000’s of pages in length. Simple is best. Land ownership and consumption of goods & services are the closest correlation to people’s wealth and fair share of tax. There are so many scenarios where current “taxable income” is a such a poor correlation in comparison.

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  37. PaulL (5,446 comments) says:

    Mattbnz: to be clear, I’m pretty sure they aren’t trying to tax people based on their usage of economic resources. A user pays system would achieve that. The are trying to create a “fairer” tax system. The trick is what that means:
    – some see a fair tax system as one that the rich pay more
    – some see it as being those who use more pay more
    – some see it as being a system that is less easy for future governments to increase or decrease tax

    I think this review is focused on:
    – pulling into the tax net those who would be generally seen as wealthy, but who pay little tax. Those with large property holdings but little taxable income fall into this category
    – focusing on taxing things that are less internationally mobile, avoiding becoming part of international tax competition
    – trying to avoid economic distortions that are disincentives to overall economic growth

    Those seem reasonably worthy goals to me.

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  38. gazzmaniac (2,306 comments) says:

    I don’t see how introducing a land tax on the already paid for 3/4 acre my elderly grandparents live on is spreading it more fairly and efficiently. It is not right.
    I don’t disagree with your argument about income either – it is my income and I do object to the government taking a sizeable chunk of it.

    It’s simple – if other investments had no tax, then people would seriously look at investing in them like they do with real estate. Instead, the only reason that anybody invests in any of the super funds in this country is so they can take advantage of the government and employer subsidies. The only reason why people do it in Australia is because it is compulsory, and there are concessional tax rates for doing so (15% instead of 45% income tax, though you don’t have access to it until you’re 55). And you are wasting your time with money in the bank – with inflation running at, say, 3% a deposit in the bank earning 5% will pretty quickly disappear in real terms when taxed at 33%.

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  39. expat (4,050 comments) says:

    If GST is levied on house sales then watch house prices go up to compensate. political suicide.

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  40. Jack5 (5,274 comments) says:

    Mattbnz at 4.32:”…Land ownership and consumption of goods & services are the closest correlation to people’s wealth and fair share of tax. There are so many scenarios where current “taxable income” is a such a poor correlation in comparison.””

    I agree with your second sentence about taxable income often being a poor correlation to wealth and fair share of the tax burden

    I disagree that land ownership and consumption of goods are the closest relation.

    I still think death duties are the fairest correlation of a person’s wealth. In fact they are a full correlation with wealth at time of death. If a person gives the money away before they die, they pay gift duty on all but modest amounts. And unless the rate is exorbitant people won’t give all their money away, or at least they didn’t in the past.

    Mattnz also says simple is best. Death duties, a one-off tax, are simple to administer and to understand.

    Of course we would want other taxes reduced to compensate.

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  41. gazzmaniac (2,306 comments) says:

    It still really bugs me that the government was voted in on a mandate to lower taxes and hasn’t even considered doing anything serious yet, and in fact are only shuffling it all round by making new ones.

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  42. Mattbnz (6 comments) says:

    Jack5 – I think the main problem with Death duties is as you have immediately started doing is people/lawyers start thinking up ways to avoid it. Then you have investment and long-term decisions being driven by tax consequences just like income tax. Trusts are the obvious way to avoid it. ie. It drives “negative” non-beneficial investment decisions.

    Whereas.. land tax (as the wikipedia article states per the Nobel prize winner) drives people to use land efficiently, stops urban sprawl, encourages renewal of run down areas and abandoned areas, encourages the most productive farm and industrial property use… Wikipedia even concludes it is an Eco-tax. And as it says, land cannot be transferred to a tax haven, hidden in paperwork etc.

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  43. whalehunter (480 comments) says:

    surely the national government has the mandate to decrease spending. looking at new taxes is risky.

    a labour governement could have sold a capital gains tax.

    land is undoubtably a limited resource, how do you stop it driving inflation, feeding the banks and taking most of your after tax wage??

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  44. Jack5 (5,274 comments) says:

    The tax debate is interesting, but I don’t think it’s the main problem or answer to NZ’s economic woes. The causes are much wider and deeper than that. For example, as NZ Farmers’ Weekly says in an interesting article, fewer than 200 people graduated in NZ in agricultural science last year compared with 2500 in film and media studies (see link below). The film industry gets good tax breaks, too, though if Jackson moves the bulk of the industry will probably follow him.

    It’s as though the whole country is on an acid trip.

    http://www.farmersweekly.co.nz/article/7881.html

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  45. Jack5 (5,274 comments) says:

    A further thought on land tax…

    It would hit the pale-ghost iwi that once again owns big chunks of the South Island.

    Would they try to block a land tax citing the Waitangi Treaty?

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  46. gazzmaniac (2,306 comments) says:

    Land is not a limited resource – Australia uses about 0.5% of its land for housing (I believe NZ is somewhere closer to 1%). The “shortage” in both countries is created by requiring approval from the local body to develop it. In Kapiti around $40k is required per section created just to give to the council for their development fees – in a town like Otaki, land costs between $80-100k per section (Paraparaumu is a bit dearer, but not much), so a fair chunk of the value is in local body charges alone. Basically it adds up to the only way to develop land is in large scale subdivisions, and with a council hostile to “destroying” farmland this is further unlikely. A land tax will not address this.

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  47. alana (1 comment) says:

    GST on Rent and Mortgages is a great way to really hammer ordinary hard working people who owe more than they have invested. Why not just add capital gains tax to property instead. The excuse that it’s too hard to value is rubbish because properties are re-valued at various times anyway for instance if you sell a property or remortgage. And what about getting rid of all those dodgy income tax rules that favour investment properties. Many of us, as has already been pointed out, don’t earn $200k and already get hammered on income tax but could never afford a 2nd property. Tax on mortgages helps only rich people sitting on lots of assets and is totally unjust which is why it’s not done elsewhere (capital gains is).

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