Small on Tax

August 21st, 2009 at 9:00 am by David Farrar

writes on tax:

If it does not move, it. If it can move, try to it less. If Treasury used single syllable words, that is how it might define its view of revenue raising.

That’s a great summary. And if we want to have decent economic growth in future we do want a tax system that drives people and investment offshore.

Put simply, since people can leave or  go elsewhere – and so can investment  dollars – they should be taxed the least.

On the other hand, local consumption – which attracts – can by definition only happen here.

Similarly, stuff that is nailed to the ground is relatively immobile, though the investment dollars that build and develop it are slippery.

GST is also a lot harder to avoid than income tax.

Much has been made of ministers “leaving the door open” to a capital gains tax, but that has long been a poisoned chalice. More pertinent is the group’s request for officials to also look at land or property tax.

By coincidence on  the Auckland-Wellington leg of the flight back from Hawaii, I was seated next to a prominent economist and the pros and cons of a was part of the discussion. It is an interesting area to look at (on the proviso that any new tax be matched by reductions in other taxes).

But the economic case for a tax on the unimproved value of land are intriguing – though it would require a big sell to property owners, especially older voters, some farmers and Maori who are asset rich and income poor (with high levels of equity in their properties) and would take the biggest hit from any consequent fall in property prices.

A small land tax could take some of the heat out of the housing bubble, with less need for interest rate hokes in future.

A small tax on land alone could fund a big move in personal tax rates.

A 0.1 per cent tax – $460 million on the $460 billion of privately-held land – would offset the lost revenue from cutting the 38 cent rate to 33 cents.

Starts to get appealing.

It would genuinely broaden the tax base, taxing foreigners who own property in New Zealand, and be likely to push more investment into areas other than property while helping curb a new housing boom.

The inevitable drop in property values would be a two-edged sword. Home ownership would become more affordable, and the extra impost would give owners of bare land an incentive to develop it.

It would arguably be relatively progressive, because wealthier people tend to have more valuable property holdings. And it would provide far more predictable revenue than a capital gains tax.

There is also a ready-made framework in the local-body rating system, to help keep compliance costs down.

I look forward to some of the economist blogs discussing the pros and cons of reducing income tax and instituting a land tax in a fiscally neutral manner. So far the pros seem pretty strong.

Even so, it is hard to make the leap of logic that would see National – the natural home of the landed – slap a new tax on the land beneath their voters’ feet.

It comes back to how seriously you want to close that gap with Australia.

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30 Responses to “Small on Tax”

  1. Glutaemus Maximus (2,207 comments) says:

    Best adjustment is surely a nil band of Income tax to $35k per individual. Threshold for marginal tax should be 120k

    Raise GST to 16%. But all Food. Cooked, frozen, raw, eat in, take out, etc should have a zero band.

    This really helps inbound tourism, and the domestic tourist market. Spain has reduced rates for restaurants etc.

    Dispose of WFF in a phased 3 year withdrawl. (Or even longer).

    Having multiple GST rates isn’t complicated. My old business in the UK had to account for 5 types of VAT.

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  2. Alan Wilkinson (1,901 comments) says:

    “The inevitable drop in property values would be a two-edged sword. Home ownership would become more affordable”

    Even though Vernon Small is a smart guy (from my chess playing days) this statement is idiotic.

    Any drop in value would be at most in direct proportion to the impost of the new tax. Affordabilty would remain exactly the same.

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  3. trout (945 comments) says:

    We already have a Property Tax euphemisticaly called ‘rates’ ( rates have long ceased to be a payment for services and have morphed into a wealth tax – the imposition of GST on ‘rates’ was the con of all cons). A genuine Property Tax could be developed from the existing data base (with a percentage of revenue allocated to local Authority spending) and this would certainly be a preferable alternative to CGT. The distinction between improved and unimproved values would be an issue; perhaps the National tax would be on unimproved, and the local tax on capital improvements.

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  4. bruceh (102 comments) says:

    I’m not sure trade-offs between one type of tax and another can be properly discussed without putting a discussion on the role and size and rate of growth of govt on the table, including the sensitive social policy areas which consume the bulk of govt expenditure.

    The single biggest contributor to keeping tax rates high is the continuing increase in govt expenditure assumed in each years Budget. Dealing with this in a committed way will allow tax rates to be significantly reduced and continue to reduce as volume increases in tax collections through growth kick in. The return of govt accounts to surplus will happen quicker and ‘wholesale slashing’ of current levels of expenditure will not be necessary.

    Against this type of healthy taxation dynamic, discussions of the economic efficiencies and behavioural benefits of different types of tax make a lot more sense, in my opinion

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  5. peterwn (3,312 comments) says:

    But how do you value land? AFAIK valuers value a property ‘as is’ based on recent sales evidence. They then stick a thumb up in the air to have a stab at ‘bare’ land value for which sales evidence is thin or almost non existant. Theu subtract one from the other to get the ‘improvements’

    In Wellington, much land seaward of Lambton quay was reclaimed years ago and the freehold is vested in Wellington City Council who leases it out generally on 21 year rolling leases ie a rent review each 21 years. In the early 1980’s some three storey buildings in Lambton Quay owned by Greek or similar families were sold to developers for redevelopment. The developers paid heavily for them but the cost was peanuts compared with the cost of the new develpments. If there was a liquid property market those prices would have been unsustainable.

    Now, what then happened, is these unsustainable prices resonated right through Wellington CBD valuations and land ‘values’ skyrocketed despite there being no further sales following the 1987 crash. This caused leaehold ground rents to skyrocket to ridiculous values and wiped out building owners’ equity in some cases. AFAIK the owner of old Wool House walked away from it leaving it to the Council. The NZ Library Association losts its reserves when the value of its ‘own your own’ floor tanked. A government agency leasing space in such a building deliberately negotiated a lease with no ratchet clause so the ground rent increase (passed to tenants) could be offset by a corresponding decrease in the rent paid to the landlord. Although the lawyer removed the ratchet clause, he forgot to modify a clause that allowed only the landlord to initiate rent reviews, a de facto ratchet clause – it went to the Privy Council but the landlord prevailed. The lawyer in question was the BOMA lease ‘Guru’ but slipped in that case.

    So similarly a land tax could end up being based on ‘how long is a piece of string’ value.

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  6. Bevan (3,924 comments) says:

    And if we want to have decent economic growth in future we do want a tax system that drives people and investment offshore.

    Gee DPF, with lines like that you’ll have the lefties foaming with cries of a vast conspiracy.

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  7. Crampton (215 comments) says:

    In a first-best world, moving from income tax to a mix of consumption and land tax could well be optimal. But you know that isn’t how things will work out. We’d get a hefty cut in income tax in exchange for increased GST and a land tax as the first move, fiscally neutral. Then, once everyone’s used to the new taxes, folks will remember the looming budget problems if we keep Working for Families and the retirement age where they are. Then income taxes will creep up a little. Eventually, Labour will win government again and put in a new 39 cent rate for the rich pricks without cutting the land taxes. Prediction: if we go with a land tax now, the overall tax burden will be higher 15 years from now than it otherwise would.

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  8. Nigel (517 comments) says:

    The real win with NZ GST is there is it covers everything, going to a VAT style system of exclusions would be going backwards big time IMHO.

    Having a property tax makes sense, it’ll take some selling though.

    Removing WFF requires compensatory PAYE reductions ( thanks Labour, appreciate that NOT ), so my guess is next parlimentary term, once the global economy is back & stable & some of National’s changes filter into a stronger domestic economy as well.

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  9. GPT1 (2,123 comments) says:

    I spoke with a mate of mine from the IRD about capital gains. He biffed a heap of figures at me but the upshot was that enforcement costs would eat up most of the revenue. Anyone know more about that side of it?

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  10. Portia (175 comments) says:

    It doesn’t matter what the taxes are, so long as the fundamental, underlying principle is KISS (keep it simple, stupid). Every NZer pays tax, so every NZer should be able to understand how the tax system works.

    If you want to incentivise businesses to act in certain ways, find other ways of doing it, but don’t contaminate the tax system by coming up with some complex, bound-to-be-problems, rebate scheme.

    If we want to ensure people on lower incomes aren’t unfairly disadvantaged by, for instance, increased GST on food, find other ways of compensating them (eg food vouchers), but don’t contaminate the tax system by coming up with some complex, bound-to-be-problems, GST exception.

    Throw out the current legislation, and start from scratch. No exceptions = no loopholes = no dead money siphoned off to overpaid tax accountants and lawyers.

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  11. Jim (398 comments) says:

    Alan W: Any drop in value would be at most in direct proportion to the impost of the new tax. Affordabilty would remain exactly the same.

    If all property buyers were investors who looked only at net yield, and none was deterred by the tax, then yes, I’d agree.

    If the introduction of a property tax (of any value) was sufficient to trigger a small shift of money away from the property market and into other investments then a greater drop in value could result. Could it not?

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  12. Alan Wilkinson (1,901 comments) says:

    Jim, that shift (a very small proportion of the market) would soon be balanced by a similar reduction in supply. The price of property is determined by what the buyer can afford to pay which doesn’t change. Only the distribution of the costs between tax and cost of money is changed.

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  13. Jim (398 comments) says:

    Alan, good point. I hadn’t looked at it that way, and I’m quite unfamiliar with what makes the property market tick.

    When I do think about it it seems that many in property are irrational, equally easily spooked and then lured back. There’s a bit of that in every market, but property (I’m thinking residential) seems like a special case.

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  14. Alan Wilkinson (1,901 comments) says:

    Jim, from my experience most residential property buyers are long-term holders whether for investment or their own use.

    If they relocate they sell/buy at the same time. The exceptions are mostly those who buy to renovate and flick on. I think these are a small proportion of the market.

    The notion that increased taxes (land, capital gains) will make the slightest difference to affordability is just outright, blatant, inexcusable ignorance IMHO.

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  15. side show bob (3,660 comments) says:

    For what it is worth I’m with Portia, our taxation system is a dog’s dinner. But I guess it is supposed to be this way, imagine the consternation from the accountants, lawyers etc if a flat rate was introduced. Of course the government claims taxation must be fair and so the rich must pay more and thus different rates, what a crock of shit. I’m all for a low flat tax rate, something like this would lift our country beyond belief but politicians would be loathed to relinquish their grip on the reins of power. Taxation is the ultimate power a government has over it’s population. A low flat tax rate would probably after a couple of years return a greater dividend then the extortion that pretends to be fair at the moment but of course it’s more of the same old, same old.

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  16. freethinker (696 comments) says:

    What about expending as much energy and resources to cutting out government waste as is devoted to collecting and policing taxes,thereby releasing both cash and human resources for more useful things?

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  17. Jeff83 (745 comments) says:

    Four things. Firstly GST is the tax which the most evasion happens in regards of, this would seem to contradcict your statement. Also GST hits wage earners a heck of allot more than business owners who often push the letter of the law on what a good was purchased for. Know this as a fact due to my profession and also due to my job during Uni at Noel Leemings (o another laptop for the business going down to dunedin with my daughter….o right yeah). At least for income tax these benefits are spread via depreciation.

    Secondily whilst technically not a regressive tax, everyone pays 12.5% on their consumption, in effect it is. Lower income people have to spend a greater % of their income to survive in effect increasing their taxation. This often doesnt ‘wash out’ either with increased spending of high income earners being offshore or continuing indefinitium to have investments, not to mention generally they can claim more GST back as being “business expenses”.

    Thirdly if even a greater percentage of your tax income is indirect sources such as GST they are going to be even more volitile in economic upturns and downturns with salaries tending flattern out such spikes. As it is GST makes up the second biggest tax group after PAYE, being a bigger percentage of total tax revenue than company tax.

    Finally if you reduce company and income tax rates more then effectively foreign companies (being the majority of companies in NZ) are going to pay even less. With GST being an end user tax – i.e. consumer companies pay no GST liability and their company tax rate will fall even lower. With dodgy practices in regards to the likes of transfer pricng being questionably arms length and excessive debt funding of NZ companies one would question if moving to a GST based system is really in NZ favour.

    What would be in NZ’s favour is dumping WFF and putting all savings into tax cuts – a hell of allot more efficent.

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  18. Jeff83 (745 comments) says:

    “Raise GST to 16%. But all Food. Cooked, frozen, raw, eat in, take out, etc should have a zero band.

    ….

    Having multiple GST rates isn’t complicated. My old business in the UK had to account for 5 types of VAT.”

    From my understanding its incredibly inefficent. Generally businesses can cope with it if they have the correct systems, but from an auditing and oversight perspective it just doesnt work. The benefits of supposidly exempting foods and working out what is in and out of the bands is .

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  19. JeffW (327 comments) says:

    The problem is with collosal government expenditure, and if this were better controlled the need to recast the tax system might be lessened.

    I have paid the extortionate rates of tax applicable in NZ, and now that I am nearing retirement (I hope!), tax is going to shift from my reduced earnings to more of the assets I have been able to build. Hardly seems fair from a personal perspective.

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  20. expat (4,050 comments) says:

    Just get rid of the inefficiencies eg by replacing WFF with a tax free band, make a stamp tax on housing of 1 or 2%, and create tax breaks for personal income from savings/investment income

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  21. trout (945 comments) says:

    Arguments over how and what to tax are largely academic if productive enterprise withers and the economy fails. Driving around the industrial areas in Auckland in the past week I am amazed at the number of empty factory/warehouses. Friday is very quiet because of the number of Companies that are working a 4 day week. The business people I have talked to have never seen it so quiet and there is no evidence of ‘green shoots’. New Zealand right now is going into serious debt to support Government spending and to shield the population from the worldwide economic downturn. Muldoon tried the same gambit and failed miserably; he led us into virtual national insolvency. The navel gazing over carbon trading is a total distraction from the immediate issues; and the prospect of the Greens clobbering the farmers, who in reality earn the funds that support our standard of living, defies belief.

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  22. Repton (769 comments) says:

    I remember a few years ago on a visit to Australia a lobby group had calculated a day when all work to that date from the beginning of the year had gone to paying tax and that from that day to the end of the year your earnings were your own, I think at the time it was a day in July.

    That’s a pretty silly argument, because it ignores the benefits you get from government expenditure. Imagine going to a country with no tax at all — great! You’re working for yourself from day 1. Except that you’re paying the private owners of the roads you use, you’re paying health insurance, you’re paying a subscription to the fire service so they’ll come to your house, you’re paying a streetcleaning firm to keep the street outside your house clean, etc etc.

    A slightly better approach would be to work out how much is being spent on benefits, divide that proportionally over the taxpayers, and see how long that is in days. Or else you can try to find somewhere with 0 taxation to live so you can stop complaining. Maybe Sealand has space.

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  23. getstaffed (9,186 comments) says:

    How much tax do kiwi’s pay when you take into account all forms of tax including Income Tax, Rates local and regional, arguably speeding and parking fines, licence fees, road tax, acc levies, import duty…………?

    I’m very interested in the answer to that question. Remember to add fuel tax (and then the GST on that tax) and you could arguably include some of the SOE’s the return a profit (state-owned power companies etc)

    Repton: You are correct of course, but what you miss is the essential elements of choice and competition… which are lacking when the state decides what services your should buy from them.. and them alone.

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  24. Viking2 (11,575 comments) says:

    NZ still a high tax country

    Rob Hosking | Friday August 21 2009 – 07:50am
    The latest KPMG international survey on tax shows New Zealand’s position has improved – but it is still a high tax country.
    New Zealand is now 24th highest out of 83 countries in the level of personal tax paid – last year the country was 18th highest but the dropping of the top rate from 39% to 38%, and the shifting of its threshold from $60,000 to $70,000 income a year has caused the move, says KPMG New Zealand partner Paul Dunne.
    The big difference from most countries though is New Zealand’s top rate still kicks in very low, he said.
    “Our average wage is a little above $40,000 a year, our top rate kicks in at under two times the average wage.
    “For example in Australia you need to earn over $150,000 in order pay the top rate,” Mr Dunne said.
    “The concern is that this has long encouraged overseas migration and the big OE which has been a constant drain on New Zealand’s workforce. It’s a known fact that New Zealand has one of the highest workforce migration rates in the Western world,” Mr Dunne said.
    This point has long been made to successive governments: Labour, back in 2001, found itself criticised on this point by a report it commissioned on growth and innovation and getting more talented people to stay within New Zealand.
    The KPMG global study recorded a general decline in top personal income rates over the past seven years, but in 2010 there are indications that a reversal may be on the way.
    Some countries in the European Union, including Ireland and the United Kingdom specifically, are already proposing rate increases for its top earners.
    http://www.nbr.co.nz/article/nz-stil…country-108736

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  25. Viking2 (11,575 comments) says:

    We already have a nasty land tax albeit not for central govt. purposes. It is called rates. Approximately 20-25% of the population pay this tax for the benefit of everyone. Ratepayers you see pay for all those things that other people use and consume that are supplied by local govt. In some instances ratepayers who own other than their own property are even forced by poor quality policy to pay for their tenants water and sewerage, rubbish removal and so on.
    Ratepayers pay for things like other peoples transport via all manner of subsidies to transport companies from th ratepayers pockets. (In Tauranga some of us not only subsidize each bus trip by over 80% but we also pay a toll for the road that we use.)
    Land tax is another wealth tax on top of the rates which are determined by an estimate of the value of that wealth without regard to the number of people who inhabit that piece of wealth nor regard to the services that those people use without charge.Given that land tax is just wealth tax by another name, (typical socialist trick, DPF), then can someone then please explain to me whats good about it?
    Given more people own cars why don’t you tax them with a wealth tax, why don’t you tax millionaires with boats because frankly its about as logical.
    There are a lot better and more logical and practical things to do before we need to do that.
    In another post about English DPF tried to say that English goes the complicated route and that almost inevitably most things are complicated. Well I beg to differ. Most things are actually simple when you break them down to small bits, its th educated trait of lashing them all together in the bid to make them complicated so no one can follow then nor understand them that’s the problem.

    Its a simple application of the KISS principle that is required.
    Tax need not be complicated and there is ample evidence that making it complicated causes that very mindset to apply to everything else. e.g. look at the lengths people will go to to avoid paying what they consider unfair taxation. From major banks down to the person who does a cashy or the bird that turns a cash trick ’cause its doesn’t effect her benefit, the wealthy who arrange their affairs so that they don’t have too big of an income and therefore “qualify” for Govt. handouts. And that’s been going on for 40 or 50 years as any old farmer can tell you.) and so on.
    Only way to fix all that is to reduce and simplify taxation and reduce the cost of state to what we need rather than what others want.

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  26. KiwiGreg (3,260 comments) says:

    New Zealand used to have a Land Tax – in fact the 1954 statute was called the “Land and Income Tax Act”. From memory it was imposed at 2% on unimproved land value but there was a significant number of exemptions, most notably for residential land and also an exemption for (memory here) the first $150,000 of land owned. I would guess there were exemptions for farmers and maori, given the times.

    One of the main theoretical advantages of a land tax is by increasing the cost of owning land it drives the land to its highest economic use (consider the difference between an empty holiday home and one rented out to pay the land tax for example). Of course in practice all the special exemptions prevent that from occuring.

    @Repton – you do realise almost none of youe examples are actually paid for out of central government taxation?

    @Jeff83 I’m afraid none of your points are correct. First, anyone evading GST is also evading income tax (apart from the small subset of non-income tax paying GST collectors). Tax evasion will always occur in an income tax or consumption tax environment (cash jobs etc). However the largest collecters of GST are major corporates like supermarkets and they dont evade tax (and GST is hard to avoid, I’m using both terms in the technical sense). People claiming personal expenses in their business are evading tax (breaking the law) not “pushing the boundaries”.

    Second, GST is in fact technically a regressive tax. Always has been. This was recognised when it was introduced with, for example, increases to benefits to compensate the less well off for exactly this point.

    Third, if incomes are not volatile, it is difficult to see how GST would be either (as without one its a little hard to consume). In fact both income tax and GST are subject to fluctuations through the economic cycle and income tax is more immediately affected (for instance if you lose you job you dont stop eating).

    Forth, New Zealand has been, under both National and Labour (but more under Labour) moving to REDUCE the effective income tax on foreigners (AIL, FITC etc). This is a deliberate and sensible policy for the reasons outlined in the Treasury paper

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  27. Viking2 (11,575 comments) says:

    Absolute confirmation of my above post. Land tax will only be paid by those that own land. Not all the other 80% of people who live in this country and make use of the tax money collected. Totally unprincipled. (But then who is surprised at that?)
    They also argue that it can be used to control house prices. What rot. Just like the RMA it will increase prices. We landowners are not that bloody stupid.

    Land tax to aid top earners
    By VERNON SMALL – The Dominion Post
    Last updated 05:00 22/08/2009

    A land tax that could cost the average homeowner $214 a year is to be considered by a high-powered committee.

    The tax is one of several options in the mix as the Government looks at ways to revamp the tax system to allow lower personal rates.

    The Government has said it wants, in time, a top personal rate of 30 cents but will need to raise revenue elsewhere to pay for it.

    But even a low-level land tax would be a political hot potato if all the cash raised was used to cut taxes for the well-paid.

    The issue will be considered by the committee, chaired by Victoria University professor Bob Buckle, at a meeting next month to consider “base-broadening” measures such as property-based taxes, death duties and capital gains tax.

    It has already scoped lifting GST to between 15 per cent and 20 per cent and revamping Working for Families. It will present policy options when it reports back to the Government in December.

    Taxing the unimproved value of land excluding buildings and other developments is seen as an effective lever to raise revenue and damp down a resurgence in house prices without creating too many distortions.

    A capital gains tax is widely considered too politically charged and a full property tax could act as a disincentive to invest. But a land tax could cause a small one-off drop in values and hit the elderly, Maori and farmers the hardest.

    The average residential land value is $214,000. In Wellington City it is $250,000, Lower Hutt $200,000, Christchurch $188,000, Hawke’s Bay $100,000 and Manawatu $110,000.

    A land tax of 0.1 per cent, cited as a possible rate for discussion by sources close to the tax group, could raise more than $460 million enough to fund a cut from 38 cents to 33 cents in the top personal rate.

    A revised version of the paper will be delivered to the tax working group’s September meeting.

    Reserve Bank chairman Arthur Grimes, who co-authored a draft paper that will be used as the basis for the tax group’s work, said he did not advocate a land tax, but was interested in exploring its effects as part of the mix being looked at by the committee.

    Finance Minister Bill English said the Government would take “some convincing” to raise GST or bring in a new land-based or capital gains tax but would wait to see the options. Revenue Minister Peter Dunne said land tax was “floating around as an issue”.

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  28. KiwiGreg (3,260 comments) says:

    @ Viking2 Not necessarilly – dont be comfused by who pays a tax (i.e. cuts a cheque to the IRD) with who bears the economic cost of the tax. A tax which raises costs to business will be borne by consumers ultimately. And everyone in the country lives on the land one way or another. I’m not sure where your 80% non-land owners figure comes from but once you adjust for kids and spouses I think it balances out. Obviously people who rent will end up paying such a tax (just as they “pay” rates) through higher rentals (assuming landlords dont take lower returns which seems unlikely).

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  29. kiki (425 comments) says:

    Just vote ACT put Roger D back in charge and we could end this arguement.

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