The benefits of a 1 per cent land tax on that engorged base of land values shouldn’t be sneezed at either. It would generate $6.7 billion of tax revenues that would allow either income taxes to be cut across the board or for the GST rate to be cut back to 10 per cent.
Key could engineer a massive new tax cut switch that would help address the housing affordability crisis and reset the incentives for business investment in one swoop.
This is key. A land tax that increases overall tax revenue for the Government should be resisted. A land tax which allows other taxes to be cut (especially income taxes) is a different proposition.
A 1% land tax would allow the top tax rate to go from 33% to 27%, the third rate from 30% to 24%, the second rate from 17.5% to 12% and the bottom rate from 10.5% to 5%.
The politics of it would be awkward, but not insurmountable. It would be progressive tax (ie, it hurts more as wealth levels rise) that falls more heavily on some more than others, in particular richer and older people, and especially those on New Zealand Superannuation.
However superannuation is calculated on average after tax income, so they would get a big boost.
The benefits are obvious. It would finally send the right signals to investors, that capital gains are not completely tax free, that more productive and intensive use of land makes sense, that land banking does not make sense, and that investing in equipment, research and development would be as sensible as gearing up to buy land.
Most taxes reduce whatever is taxed – income taxes reduce labour, capital taxes reduce investment, consumption taxes reduce consumption. A land tax can’t reduce land – instead it incentivises better economic use of land.