Wednesday, 16 September 2009

Bollard on capital gains

A month ago, I said
Now, it could be the case that some property investors who improve and resell properties quickly are able to disguise normal income as capital gains by this mechanism, but I'd be surprised if the efficient solution were a broad capital gains tax rather than IRD just watching things a bit more closely.

From the National Business Review, we find that Reserve Bank Governor Bollard agrees.
“We’re particularly interested in the prospect of seeing a flattening of the tax incentive structure around housing investment.

“It seems to me the most obvious part of that would be around taxation on people who intend to flick on investor housing.”

And, asked by Mr Cunliffe whether he believed the current tax system favours of property investment, Dr Bollard drew a big breath and said, “the short answer is yes.”

That though is somewhat short of calling for anything, let along a capital gains tax. As Dr Bollard well knows there are existing provisions in the income Tax Act which allow the Commissioner for Inland Revenue to treat the gains on the sale of property by people who are consistently buying and selling properties as income.

What it boils down to is determining those people are buying and selling property so frequently they are essentially traders, and any capital gain is treated as part of their income.
There is no need for a capital gains tax to remove purported distortions in the housing market. I can imagine a case for a move from an income tax to a land tax as efficiency-augmenting, but I have a hard time believing that such a move would be an equilibrium.


  1. I'm not well-read on this, but I've heard arguments to the effect that a capital gains tax could discourage those who might, perhaps, consider buying a second house and push them towards investing in something more prodcutive.

    I suppose the obvious retort is that such people would only very occasionally sell either of their houses and thus a capitcal gains tax might not provide much of an incentive for them to do anything (and they would get taxed on the rent they earn in any case).

    Could you perhaps deal with this argument?

  2. There's nothing wrong with investing in a second or third house, so long as there's a level playing field between investing in housing and investing elsewhere. Currently there's distortion to the extent that folks are able to hide regular income as capital gain in housing. It would be tougher to build an economic argument that, once you're at a level field, there's good reason for government to go in and pick winning sectors for investment targeting.

    If the field is level, then folks invest in housing only up to the point that the dollar invested there gives the same risk-adjusted yield as the risk-adjusted yield in other sectors and there's then no particular reason to think that we should push money out of housing and into other areas.