Wednesday 10 February 2010

Further thoughts on Key's speech

I'm less annoyed by Key's speech today than I was yesterday; my expectations were too high going in.

My (limited) understanding of the distortions caused by the tax treatment of investment property largely led me to think that the problem could be solved by more diligent application of already-existing IRD rules. So, where investment property owners could write off depreciation and other losses against salary income, I'd thought that normal treatment of any tax advantage from those depreciation losses would require that they be paid back to IRD should the asset be sold showing a capital gain; moreover, folks buying houses, fixing them up, and re-selling them ought properly have the increase in value treated as taxable income rather than non-taxed capital gain. Again, though, I'm no tax expert. Will have to get Andrew Maples out for a beer at the staff club sometime.

It's sounding like they're going to disallow depreciation on property investment, which is a fix in the direction suggested above. I'm wondering whether all the talk of a land tax or of tax on imputed risk free rates of return on property wasn't there just to scare the bejeezus out of property investors so they'd see this move as less bad.

It sounds like removing this distortion would also bring in sufficient revenue to drop the top marginal rate substantially. The GST increase looks, while not pointless, of limited benefit. But the package as a whole could be decent, depending of course on the details to come in May.

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