Friday, 12 August 2016

Taxes don't build houses

I'm still not a fan of capital gains taxes as a way of digging our way out of a shortage of houses. Taxes don't build houses. Me at The NBR (ungated, but dated - you should subscribe - their coverage is worth paying for). A snippet:
More broadly, though, capital gains taxes of all forms tax future consumption more heavily than present consumption. Taxes on wages and salary incomes do not affect choices of whether to save or spend from today’s income. Taxes on consumption, if they are not expected to change over time, are also neutral between spending today and spending tomorrow. But taxes on savings mean that tomorrow’s consumption is more heavily taxed than today’s. 
Real world implementation issues abound. Investment in New Zealand does not enjoy tax-preferred status, so the case for taxing capital gains is far weaker than where investors can defer income taxes by placing income into sheltered investments. And every dollar spent out of capital income draws 15% GST. 
It would be near impossible for Inland Revenue to implement a capital gains taxation regime before its systems refresh. What descriptions I have heard around Wellington suggest the tax computers are held together by No 8 wire and the world’s last remaining stock of COBOL programmers. Any substantial tax changes could make the system’s 50 million lines of code collapse in a flaming heap.

If capital gains taxes are meant as solution to Auckland’s housing problem, it may well be impossible to implement it within the next six or seven years. It could well be faster to get new apartments consented in Epsom. 
Nor will taxes make Auckland housing more affordable for a simple reason: they do not get more houses built. The fundamental problem in Auckland remains a zoning-induced shortage of housing.

Tax reform, over the longer term and after the IRD systems refresh, is well worth looking into. There are poisonous fishhooks in a lot of proposals that look attractive but shifting to the kind of land taxes suggested by Arthur Grimes has clearer merit. 
At best, tax reform fails to help a housing shortage. At worst, it distracts from the more important problem of getting new houses built.

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