Will Common Sense Economics Prevail? Tax the house? It’s worth a look – Brian Fallow. 

“Vote for me. I’ll tax the equity in your home” does not sound like an election winner. But the tax policy released last week by Gareth Morgan’s political vehicle, the Opportunities Party, deserves a second look.

It would gradually but substantially broaden the tax base and recycle the proceeds as income tax cuts.

It is a serious proposal for dealing with an entrenched structural distortion in the tax system, which drives savings into bricks and mortar rather than enterprises that might employ people and earn us a first-world income.

The distortion contributes to the capital shallowness, or low levels of capital invested per worker, which is part of the explanation for our weak productivity and income growth.

And it fuels the house price inflation which deepens inequality, condemns lots of Kiwi families to poverty and blights the prospects of children, as the Children’s Commissioner’s latest report reminds us.

So the status quo should not be the default option.

The Morgan plan starts from the proposition that not all income is cash income.

Income from labour (wages and salaries) is taxed. So is the income from some forms of capital, including financial assets like shares, bonds and bank deposits.

But if you own the roof over your head, you avoid the cost of renting a similar property out of your after-tax income.

That return on your investment – “imputed rent”, in the jargon – escapes the tax system altogether.

“The benefit you receive each year from owning the house is every bit as real as that you receive from owning a bank deposit or from rent paid by a tenant,” Morgan says.

“Why should you be tax-exempt when tenants have to pay rent from their income after tax and their landlords pay tax on that income received?”

The Morgan plan would take all forms of capital above some threshold, including land and housing, and net off any associated debt; it is equity which is the tax base.

It would then specify some deemed minimum rate of return on that capital and tax that. If the asset already returns more than the minimum, the higher amount is what would be taxed, as it is now.

We are not talking about trivial sums here.

NZ Herald 

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