Property owners learn their fate on Thursday with the Tax Working Group‘s big reveal on capital capital gains tax. But whatever happens, it won’t be the housing panacea Generation Rent is hoping for, warns TOP’s Geoff Simmons.
Here’s a message for young people who don’t yet own a home. In the coming months you will be told that a capital gains tax is your best bet for ever owning a home, that it’s the ‘last chance saloon’ for those struggling to get onto the housing ladder.
Don’t believe a word of it.
Don’t settle for crumbs from the table of the property-owning class. Even with Kiwibuild thrown in, on current trends your chances of owning your own home are as tiny as the room in the flat you are currently renting. Younger generations can, and should, demand better of our government. Anyone from an older generation who wants to offer real hope to future generations should do the same thing.
This supposed ‘last chance saloon’ is more like ‘shutting the barn door after the horse has bolted’. House prices are already a complete clusterfuck, especially in our major centres. The best we can hope from a capital gains tax (CGT) is that it will slow the rate at which they get even more shambolic. The time to put in a CGT was 30 years ago.
For housing to become affordable, capital gains would need to stop for 10-15 years. A CGT will not deliver this. Australia has had one for years and their housing affordability is only slightly less screwed than ours. Imposing a CGT only taxes any further increase in house prices from here on in. It may slow the rate of house price inflation, but it won’t make housing affordable.
Imagine if our government applied this approach to another policy area: ‘Oh, we won’t actually fix family poverty, or our polluted rivers, but we will a hundred per cent make sure that we slow down the rate at which they get screwed.’ We wouldn’t put up with that shit.
There are many reasons why a CGT won’t help much, and could even make things worse. Here are a few:
You only pay a capital gains tax when you sell a property or business.
Want to avoid paying CGT? Simple – don’t sell. This is bad for the economy because people hold onto houses or businesses or farms longer than they should, simply to avoid the tax.
The Family Home exemption.
Sounds nice right? But this exemption opens up a hornet’s nest of potential loopholes. Rich people will employ accountants and lawyers to help them avoid paying the tax, and these firms are already gearing up. In other words a CGT will only really help you if you are studying to be an accountant or lawyer. Even if this loophole isn’t used and the 40% of houses currently classified as investor properties stay that way and will potentially be taxed on capital gain, those properties only make up 24% of the value of housing in New Zealand. So this tax would only tax price increases for less than one quarter of our housing stock. That won’t stop prices rises, especially because of the next point…
It misses the country’s biggest tax break.
The government’s own Tax Working Group noted that the biggest tax break in New Zealand comes from owning your own home. This tax break is called ‘imputed rental’: because you are paying rent to yourself (not a landlord) there is no tax paid. Returns on every other investment (shares, a bank deposit, a business) are taxable, but not owner-occupied housing. Even if a CGT included the family home, it still wouldn’t capture imputed rental. There would still be a good reason to put all your dosh into housing, because everyone longs to have this tax break. Sadly, only 50% of adult Kiwis can afford to have the tax break. By the way, the poorest 40% of Kiwis own nothing at all – shouldn’t they be the ones getting the tax break?
The Mansion Effect.
Thanks to the family home exemption, after a CGT is introduced there will be even more incentive to put more money into your biggest tax break, the family home. Overseas this is called the ‘Mansion Effect’. Expect to see more big houses with pools and tennis courts. Is it fair that New Zealand’s biggest tax break goes to the 50% of New Zealanders aged over 15 who can afford their own home? This is a tax break renters don’t get, which means the majority of your generation will probably never benefit from it. Sucks to be you.
Capital gains tax is bad for business.
You may not care about ‘business’ but have you ever wondered why your wages are so shit? The big problem is that our tax system favours investment in housing over investment in business. As a result Kiwis invest in houses instead of business, and then wonder why our productivity (and wages) are crap. A CGT will hit investment property and businesses, so there still won’t be any real incentive to invest in business. This is a BIG own goal for a government that is struggling to get businesses to invest already. You might not give a shit about businesses investing, but that is what leads to higher wages.
A CGT won’t reduce inequality.
Housing has been the major driver of inequality in the last 25 years. Higher house prices have made the rich richer, and higher rents have made the poor poorer. A capital gains tax will only tax further increases in house prices from here – in other words, it only raises money if house prices keep rising. To reduce inequality we don’t need to tax capital gain, we need to kill off capital gain entirely.
Of course the argument is that a CGT is the best younger generations can hope to get through Parliament. My message to you is don’t believe the hype. Don’t put up with a limp, half-baked solution. And particularly don’t leverage yourself to the eyeballs to get into this Ponzi scheme.
Around half of Kiwi adults now don’t own the house the house they live in. That number will grow as the dream of home ownership continues to fade for young people. Very soon there will be enough people who would benefit from a far more radical shift in our tax system than is currently being proposed. If done well that shift that could reduce inequality, tame house prices and supercharge the economy at the same time.
When younger generations realise their electoral power they can bring the whole house of cards crumbling down.
Geoff Simmons is the leader of The Opportunities Party.