Last week an economist-turned-politician and a broadcaster exchanged verbal salvoes over the idea of taxing certain assets as income. Jamie Whyte explains why he’s siding with the broadcaster.
Gareth Morgan has a PhD in economics. Paul Henry does not. On Thursday, Henry interviewed Morgan about his new political party’s tax policy. An argument about economics ensued. Morgan told Henry that he should not try to correct an economist on economic matters.
Good advice, you might think. Except that Henry was right and Morgan wrong.
Under Morgan’s tax plan, people who live in homes they own would be deemed to earn an “imputed” rental income, which he puts at 5% of their home’s value. If your home is worth $1 million, for example, you will be deemed to earn $50,000 a year by living in it, and this amount will be added to your taxable income.
Henry complained that you do not in fact earn an income by living in your own home. Morgan replied that incomes needn’t come in the form of money. The income you earn from living in your own home comes in the form of having a roof over your head.
Morgan is right that incomes need not be money. Imagine you lived in a barter economy and worked on a potato farm. You might get paid in potatoes, which you could take to the market to exchange for other things you want. Then potatoes would be your income.
What makes them income is that they increase your ability to purchase things. Which makes it clear that Morgan is wrong when he says that having a roof over your head is income. A roof over your head is something you purchase, not an addition to your ability to purchase things.
You can purchase accommodation in two ways. You can buy a house or you can rent one from someone else who owns it. In neither case is your accommodation an income. It is something you consume.
Morgan is right that buying a house to live in enjoys a tax benefit that some alternative uses of your money do not. Suppose you inherit $1 million, deposit it with a bank and use the interest income to rent a house. The government will tax your interest income. If you instead use the $1 million to buy the house you live in, you will pay no tax. But this difference does not make having a roof over your head a kind of income. What you consume is never your income. Perhaps Victoria University did not cover the difference between consumption and income when Morgan was studying for his PhD.
It is a shame, because Morgan’s difficulty in distinguishing them makes him see untaxed income everywhere. It isn’t only the accommodation supplied by your house that he deems an income. He thinks your car and boat, for examples, also provide you with an income that should be taxed.
It’s the same mistake. You can purchase car transportation by buying your own car or by riding in taxis. In both cases, car transportation is what you consume, not your income.
Of course, you could sell the transport your car delivers instead of consuming it. You could rent your car to someone else or use it to be an Uber driver. But just because something could be a source of income doesn’t mean it is one. You could rent out your clothes, your bed, your fridge. Because you need them for yourself, however, you don’t. And, so long as you don’t, they are consumables, not “productive assets”.
Strip away Morgan’s confusion of consumption with income and he seems to be saying this: income tax should apply not to what you do earn from something you own but to what you could earn from it. When Henry put it to him that this is the essence of his idea, he agreed that it is.
I have heard people recommend this approach to taxation as one that would encourage people to use assets efficiently. They are wrong.
Imagine a clever woman with a law degree. She could earn $250,000 a year working as a solicitor. Instead, she makes only $30,000 working as a waitress while trying to write the great Kiwi novel in her spare time. If Morgan’s taxation principle were applied, she would get a tax bill for about $75,000 a year, this being the income tax she would pay if she earned what she could from her legal skills. The tax system would effectively force her to be a lawyer.
Taxing someone into a job they do not want to do will strike most people as wicked. It is also inefficient, perhaps for the same reason. This woman was already free to work as a lawyer. The fact that she chose not to, even though this would increase her annual income by $220,000, shows that the value she places on being a waitress and novelist rather than a lawyer exceeds $220,000. A tax that nevertheless pushed her into being a lawyer could promote efficiency only if her preferences should be discounted. But why should they be? Why should Morgan’s preference for how this woman uses her skills count for more than her preference does?
Overriding the preferences of those he wishes to tax is the essence of Morgan’s plan. You may want to use your boat for recreational rather than business purposes. Well, tough. Since your boat could be used to earn the income Morgan deems the bare minimum, he will tax you as if that is how you do use it. That will teach you for wasting your boat on yourself!
When Paul Henry pointed out that having a roof over your head is not an income, Dr Morgan became angry. He accused Henry of being selfish and not caring about fairness or the poor. Morgan, by contrast, is selfless, caring and fair. This must be what qualifies him to penalise people who fail to use what they own in the ways he considers good.
Jamie Whyte is a writer and former leader of the ACT Party
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