John Key recently hinted at introducing a land tax on non-resident property owners as a solution to rampant speculation that has pushed housing unaffordability to new heights in Auckland.
The Prime Minister's suggestion has been attacked by Labour, with leader Andrew Little saying a land tax would be ineffective and "we should just regulate and restrict sales to non-resident foreign buyers of residential property".
Labour is wrong. A land tax could achieve the goals of decreasing speculation and increasing housing affordability in a far simpler, cheaper and economically beneficial manner than any other proposal on the table.
To understand the merits of a land tax, one needs to appreciate its unique benefits and how it really does strike at our economic system's core maladies.
The current boom in Auckland has many drivers. Strict planning laws that restrict both vertical and horizontal supply of space to live and work, a flood of cheap money fuelled by historically low interest rates, and foreign investment certainly play important roles. But at its heart lies the unique economic nature of land and the fiscal advantages enjoyed by those who own it.
Auckland's current woes are often characterised as being the product of a "housing boom" or "housing bubble". This is a misnomer because what increases in value is land, not the physical structures on it. Unlike the value of houses, shops or offices which can only be maintained by constant application of labour, the rise in land values has nothing to do with its owner's individual exertion.
Land values rise in response to government investments in infrastructure and increasing economic opportunities (which often drive population increase). We all have seen what happens to land values near new public transport links, universities, work opportunities and tourist attractions.
Today's land prices are further affected by obvious speculation. Speculators do not purchase assets because of their current economic value but in anticipation of their future value. Not all speculation is bad. For instance, when avocado speculators see a bad year and start buying early, it smoothes out a spike in avocado prices and provides revenue to the growers so they can expand their crops for the following year.
But land speculation is not about getting past a bad year and it is not about funding people to produce more land. It is about privatising socially created value. What is worse, unlike speculation in goods we can produce, land speculation has a self-reinforcing mechanism because the bigger the boom, the less likely land owners are to sell because of an anticipation of higher prices which further restricts supply. As such, limiting land speculation should rightly be our Government's primary goal in addressing the spike in housing unaffordability.
Among the potential solutions, a land tax is arguably the simplest, easiest to administer and most effective one.
Ordinary property taxes or "capital gains taxes" are to a large extent taxes on putting land into use: the more we invest in improvements, the higher our potential taxes. By contrast, a land tax is primarily a burden to those who hold land out of use. As such, it is not only superior to the other forms of property taxes but to virtually all other taxes. For instance, one avoids income tax by acquiring assets (such as land) which gain in value and do not necessarily generate much taxable (and job-creating!) income. The result is fewer jobs and less usable wealth.
On the other hand, one avoids land tax by letting go of land one is not using, and by doing more with less land. The result is lower land prices, less sprawl, more affordable housing, more affordable commercial and industrial space and, ultimately, more economic opportunities and, over time, equality.
It is important to note a land tax will not deter the type of foreign investments, including those in the real estate sector, we need the most. It does not discourage making profits from building apartments or establishing new businesses but merely discourages land banking.
Interestingly, what John Key proposes is not a "new tax", but a proposal to reinstate a limited version of our old land tax. The old land tax used to be the backbone of government revenue stream and the key factor mitigating speculation and rising inequalities. Gradually weakened in response to special interest pressures throughout the 20th century, it was eventually abolished in 1991, the year that curiously marks the beginning of the current long boom in housing.
It is imperative that we re-examine its merits in light of the current housing unaffordability crisis. While Key's proposal perhaps does not go far enough, imposing it on non-resident land owners is certainly more politically acceptable than introducing it for everyone.
It could also be effective in those hot zones which attract the most non-resident investors. But one could hope that if successful, we could then ask if we shouldn't aim to gradually shift more of our tax burdens from work on to land.
Nicholas Ross Smith and Zbigniew Dumienski are lecturers in politics and international relations at the University of Auckland.
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