Editorial: Property tax could improve the economy

If former deputy prime minister and finance minister Sir Michael Cullen's tax working group is as bold as it could be, the economy could gain. Photo / Doug Sherring

Sometime this month Sir Michael Cullen's tax working group is expected to issue an interim report giving an indication of the new taxes we might expect from this Government if it is re-elected. The Labour Party gave an undertaking in last year's election campaign that any new taxes would not come into force until after the 2020 election, so Cullen's working group is writing a supercharged proposal.

It is hard to deny that owners of capital wealth contribute less than their fair share to tax revenue and wage and salary earners bear most of the burden. That has been true of most western countries after a long period of booming property and share markets and stagnant wages.

As incomes have grown they have tended to move into higher tax brackets, a problem the present Government perpetuated when it cancelled National's "tax cuts" that would have taken effect from April this year.

Those were not real tax cuts, they were increases in the income thresholds at which lower tax rates apply and raising the thresholds was well overdue. Income over $70,000 a year, which is modest these days, attracts the top tax rate. Cullen's group will probably need to suggest threshold increases as one way of shifting more of the burden of tax from incomes to capital.

But the most interesting element of its exercise will be the additional taxes on capital it proposes. The National Party would dearly like to fight the next election on capital gains tax. It's revenue spokeswoman, Judith Collins, is already mounting arguments against one. On our business pages yesterday she warned that a capital gains tax on rental property would cause rents to rise and cause more hardship for those who cannot afford their own home.

That would have been true a few years ago when house prices were still rising rapidly, not so now. Investors in rental property can no longer count on the capital gains they used to enjoy and must be already looking to rents for a return on the investment.

Prices seem unlikely to take off again as the Government sets about selling lower-cost homes and imposing more obligations on landlords. Right now, property investors have little to lose to a capital gains tax.

Collins points out, however, that the tax is unlikely to be confined to property. Will farmers be taxed on the rise on value of their farms and stock, she asks. Will owners of a small business be taxed when they sell it for retirement. Will estates be subject to the tax when they are inherited.

Principles of fairness and tax neutrality says all forms of capital gain should be taxed, but is that necessary? Property is much less risky than most business investments, which is why there is such a demand for it, especially in a small economy such as New Zealand where other business opportunities are limited by the size of the market.

We have plenty of investment in property and could do with more of it in productive new ventures. Selective taxation of property could send more investment into productive alternatives.

If Cullen's group is as bold as it could be, the economy could gain.