Lots To Be Said For Housing Tax

By Mary Holm

Monday 25th June 2001

Talk of taxing the equity in people's homes really got tongues wagging this past week. And nobody much had anything good to say about the idea. Except me.

I like it because it's fair. People who can't afford to buy a home, or those who choose not to buy one, pay tax on the income from their savings.

Homeowners might not get any obvious income from their "investment", but they don't have to pay rent. Avoiding an expense is equivalent to receiving an income.

Another point is that, as the Tax Review 2001 committee said, the housing tax would raise $750 million a year. And, the committee added, that should be used to cut income tax.

That's good, for more than just the obvious reason. Taxing people for earning income discourages work. So a cut in income tax would be good for the economy as a whole.

The economy would also benefit from the housing tax in another way.

People wouldn't be quite as keen to spend most of their savings on housing. Instead, some would go into other investments, which are more likely to create jobs and wealth.

Individuals would also benefit directly if they invested more broadly.

The Tax Review report says housing accounts for more than 70 per cent of household savings in New Zealand, compared with less than 50 per cent in all OECD countries.

That bias means we have less in investments such as shares and share funds than do people in many other countries.

And a glance at returns on New Zealand housing versus international shares in the last few years shows how much harm that bias can do.

I'm not saying housing is always a bad investment. But concentrating in any one type of asset is risky [dash] especially in terms of what you can miss out on.

But, I hear you cry, if we introduce a housing tax, what about retired home owners? Many of them are relatively house-rich and income-poor. Bringing in a housing tax and lowering income tax would leave them worse off.
That's a big worry. And because of it, I can't see any government introducing a housing tax any time soon.

Nor, it seems, does the committee. "But we would be derelict in our duty if we didn't put it up for debate," said chairman Rob McLeod.

And up for debate it certainly is. The idea can now rattle around for a while, and maybe become a reality in 10 or 20 years.

That would give us time to consider suggestions like a loan scheme for those who don't have enough income to pay the tax. They could repay the money when they sell their house.

But, you cry again, that would eat into the value of inherited houses.

It would. But when an elderly person who doesn't own their home pays tax on their investment returns, that, too, eats into their family's inheritance.

We need time to think these things through. While a housing tax will never be perfect, nor is the current tax system.

The Tax Review's proposed housing tax is similar to one in the Netherlands, which evidently works well.

And as far as loan schemes go, similar schemes for retired ratepayers are already working in some parts of the country.

Good on McLeod's committee for raising an issue that's well worth debating.

Footnote: In my last column, I said that this time I would write about how to find a good financial adviser. Then the tax news broke. So I put off the adviser article until my next column, in two weeks.

Mary Holm, a freelance journalist and author of "Investing Made Simple", is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached by E-mail at timh@pl.net. Sorry, but she cannot respond directly to readers.

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