Even in their most desperate moments, it is almost impossible to imagine that either Labour or National would ever embrace a Citizens Income or a Land Tax. That being so, the extensive media analyses being devoted to Opportunity’s key policies have an “angels on pinheads” air of unreality to them.
Certainly, these are interesting ideas for voters to consider but they’re also more of an exercise in aspirational politics than anything likely to take concrete form any time this decade. It took two decades of the Greens talking about climate change before that became the received wisdom. Are the people behind Opportunity in it for a similarly long haul? Maybe not.
That aside, the fact that Opportunity – the new kid in town – is being tested and talked about as an alternative to the status quo is significant. Plainly, a lot of voters are shopping around for a change, and painfully few other options are available to them. Labour’s refusal to offer and defend a significant array of alternative policies has left a vacuum that Opportunity is filling. Apparently, it is taking a sizeable number of centre-left voters from Labour in the process. No wonder Helen Clark is rallying to the rescue.
Taxing options
Since the 1980s, New Zealand politicians have shied away from discussing the logical connection between the taxes we pay and the services we need and desire to receive in return. If the answer to “how are you going to pay for it?” is “by raising taxes” then that solution has been anathema for the past 40 years. Unsurprisingly, the range and quality of our public services has shrunk sharply over the same period.
For that reason alone, the Greens deserve credit for promoting a wealth tax. Ditto Opportunity for their land tax proposal. The unjust reality is that by international standards, New Zealanders have been over-reliant on taxing the wages that we earn, and the goods and services that we buy. Regardless, any suggestion of more progressive ways of raising revenue has been treated as a political crime against nature and contrary to the accepted rules of good governance.
Opportunity for instance, has just been expelled from the centre-right campfire for the sin of…suggesting a reform of our tax laws based on a land value tax (LVT). The LVT would apply to almost all land, with the exception of Māori customary land, social housing land, and conservation land. Opportunity is proposing to phase the tax in gradually, starting below the eventual maximum rate of 1.75% on the value of urban land, and at a lower maximum rate for rural land.
The revenue gathered would help to fund Opportunity’s other signature policy, the Citizens’ Income. This would be a universal benefit paid to almost all adults, and would be set at “up to” $370 a week, or $19,400 annually.
Would there be anything to stop future governments from freezing/ reducing the funding for the Citizens Income? Would those base amounts be inflation adjusted? These are significant concerns, since the Citizens Income would replace most of the current, targeted web of welfare benefits.
Opportunity also confirmed in this interview that there would be budgetary savings and significant staff cuts made at MSD, since (supposedly) fewer MSD staff would be needed to manage the reduced welfare safety net. In this respect – and others – it is difficult to see the compatibility of Opportunity with a centre-left bloc.
Back to the LVT
Using land value as a basis for taxation has the distinct advantage of being (a) easy to calculate and collect and (b) difficult to avoid. The politics of getting tax reform on the agenda aside, there are areas of concern with an LVT.
1.Affordability. Reportedly, even with the added income from the Citizens Income, paying the LVT would create an annual financial burden on “land-rich, cash-poor” pensioners reliant solely on a fixed income, such as New Zealand Superannuation. It would also place a similar annual burden on young couples in first homes who may already be struggling to pay their mortgages and put food on the table.
To avoid pensioners coming under pressure to sell their family homes to meet their LVT obligations, Opportunity has talked about retirees at least, being offered tax deferrals until the property is sold. In such cases, the LVT would be collected as a form of estate tax. Why this LVT relief should be offered only to seniors but not to young first-home buying families (or to single parents struggling to look after the kids in the former family home) is unclear.
2.Rent Increases. An LVT levied on urban land owned by landlords and property speculators would surely be passed on to tenants in the form of rent increases. Given the rising numbers of seniors who are renting – and who are reliant solely on National Super – the impact of those increases could be considerable. Again, the Citizens Income would partially help to offset the rent increases, but many renters would still be left treading water, at best.
3.Changing the wealth equation. As a measure for generating revenue on a scale sufficient to pay for quality public services, the LVT would be superior to Labour’s anaemic capital gains tax, which has missed the house price boom by the best part of a decade. The value of land is also not as subject to the swings evident in house prices.
The significant political change with an LVT has to do with who would be taxed, and the origins of their wealth. Obviously, an LVT would levied on landlords and property investors and anyone (including the cash poor) whose wealth has been derived, or is tied up in the ownership of land, whether that be in farms, or residential properties.
Parliament is full of such people. An astonishing number of MPs own (multiple) investment properties, and the trend is not abating. Reportedly, some MPs have leveraged their accommodation allowances to help fund these personal investments. The combined value of the properties owned by MPs has recently been estimated to be $379 million, or $3.16 million on average, per MP. In other words, the vast bulk of our law makers in Parliament have a very personal incentive to oppose the introduction of an LVT.
That said, there would also be some wealthy winners from any tax reforms based on an LVT. The researcher/academic Dr Harpreet Singh has recently argued that some of Opportunity’s donors would see their wealth remain relatively untouched by any directional shift in the tax burden based on an LVT:
Take a close look at who funds The Opportunity Party. Whether built on fitness empires, software companies, or bitcoin fortunes, these donors hold vast wealth outside of real estate…A Land Value Tax conveniently shields non-land financial fortunes while shifting the tax burden onto everyday homeowners. This isn’t genuine tax reform; it’s a protected sanctuary for the ultra-wealthy…
In other words, the proposed Land Value Tax is not a wealth tax, since it would tax land, but not the wealth that is being derived from other sources :
Shares, private companies, managed funds, cash, bonds, intellectual property, and overseas financial investments would not be included directly in the Land Value Tax. Income from these assets could still be taxed under existing or proposed tax rules. Companies would continue to pay tax on profits, while investors may pay tax on dividends, interest and some overseas investments. But the value of the assets themselves would sit outside the Land Value Tax.
Singh gives a striking example of the potential difference in treatment for tax purposes :
Consider two people, each worth NZ$20 million. The first owns properties with land worth NZ$15 million. At the full rate of 1.75%, that land would create an annual tax bill of NZ$262,500. The second person has NZ$19 million in shares, managed funds, and private companies, plus a home on land valued at NZ$1 million. Their Land Value Tax would be NZ$17,500. Both have the same total wealth, but one would pay 15 times as much in Land Value Tax. The difference is not their total wealth or income. It is how they hold their wealth.
In itself, this is not a knock-down argument against an LVT. An LVT would offer significant benefits in discouraging the property speculation that continues to distort the New Zealand economy in the absence of a meaningful capital gains tax. National and ACT have no answers to this problem. In fact, they have encouraged it by offering huge tax breaks to landlords.
Ultimately, any tax reform process will involve a balance between winners and losers. In some forms of tax policy, the balance will be struck more fairly – and do less damage – than others. In the case of an LVT, the winners would include some people with very close links to the Opportunity Party.
Footnote One: A wealth tax for instance, is commonly criticised because of the risk of capital flight, which is almost certainly over-stated. Land-based wealth is not readily portable, and this problem of capital flight could be addressed (in part at least) by an exit tax.
As others have pointed out, the more significant problem with a wealth tax levied off net earnings is that the mega-wealthy can – and often do – live off debt that can be massaged to reduce their tax obligations. Paying off the interest on this debt is cheaper than paying tax. For the super-wealthy, renting can also be preferable to owning property. So again, an LVT would not operate as a wealth tax on such people.
Arguably, one-off windfall taxes are probably the form of wealth tax that’s most likely to succeed in capturing a fairer amount of tax from those currently extracting excess profits, and who may not be paying their fair share of tax. Even so, for IRD it can still be like trying to gauge the profits from a Hollywood movie. If your salary package includes percentage “points” from what the movie earns, it always pays to ensure these points are levied on the gross box office earnings, and not on the net profits, which can easily be made to appear non-existent. Achieving that result is what tax lawyers are commonly paid to do.
Footnote Two: To date, none of the significant alternative policy proposals in this election campaign have been coming from Labour. That alone should have given pause to Helen Clark before she put on her partisan Labour hat and slammed the recent Q&A grilling by Jack Tame of Opportunity leader Quilae Wong.
“Fantasy posing as policy” is surely a more accurate description of Labour offering three free doctors visits a year as a solution to the twin crises in public health and primary health care affordability – and then have Labour claiming to fund this policy out of the eventual earnings from its puny, belated version of a capital gains tax.