The paper states that the group most likely to be disproportionately affected by a land tax are retired people, as they tend to hold more land, and would benefit less from other tax reductions.>
A property or capital gains tax includes a tax on all improvements made to the land, whereas a simple land tax taxes everyone who owns land in New Zealand. If the New Zealand government implements a flat land tax, foreigners who own land in New Zealand will be subject to the tax, effectively ensuring more people will contribute to the tax income of the country.
A land tax would be likely to cause home ownership rates to rise slightly, and gross debt to GDP and net foreign assets to GDP ratios to fall due to lower foreign borrowing, the paper states. Grimes and Coleman argue that there are too many variables on a capital gains tax, especially for foreign investors, who do not currently pay tax in New Zealand. A simple 1 per cent tax on land value ensures that the landowner pays the tax, whatever the tax rules that prevail in the landowners own country. Land is an unmovable asset, so landowners cannot effectively move the land off shore to avoid the tax as it is possible to do with other kinds of liquid assets.
Although the Working Tax Group combines the collaborative efforts of tax experts in different fields and the officials from the Treasury and Inland Revenue Department, it has no official government mandate. However, since the New Zealand government is working on the economic premise that New Zealand must widen its tax base or individual tax payers will face higher rates of income tax or GST, it is highly likely that recommendations from the Working Tax Group will be implemented into fiscal policy in the future.
According to the report, the value of taxable land in New Zealand is about $460 billion, excluding government owned and dedicated conservation land. This means a 0.1 per cent land tax could raise about $460 million, before the predicted value loss of the land to cover the tax. However, if the government decides to exclude forestry, agriculture, and owner-occupied land, only taxing property investors, the total taxable income would be dramatically reduced to about $160 million.
By comparison, the discussion on the practicality of taxing capital gains was less positive, despite the fact that a capital gains tax could raise up to $1.5 billion a year, when owner-occupied homes were excluded. The Treasury said a capital gains tax would nearly offset the cost of alignment of other tax rates at 30 per cent. However, the Inland Revenue Department disagreed, and said that the advantages of a real-world capital gains tax would not outweigh its disadvantages.
While the Working Tax Group paper considered the two options of a realised and accruals based capital gains tax system, these two systems are not complementary and no other country in the world has successfully implemented an accruals based capital gains tax. Some economists argue that a capital gains tax discourages the sale of assets, as the tax becomes payable on the sale of the property. This could effectively slow down the property market in New Zealand. A land tax would not have the same effect.
Meanwhile, the Working Tax Group and officials are undertaking further research on implementing a capital gains tax and the impact this tax could have on savings. New Zealands Finance Minister Bill English is seriously considering introducing a land or property (capital gains tax) in New Zealand. With a major tax review occurring in Australia, it seems likely that Australian land owners will soon be paying a land tax. If this happens, Mr English has suggested that New Zealand will likely do the same. No decision has been made on the recommendations of the Working Tax Groups paper, but it will certainly be interesting to watch out for more news on a possible land tax in the next few months.