Saturday, January 2, 2010

ZenTiger Land Tax Ahoy

We might find the potion of immortality, but we'll never escape tax
David at Kiwiblog has done an interesting post on the possible demise of LAQC's. Apparently, the preferred vehicle for pirates.

Whilst LAQC's may be used as a tax avoidance vehicle, there are legitimate uses of such structures. Mind you, the merits or otherwise of LAQC's is not the point of my post.

Part of the tax review discussion around LAQC's inevitably brings up a discussion on the merits of a CGT, or possibly a straight Land Tax. Putting aside the argument that we effectively have a CGT anyway, let's get straight to the issue of a Land Tax. David supports a Land Tax:

I do not support a capital gains tax but do support a land tax, if income tax is reduced to compensate. A land tax would be administratively very simple - Councils already levy rates on properties, so it would be merely added to that.

I'm against a Land Tax, primarily for one reason: that it adds another tax to the range of taxes we already pay. Why is this so bad?

Adding tax sources enables the government to increase the overall tax burden of the middle class, and that in turn enables the government to grow which will see the need to find more sources of tax to fund the growth.

Adding new tax sources is feeding a vicious circle and we end up stemming the leaks from the wrong end. Government is built to require a steady increase in spending, and therefore will devise ways to ensure a steady increase in taxes. We need to put restraints on Government that actually forces government to behave differently. I'll leave expansion og that point for another post.

David suggests that it would be acceptable to adopt a Land Tax in exchange for an income tax reduction. That was the exact justification to adopt a GST: GST was added at a rate of 10% in exchange for lowering of income tax rates.

What happened after that point? GST went up to 12.5% and income tax went back up again too.

Why will this time be any different? We will see the Land Tax Rates and Income Tax increased after a period of time, perhaps as little as one election cycle.

Can we believe this time to be different because National are committed to reducing income tax? David points out that National lowered income tax rates when they came into power: Are you stupid or pretending? There was over $2 billion of income tax cuts on 1 April [2009]. Actually, it was a combination of a small rate change and an increase of income tax thresholds - the first time in over 10 years I think, hardly enough to meet the CPI increases for the past 10 years.

Those cuts (amounting to 2% of my tax bill) were not the whole story either. The ACC levy was increased at the same time and rates (a form of land tax) increases for many years for most New Zealanders have been well above CPI, negating the benefit of the income tax adjustments (the first in many years) for many people.

In summary, there are indeed a few assumptions I am making about the impact of introducing a new land tax, ones borne out in what happens overseas and here in NZ with other taxes:

1. That the initial land tax rate will be increased over successive governments.
2. That the combination of council rates (a form of land tax) and the new central government land tax will continue to put pressure on cash strapped retirees to sell and move.
3. Income tax rates will also increase again over time
4. The GST rate may also increase in the upcoming tax package, putting pressure on food, rates and utilities, all which have GST applied to them
5. CPI adjustments are often built in to automatically increase on government fees and charges, but never on government tax thresholds, meaning we effectively pay more tax every year unless explicitly given a tax cut.

That the above create a “perfect storm” of pressure on low income workers and retirees who are asset rich but cash poor.

The way socialist/progressive governments handle this is to instigate an elaborate rebate/deduction/allowance scheme that creates more bureaucracy, more paperwork, and more opportunity for people to evade the actual taxes, except for the middle class who will ultimately see various tax rates raised to cover the people that are too poor to pay it or rich enough to structure their tax affairs to minimise it.

I’m not in favour of that approach, and to find the money that both ends of the tax spectrum avoid paying, there will be further rises assigned to the middle class section of society who already take on a large burden of the tax take. Cooked by degrees.

There was a lot more to the discussion than just this snippet. Read it to prepare yourself for a debate that John Key might prefer you not bother with: Kiwiblog - We might find the potion of immortality, but we'll never escape tax.

PS: I note in NSW they decided to set ranges based on the sum value of properties (but owning just one property in Sydney gets you over this limit.) The end result is that there are complex thresholds to check, and several rates. Their .2% land tax now sits at 1.6 or 1.8%. When you buy a property, you also have stamp duty - which will set you back between 10K and 20K for a typical Sydney home.

1 comment(s):

Michael Wynd said...

One thought on the imposition of the land tax. What implications are there for political representation? As the tax will fall on property owners will this create a new class of voters that have more votes. In the case of council rates we got away from the sensible ruling that property owners could vote in local body elections.

Would this mean that only property owners should be allowed to vote in general elections, or vote for an upper house?

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