A TAX SYSTEM FOR NEW ZEALAND'S FUTURE 1 December 2009 Afternoon Session 1 Base broadening – land taxes Arthur Grimes, Seni...
Base broadening – land taxes Arthur Grimes, Senior Fellow, Motu Economic and Public Policy Research Background paper :  Co...
Background <ul><li>Land tax  (LT):  tax on unimproved value of land </li></ul><ul><li>Property tax  (PT):  tax on capital ...
Recurring land taxes   NB: Australia & Ireland currently reviewing (upwards)
Background (contd) <ul><li>A land tax (LT) taxes an  immobile factor </li></ul><ul><ul><li>Economically efficient (does no...
Fiscal Implications: 2006 Tax Base <ul><li>Taxable land value base ≈ $460 billion </li></ul><ul><ul><li>Excluding conserva...
Distributional Impacts: Progressivity <ul><li>Higher income households have higher value homes </li></ul><ul><li>Higher in...
Additional Distributional Results <ul><li>Retired households mostly negatively affected </li></ul><ul><li>Young homeowners...
Land Tax with Differing Thresholds: Examples
Direct Price Effects <ul><li>Land values fall with introduction of tax </li></ul><ul><li>Magnitude of fall depends on: </l...
Other Effects <ul><li>Land value fall affects existing owners’ wealth </li></ul><ul><ul><li>No effect on future purchasers...
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Motu economist Arthur Grimes Land Tax Option

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Motu economist Arthur Grimes Land Tax Option

  1. 1. A TAX SYSTEM FOR NEW ZEALAND'S FUTURE 1 December 2009 Afternoon Session 1 Base broadening – land taxes Arthur Grimes, Senior Fellow, Motu Economic and Public Policy Research
  2. 2. Base broadening – land taxes Arthur Grimes, Senior Fellow, Motu Economic and Public Policy Research Background paper : Coleman, Andrew & Arthur Grimes. 2009. Fiscal, Distributional and Efficiency Impacts of Land and Property Taxes Motu Working Paper 09-14, www.motu.org.nz
  3. 3. Background <ul><li>Land tax (LT): tax on unimproved value of land </li></ul><ul><li>Property tax (PT): tax on capital value (land & improvements) </li></ul><ul><li>NZ has land value & capital value local authority rates: </li></ul><ul><ul><li>Administratively almost zero cost for central govt to collect </li></ul></ul><ul><ul><li>No evasion/avoidance </li></ul></ul><ul><li>NZ has relatively low use of recurring LT/PT (internationally) </li></ul><ul><ul><li>So land tax base not ‘fully utilised’ through local authority rates </li></ul></ul>
  4. 4. Recurring land taxes NB: Australia & Ireland currently reviewing (upwards)
  5. 5. Background (contd) <ul><li>A land tax (LT) taxes an immobile factor </li></ul><ul><ul><li>Economically efficient (does not distort production) </li></ul></ul><ul><ul><li>Property taxes (PT) less efficient (because of tax on improvements) </li></ul></ul><ul><li>Current concerns about NZ tax system favouring property </li></ul><ul><ul><li>A land tax may cause a rethink for property investors </li></ul></ul><ul><li>What other effects of fiscally neutral switch towards LT? </li></ul><ul><ul><li>Size of fiscal revenues that could be recycled? </li></ul></ul><ul><ul><li>Distributional impacts? </li></ul></ul><ul><ul><li>Impacts on asset values, private & country debt? </li></ul></ul>
  6. 6. Fiscal Implications: 2006 Tax Base <ul><li>Taxable land value base ≈ $460 billion </li></ul><ul><ul><li>Excluding conservation forestry, public & Maori land </li></ul></ul><ul><ul><li>Implies 0.5% LV tax raises ≈ $2 billion p.a. (given land value falls) </li></ul></ul><ul><li>Residential (incl lifestyle): ≈ 2/3 of total tax base </li></ul><ul><li>Agriculture + forestry: < ¼ of base </li></ul><ul><li>But very different average LV’s per assessment </li></ul><ul><ul><li>Agriculture average LV: $1.0 million </li></ul></ul><ul><ul><li>Forestry average LV: $0.9 million </li></ul></ul><ul><ul><li>Comm/Ind average LV: $0.5 million </li></ul></ul><ul><ul><li>Residential average LV: $0.2 million </li></ul></ul>
  7. 7. Distributional Impacts: Progressivity <ul><li>Higher income households have higher value homes </li></ul><ul><li>Higher income households have higher rents (if they rent) </li></ul><ul><ul><li>Similar relationships hold using net worth in place of income </li></ul></ul><ul><li>Families with children tend not to own high value homes </li></ul><ul><li>Maori & Pacific families tend not to own high value homes </li></ul><ul><li>Land tax is more progressive than property tax </li></ul><ul><li>Taxes non-resident land-owners </li></ul><ul><li>Overall distributive effects depend on nature of other tax changes </li></ul>
  8. 8. Additional Distributional Results <ul><li>Retired households mostly negatively affected </li></ul><ul><li>Young homeowners with little equity also hit </li></ul><ul><li>Owners of large properties hard-hit </li></ul><ul><ul><li>Especially farmers & forest-owners </li></ul></ul><ul><li>A per hectare tax-free threshold can overcome problems for farms/forests & improve progressivity </li></ul><ul><ul><li>A threshold is ‘cleaner’ than exempt classes of land; exemptions could lead to policy tinkering/uncertainty </li></ul></ul>
  9. 9. Land Tax with Differing Thresholds: Examples
  10. 10. Direct Price Effects <ul><li>Land values fall with introduction of tax </li></ul><ul><li>Magnitude of fall depends on: </li></ul><ul><ul><li>land tax rate </li></ul></ul><ul><ul><li>whether tax is deductible by business </li></ul></ul><ul><ul><li>real interest rate </li></ul></ul><ul><ul><li>expected rate of land value appreciation </li></ul></ul><ul><ul><li>other proportionate costs (e.g. local authority rates) </li></ul></ul><ul><li>A 0.5% land tax (with no rebate) may cause land values to decline by up to 15% (possibly much less) </li></ul><ul><ul><li>i.e. house prices to fall by ≈ 4-8% </li></ul></ul><ul><ul><li>small cf recent years’ value changes </li></ul></ul>
  11. 11. Other Effects <ul><li>Land value fall affects existing owners’ wealth </li></ul><ul><ul><li>No effect on future purchasers </li></ul></ul><ul><ul><li>Effect on renters is broadly neutral </li></ul></ul><ul><ul><li>Incentive on land developers to get land developed </li></ul></ul><ul><ul><li>Tends to reduce urban sprawl </li></ul></ul><ul><li>Borrowing by New Zealanders for housing decreases because of lower house prices </li></ul><ul><ul><li>Hence overseas debt reduces </li></ul></ul><ul><li>Fiscal revenue can be used to reduce distortionary taxes </li></ul><ul><ul><li>Hence positive effect on economic growth rate </li></ul></ul>

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