Where is Labour's big idea?

In recent discussions with friends I am often left wondering when Labour will announce their 'big idea' for the election campaign. A big idea is seen as essential to their election chances.

Did Michael Cullen's tax cuts in April leave no money for big ideas? Perhaps, to give Michael some credit, this formed the reason for Cullen's reluctance to give in to tax cuts in the first place. Could tax cuts end up costing Labour the election?

Perhaps an historical example will help illustrate my point. Many have wondered why Winston Churchill was voted out of office so soon after leading Britain through World War Two. Part of the answer lies in the significant policy progress UK Labour made while part of the wartime coalition government. In the eyes of the British people Labour's ideas became more mainstream during this period, leading to the election of the progressive Attlee government in 1945.

Will Labour's tax cuts give encouragement for people to vote for National's irresponsible borrowing for bigger tax cuts? Me-too-ism could have a cost. I actually hope I am wrong here.

What if Labour had announced a plan to significantly improve public heath, education or housing affordability? Would this have quarantined the call for tax cuts to the struggling folk of Remuera? The new BMW would have had to wait.

In terms of big ideas - how about a housing affordability measure on the scale of the State Advances Scheme? While I do not entirely buy the argument that housing affordability measures will necessarily increase prices, perhaps the recent fall in house prices presents an opportune time to help young New Zealanders into their first home. Not only will the working class of South Auckland love such a policy, it could also ease the fears of middle class property owners who fear the paper value of their major asset will decline further.

Price Waterhouse Coopers oppose measures aimed to cut tax avoidance

I came across an opinion piece from the Dominion Post on Friday where multinational tax advisors Price Waterhouse Coopers (PWC) attempt to start a scare campaign about the Government introducing a capital gains tax.

The article is headed 'Capital gains tax lifts its ugly head'. All that is lifting its ugly head here is the spectre of tax advisors complaining they will be less able to help their wealthy clients avoid paying their fair share of tax.

Is the government proposing to introduce a comprehensive capital gains tax? Sadly no. Ugly? Well assuming such a tax included an exemption for the family home, it is only ugly for the well off who have taken advantage of the lighter taxation on property investments, and have driven first home buyers out of the market as a result. It is a shame Labour didn't close this complete rort when it raised the top tax rate to 39c in the dollar in 1999.

Between 1989 and 2005 the residential property market provided investors and owners with a tax free gain of 319%*.

Despite PWC attempts to scaremonger, all that is happening is that the Government is tightening the rules around existing tax law that makes investments in housing for the purpose of making a capital gain taxable. So the Government is seeking to remove the loopholes that PWC and its clients love so much. It is not a new tax. As Michael Cullen explains:
"Associated persons: ... The definitions are used extensively in the Income Tax Act, primarily in an anti-avoidance capacity to counter transactions that are not conducted at arm’s length and therefore have the potential to undermine the intent of the law. ....There are a number of major weaknesses in the current definitions, particularly in the definition relating to land sales. That definition contains some major gaps which allow land dealers, developers and builders to circumvent the land sale tax rules by operating through closely connected entities. Parliament’s clear intent in 1973, when it enacted the current land sale tax rules, was that land dealers, developers and builders would be generally taxed on all gains on property sold within ten years of acquisition, and they could not claim to hold non-taxable investment portfolios."

PWC's Chris Leatham says
"In our view, the changes will not be well received. Land dealers, developers and builders have previously been allowed to structure their affairs to avoid tainting of rental properties so that they are not placed at a disadvantage to other taxpayers."

The New Zealand tax system generally taxes property investments with a lighter touch than other forms of investment. The whole point of removing such obvious loopholes in tax law is to ensure particular taxpayers are not disadvantaged over others. Why are PWR defending such loopholes I wonder?

Opponents of capital gains taxes often make unsubstantiated claims about how unpopular a capital gains tax could be - just because they don't like it. I think views are changing. Many economic commentators, including many on the right, now support capital gains taxes because they can see New Zealand would benefit from more money being invested in companies rather than sitting in bricks and mortar. A capital gains tax introduced in a declining or flat housing market would have limited immediate impact, but it would help to slow the next housing boom that will eventually happen. Then there are the growing numbers of twentysomethings and thirtysomethings, now on good incomes, who are becoming more and more aware of how the baby boom generation have shut them out of the housing market by speculating for tax free gains on the housing market. Bernard Hickey is really onto something when he identified "The generation that New Zealand Inc failed"

If it was up to me I would introduce a comprehensive capital gains tax (with an exemption for the family home) and direct the proceeds towards affordable housing initiatives. Ironically, a declining or flat housing market can make the structural issues easier to address.

Returning to Leatham's little opinion piece, one could be mistaken for thinking that the Dominion Post are now running free advertising features for Price Waterhouse Coopers.
"The new rules will apply only to property purchases from April 1, 2009 onward (or, in the case of builders, to property improvements made after that date). This gives you the opportunity to talk to your accountant to understand the impact of the changes."

As for their views on the taxation of housing investments - their vested interests are plain to see.

* Source: Sunday Star Times (17/6/07), "The Rent Trap"

Submission on Housing Affordability in New Zealand

On Thursday last week I appeared before the Commerce Select Committee inquiry looking at Housing Affordability in New Zealand, as part of my work as Researcher at the National Distribution Union.

I drafted the written submission for the NDU, with others making some helpful suggestions for additions and improvements.

While this is, and will remain a personal blog that in no way represents the views of my employer, I thought some readers of this blog might be interested in reading the submission.

While making our oral submission MPs from National, Labour and the Greens complimented us on our written submission and said it contained useful material. Those kind comments were much appreciated :)

Affording a first home

There has been some interesting talk among the blogs in the last few days on the question of how darn difficult it is for those now in their 20s and 30s to afford their first home. This follows a column in the NZ Herald by John Roughan who advocated a capital gains tax on non owner-occupied housing.

As Jordan puts it,
"There is something wrong with a housing market that is structured to deliver endless capital gains to people who have capital, and deny the ownership of housing to the upcoming generation as the consequence."

Successive Governors of the Reserve Bank and many of the neo-liberal acolytes bemoan the fact New Zealanders sink so much money into the housing market, pretending the "market" cannot be interfered with, when there is an obvious solution - a capital gains tax. Such a tax could have significant downstream benefits for the New Zealand economy as more locally based capital would become available to finance local business. The sharemarket would get a boost, and less overseas ownership of New Zealand companies would help reduce the current account deficit. In other words, we would be more productive in using our money.

The difficulty is building political support for such a change, especially when many of the 'baby boomers' already own a house and an investment property or two. Given that they were only responding to the unbalanced way investments are taxed in this country, perhaps it would be reasonable to give a few years warning before a capital gains tax took full effect. Unfortunately, because there are so many of them, we need to convince the baby boomers to put aside their self interest in favour of the best interests of the wider New Zealand economy.

I thought of some other ways the cycle of first house unaffordability could be broken. At present, the banks have a significant bias towards lending to the housing market. If greater restrictions were placed on the ability of the banks to boost their short term profits by selling more and more housing related debt, this could also help control house prices. While this could restrict the availability of mortgages, measures could be taken at the same time to encourage and assist first home buyers.

The State Advances Scheme introduced by the second Labour Government offered 3% morgages and the ability to capitalise the family benefit to make up the deposit. The main argument used against such policies is that they might push up house prices further. Yet as we are dealing with a scheme introduced in 1958, this should be an empirical question - ie look for a link between the number of loans offered through the State Advances Scheme and increasing house prices in the surrounding areas. I would be interested if anyone knows of any figures on this. We should not let the right get away with arguing from pure theory (which is usually a simplification of the real world anyway).