Yesterday I commented regretfully on the absence of any sign of much in-depth thinking from the Labour Party about reversing New Zealand’s ongoing relative economic decline. I noted then that they had plenty of company in that failure. As one illustration, I saw a piece on The Treasury’s website this morning outlining Treasury’s work programme, which is apparently organized around seven “strategic intentions”. Each of them is probably fine in their own way, but none bears directly on reversing New Zealand’s decades of relative economic decline. The standards of the modern Treasury seem to be reflected in this quote from a related document, trying to recruit a new Chief Economic Adviser:
we are facing up to the challenge that economic actors operate in complex ways and not according to straightforward and predictable scientific models. Moreover the days when improvements in living standards were measured exclusively by the increase in total production – GDP – are on their way out.
I just shook my head in weary despair. I no longer have my Stage 1 economics textbook, but I doubt that even there anyone assumed that “economic actors” (people?) are other than complex. No Treasury in my 30 years of working alongside them ever did. And perhaps the Treasury could point us to cases where anyone ever thought that “improvements in living standards were measured exclusively by the increase in total production – GDP”. We conscripted labour in World War Two – forced people to work even when they didn’t want or need to, and forced them to work longer hours than they preferred. That provided a big boost to GDP, but no one thought it boosted living standards – it was a means to an end, defeating our enemies. If they are really reduced to arguing against such straw men, it would be a very brave, or slightly deluded, person who took on that Treasury role.
But this post is, in part, about praising the Labour Party (and on this one, I suspect Treasury probably agrees with them). The Herald has an article this morning on turnover taxes on real estate transactions. They draw on this piece from a UK accountancy firm which looked at turnover taxes (on US$1m houses) in 26 countries. New Zealand has no turnover taxes on property taxes and so ranks top of the table – just marginally ahead of Russia, which levies a fee of US$30.45 on such a transaction. Belgium, by contrast, which has always been known for its high turnover taxes charges US$113131 on a purchase of a $1m house.
The Herald found a local economist, Shamubeel Eaqub, who (in the sub-editors’ words) “frets on tax ranking” and who thinks, in his own words, “it would be a very good thing for New Zealand to tax property purchases”. To his credit, Labour’s housing spokesman Phil Twyford disagrees noting that “stamp duty is a relatively inefficient tax” and stating that Labour did not advocate stamp duty – no if, no buts, no suggestions of referring it to a working group. Stamp duties on property purchases are just bad policy. In some places (eg Australian states) they have been used when revenue options aren’t available to that particularly authority, but from either tax policy or housing policy perspective, let alone fiscal or labour market considerations, they have almost no other redeeming features and we should be grateful that we are free of such taxes.
The UK accountancy firm that wrote the piece fretted that high turnover taxes might make it hard to recruit overseas senior executives or rich foreign investors. I’m not sure that the latter concern in particular will really have much resonance among electorates anywhere. We should worry much more about what turnover taxes mean for the functioning of the market for ordinary people. Moving cities is expensive enough as it is, without slapping an additional heavy tax on people whose job opportunities mean it is necessary for them to move. Stamp duties on property transactions bear no relationship to ability to pay or any of the other usual desirable features of a tax system. At the margin, they impede labour mobility, undermining the effectiveness of the labour market. And, almost certainly, they reduce housing turnover. Some might see that as a good thing, since high housing turnover is often associated with rising prices – but it isn’t the turnover that generates the higher prices, it is the underlying boost to demand that lifts turnover and prices together. Structurally reducing the level of housing turnover would simply reduce the choices people face when they do come to the market. And where it might make good practical sense, on account of changing family circumstances, to move house, such taxes will simply encourage more people to alter and extend an existing house instead. There is no obvious welfare gain from that.
And, of course, there is no sign that the presence or absence of a turnover tax plays any part in explaining cross-country variation in house prices, or price to income ratios. Belgium’s houses certainly aren’t cheap, Australia and the UK both have quite material turnover taxes and house price problems as severe as ours, and in the US places fast-growing places with very affordable housing co-exist with highly unaffordable cities all in a regime with very low property turnover taxes
I’m also very uneasy about property taxes tied to turnover – whether stamp duties, or realisations-based capital gains taxes (which all real world CGTs) are – because of the fiscal risks they create. When times are good property turnover is higher than usual – often quite a lot higher than usual. Tax revenue floods in – not just 10 per cent higher than GDP when GDP is 10 per cent higher, but multiplicatively so (housing turnover per capita might double or treble from bust to boom), If the boom runs for several years, the fiscal authorities – officials and politicians – come to treat the higher level of revenue as normal, and perhaps even sustainable. Even if some boffins in Treasury keep sounding the alarm, politicians have elections to win and abundant revenue encourages even-more abundant spending. This is a problem even when tax systems draw almost entirely on income and consumption – our own Treasury finally caved in in 2008 and conceded that the higher levels of revenue built up during the boom of the previous few years was sustainable, just before the severe recession blew to pieces all those assumptions. It was much m0re of a problem in Ireland, where property-based revenue had hugely flattered the fiscal picture in the years leading up to the crisis. It is fine to talk about clever schemes to limit these risks – fiscal rules or separate funds – but they rarely work well. And there is no good tax policy or housing policy case for turnover taxes in the first place.
I’m not so keen on the rest of Labour’s housing tax policy – extending the quasi capital gains tax for investment properties, or “axing” so-called negative gearing – but credit to them for having no truck with pure turnover taxes.
(UPDATE: I noticed that Treasury recently released some material on the – rather limited – work they had been doing on the possibility of a stamp duty – turnover tax – for residential property).