Careful with the CGT “silver bullet”

By Matt Nolan 15/11/2012

In New Zealand people are looking for a lot of ways to solve many perceived problems with a quick policy solution.  One that is being suggested is a capital gains tax.

The feeling is that we are facing several issues:

  1. We aren’t saving enough
  2. We have too few houses
  3. We are spending too much on houses
  4. Houses is unaffordable

And for some reason a capital gains tax is seen as the solution.  I have one question though – how?

By introducing capital gains taxes we are taxing savers at a higher rate, so we will save less.

By taxing capital gains we are focused on taxing the change in the resale value of property.  Ok cool, but where do we count that?  If an individual subdivides and builds a new house we probably woudn’t … but if an individual does up a property we may count that as capital gains.  So depending on where we define the boundary of the tax we will surely be increasing the tax on investing in the supply of property … and if we are worried we have “too few houses” for some reason then this won’t help.

Now prices are meant to fall because we don’t have a “bubble” from “investors” being “morons” or something, that’s nice – but surely the observed drop in house prices in the first instance will be due to the future tax liability that has now been thrown on property.  This does nothing for “affordability” of housing services for people, as if you buy a house you have to pay the tax, and if you are renting the cost depends on the supply of property (and household income).

I’m all for treating asset classes the same, most definitely.  But I am perplexed that we believe introducing a tax on something will make it more affordable (as that is the thing people seem most concerned about) – so if you would like to tell me in comments that would be much appreciated.

UpdateAndrew Coleman goes through the long-term consequences here of a compensated capital gains tax (so other taxes are cut).  Cool, interesting stuff.  Although the CGT in this increases rents – which makes sense to me, but is different to some of the comments I keep hearing.  And of course Seamus at Offsetting has written a bunch of good posts on the issue.