Introducing a 10 per cent capital gains tax would reduce New Zealand house prices by 10.9 per cent and lead to a higher rate of home ownership – according to a leading bank economist.
The Government’s tax working group headed by former Finance Minister Sir Michael Cullen ran a two-month public consultation between March and April this year.
In September the group will release an interim report before issuing their final recommendations next February.
The working group is interested in whether changes to the tax system would affect house prices and Westpac chief economist Dominick Stephens – writing in the bank’s latest bulletin – said the answer was a ‘definite yes’.
Property prices in New Zealand are ‘profoundly affected’ by the tax system – Stephens said.
‘It follows that changing the tax system would change property prices’.
In New Zealand property is more lightly taxed than other forms of investment, he said.
Treasury and the IRD estimate that property investors pay 29.4 per cent of their after-inflation returns in tax whereas bank depositors and owners of dividend-paying shares pay 55.7 per cent.
This is mainly because income from investments is taxed whereas capital gains are tax free – Stephens said.
Bank deposits yield only income and are therefore taxed heavily.
By contrast property investments return little in the way of taxable net income and more in the way of capital gain – which is tax free.
The ‘kicker’ is the fact that expenses – including mortgage interest – are tax deductible – he said.