Housing, the ‘Great Income Tax Experiment’, and the intergenerational consequences of the lease

Andrew Coleman (andrew.coleman@otago.ac.nz)
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Andrew Coleman: Motu Economic and Public Policy Research

No 17_09, Working Papers from Motu Economic and Public Policy Research

Abstract: This paper provides an analysis of how the New Zealand tax system may be affecting residential property markets. Like most OECD countries, New Zealand does not tax the imputed rent or capital gains from owner-occupied housing. Unlike most OECD countries, since 1989 New Zealand has taxed income placed in retirement savings funds on an income basis, rather than an expenditure basis. The result is likely to be the most distortionary tax policy towards housing in the OECD. Since 1989, these tax distortions have provided incentives that should have lead to significant increases in house prices and the average size of new dwellings, should have reduced owner-occupier rates, and should have led to a worsening of the overseas net asset position. The tax settings are likely to be regressive, and are not intergenerationally neutral, as they impose significant costs on current and future generations of young New Zealanders (and new migrants). Since it does not appear to be politically palatable to tax capital gains or imputed rent, to reduce the distortionary consequences of the tax system on housing markets New Zealand may wish to reconsider how it taxes retirement savings accounts by adopting the standard OECD approach.

Keywords: tax policy; expenditure taxes; house construction; land prices; retirement savings; intergenerational transfers; New Zealand economy (search for similar items in EconPapers)
JEL-codes: H20 H22 H24 I38 R28 R38 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2017-05
New Economics Papers: this item is included in nep-ure
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