Fair Economic Return: Restoring equity to the social fabric of New Zealand

Susan St John and Terry Baucher

No 8, Working Papers from University of Auckland, Economic Policy Center (EPC)

Abstract: This paper addresses the demand side tax distortion that, along with loose monetary policy, has underpinned the emergence of a dangerous speculative bubble in the New Zealand housing market. Several demand-side tools have already been employed, such as Loan to Value ratios (LVRs), Brightline tests, and removal of interest deductibility for landlords. But low interest rates and the tax subsidisation of housing income remain as potent incentives for over-investment in owner-occupied and rental/investor housing. We suggest an approach we call the Fair Economic Return (FER). The intent is to build on the broad base low-rate approach taken since the late 1980s that is now embedded in the NZ tax system. FER is derived from the Risk-Free Rate Method (RFRM) that was first discussed in the McLeod Tax Review Issues paper 2001 and is now the basis of the Foreign Investment Fund regime (FIF). Under a FER approach, currently untaxed housing income is included in the tax base. By treating all personal income the same for tax purposes, regardless of source, the playing field is levelled. Moreover, such an approach overcomes the disadvantages of introducing a Capital Gains Tax (CGT) which, in any case, has proven to be not politically acceptable at this time in New Zealand. FER does not upset well-functioning rental markets; it encourages better use of the housing stock and makes a significant and stable revenue stream possible for government. It is targeted using a realistic per person net equity exemption so that it affects the top deciles of residential housing owners only. Its progressive impact could significantly reduce housing wealth inequality over time.

Keywords: Taxation; Housing; Capital Gains; Speculation; RFRM; Fair Economic Return; FER (search for similar items in EconPapers)
JEL-codes: H24 H31 R31 (search for similar items in EconPapers)
Date: 2021-07
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Persistent link: https://EconPapers.repec.org/RePEc:cyc:wpaper:008

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