Utopia, you are standing in it!

Dear The Spinoff,

I wish to make a Press Council complaint about the Side Eye: Inequality Tower 2018 by Toby Morris and Max Rashbrooke published yesterday for breaches of standards regarding factual accuracy.

We have a capital gains tax

Let us start with what is plainly untrue for an opinion article, graphic and even a cartoon. Morris and Rashbrooke claim that

for those on the top, housing rises in value all the time, and when you sell it you do not even pay tax …

All residential property sellers, be they citizens, residents or non-residents, must complete a Residential land withholding tax declaration (IR1101). The bright line test for capital gains tax liability as explained by IRD on its website is

If you buy and sell a residential property within five years, you’ll pay tax on the income you earn from the sale, unless you’re selling your family (main) home or another exclusion applies. This is regardless of your intention at the time of the purchase. A withholding tax may also be deducted at the time of sale.

The bright-line test only applies to residential properties bought and sold on or after 1 October 2015.

Properties purchased on or after 1 October 2015 through to 28 March 2018 inclusive are subject to the bright-line test if sold within two years.

For other sellers, capital gains tax liability depends upon your intent when you purchased, your history of buying and selling, and whether you’re in or associated with the property industry. The previous government beefed up the resources at IRD to investigate capital gains tax avoidance.

If Morris and Rashbrooke had said “when you sell a house you might not even pay tax”, that would be a fair description of the current capital gains tax liability regime for residential property sellers. Stating that residential property sellers do not even pay tax is untrue. They might. More will in time.

We already have a capital gains tax

Later in the same Inequality Tower, Morris and Rashbrooke suggest that “we could try a capital gains tax…” which cannot be true as New Zealand already has a capital gains tax. If the authors proposed to reduce income and wealth inequality by trying to raise the top tax rate to 33%, readers would conclude the authors and their editors had lost touch with reality because the top tax rate is already 33%. Instead, they did something equally groundless in fact by suggesting that New Zealand try a tax we already have. They are suggesting an extension to the current capital gains tax regime. The authors are not suggesting trying a new tax, they are suggesting an extension to an old tax.

Meet the new capital gains tax, almost the same as the old capital gains tax

A true statement of the policy status quo for capital gains taxes would require the authors to say that “we could try extending the capital gains tax for a 3^rd time in 3 years”. Their error is worrying because a factual reminder that the capital gains tax has been extended for property investment by the previous and current governments undermines their narrative in the Tower about the political powerlessness of those who are not rich. Two capital gains tax extensions in 2 years and a foreign buyer’s ban suggests considerable political responsiveness to concerns about housing affordability. It is hard to maintain a narrative of wealth inequality leading to political powerlessness by putting forward a proposal that meekly suggests extending the capital gains tax for the 3^rd time in 3 years and for the 2^nd time in the first year of the new government. Hardly a rousing call to the barricades.

Honest errors should be random

The errors when presented in a less than generous light to an uncharitable mind are all conveniently in the same direction of the central narrative of the tower that wealth inequality leads to political inequality. When there is a random error of fact, these random errors of fact sometimes overstate and sometimes understate the situation you are trying to describe and should cancel out in the long run. All the errors of fact I am complaining about are in the same direction of sexing up the numbers.

A capital gains tax is about housing affordability, not affordable rents

Another factual error in the suggestion that trying a capital gains tax will help make rents more affordable. A central narrative of the Tower is exorbitant rents paid by people already struggling.

The capital gains tax debate in New Zealand is about making housing more affordable for home buyers by reducing the incentive for investors to buy houses. By reducing the competition from investors, home buyers will pay less when they buy their first house. Rarely are the implications of a capital gains tax for rents discussed. The only technical discussion in the last 10 years is by Andrew Coleman at Motu who concluded that a capital gains tax would increase rents because of the reduced incentive to invest in rental properties; the supply of rental properties would fall.

Just listen to what the politicians say

No knowledge of technical economics is required to know that a capital gains tax will increase rents. Just listen to what the politicians promise from a capital gains tax and what they do not discuss.

The political purpose of a more extensive capital gains tax is to reduce investment in residential property by investors to make those properties more affordable for homebuyers. But if there is less investment in residential property by investors, there is less investment in rental properties because that is the type of property investors buy and sell. Fewer new residential rental properties will be built because profits from the sale of that investment might be liable to capital gains tax.

You do not increase the supply of rental properties and reduce rents by taxing residential property investment. What makes housing more affordable does not necessarily make rents more affordable

Latitude is granted to opinion articles provided they do not directly contradict themselves. A capital gains tax cannot make housing more affordable by reducing residential property investment but also make rents more affordable by reducing residential property investment. You can only have one.

Proposed correction

A correction should be made to admit that housing sales might be subject to capital gains tax, New Zealand already has a capital gains tax, and the Inequality Tower 2018 is calling for that capital gains tax to be extended for the 3^rd time in 3 years.