Tuesday, 20 Oct 2020

Simon Wilson’s election diary: The real impact of that wealth tax

OPINION

I bumped into a real estate agent I know last week. He works in the top end of town and he’s having such a good year he couldn’t stop grinning. He said to me, he used to think it was a post-Covid bubble and house prices would fall, so he was just doing his job while his clients partied on. But then he thought, what are my kids going to say?

“Dad! You lived through a time when money was free and you didn’t take advantage?”

So now the guy is borrowing as much as he can, because interest rates are almost zero, and with no capital gains or wealth tax, he’s buying property. And, well, I already said, he can’t stop grinning.

He was already wealthy, so he can do that.

I’d like to think that out of sheer gratitude he’s voting Labour this year, but I doubt it.

National and NZ First have now both narrowed the focus of their campaigns to scaremongering over the Greens’ wealth tax. Hard-working people who own a house but have little income, they say, will be the big losers.

True? Let’s assume you’re 70 years old, widowed, and own a $1.5 million home mortgage free. You have little income and few other assets. You pay the tax only on the value of the home over $1 million. That’s 1 per cent tax each year, until the value rises to $2 million, after which everything above that is 2 per cent.

But you can defer the tax until you sell the home.

Let’s say you do that and sell after 10 years.

The property will increase in value each year. By how much? The last 10 years, on average saw Auckland prices rise by 6.3 per cent. In the year to last month, the Real Estate Institute reports, they rose 11.1 per cent nationally. It was 17 per cent nationally if you exclude Auckland.

But let’s be modest and assume a rise of just 5 per cent per year, for 10 years.

The wealth tax you have to pay on the house after 10 years would amount to $109,174.90.

But the value of the house itself will have risen to $2,443,342.

To be clear: you would make a capital gain on the house of almost a million dollars and the Greens are proposing to tax you a bit over $100,000, which you can pay from the proceeds when you sell the house.

The tax is about a tenth of the additional wealth you will earn.

The Greens say that tax will be instrumental in ending poverty in this country.

It will do this by contributing to a Guaranteed Minimum Income of $325 for everyone not in fulltime employment, with top-ups for children, and a much larger programme to build affordable houses.

Jacinda Ardern said several times this week that Labour will not adopt the Green’s wealth tax. She wants to focus on the bottom end, lifting people out of poverty. A wealth tax, like a capital gains tax, is a distraction.

At Ardern’s rally in Mangere last weekend a Labour Party staffer told me, “Next term it has to be housing. That’s what we have to get right. If we do that, everything else follows.”

I told him I agreed. We had a nice chat about the underlying value: if everyone can live in a warm, dry home, health outcomes are better, so the kids can keep going to school, the parents don’t lose their jobs, they can all dare to be ambitious. Housing is the foundation of wellbeing – economic, social, however you want to measure it.

To get there we need to build a lot more affordable homes and reduce the costs of construction and consenting costs, all of which most parties want to do. But that will not be enough.

When my real estate acquaintance joins the goldrush of the already golden and buys property, it pushes up prices for everyone. And that helps condemn others to remain in poverty.

If you’re poor you spend your money on rent, and away it goes. If you’re wealthy, you can spend it on making more money. Right now, that realtor is doing it on steroids.

You can’t blame him. He’s doing what economists call the “rational” thing with his money. But you can blame a Government that knows this and lets him do it anyway.

I said to the Labour staffer, you can’t do it without tax reform. He raised his eyebrows. He knew what I meant.

Last Friday there was an election debate on economics in a world of finite resources: Felix Poole for Act, Chloe Swarbrick for the Greens, Shia Navot for TOP and Helen White for Labour.

The moderator, community housing advocate Paul Gilberd, asked, “Do you believe we need incremental change or bold and courageous change?”

Act said bold and courageous. So did the Greens and TOP. And then so did Labour.

Four mouths on stage all dropped open.

“With what policies?” asked Navot from TOP.

Helen White gave two examples: the Wellbeing Budget and “the priority now given to housing”.

She was right, the aims of both are transformational. But the progress has been slow. What she meant was: Labour has a transformational programme which will be achieved incrementally. That’s what Ardern says too.

Ardern wants progress through consensus, because when everyone agrees, the changes are locked in. Often, I agree with that. But when it comes to tax reform, aren’t we already close to a consensus? Who’s not in?

Young people and everyone else who cannot imagine being able to buy a first home, they’re in. Many boomers, counting their luck and also feeling socially responsible, they’re in too.

The 52 per cent of people who told a Herald/Kantor poll this week they agree house prices need to fall? Presumably most of them could be persuaded.

What about the people Judith Collins is trying to frighten with talk of the tax impoverishing the elderly? If it was implemented, it would not take them long to realise that no such thing is happening.

Maybe my real estate acquaintance is not in. But does that matter?

Besides, I’m pretty sure he gets it. He won’t want to be taxed on his windfall extra wealth, but he knows he’s lucky. It seemed to me, he could not believe how lucky he was.

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