In an excellent article from Brian Fallow, the idea that GST could be applied to rent is brought up.
I agree with this 100%. By not taxing rent we are distorting incentives regarding the investment in housing – after all, rent is a form of consumption and should be captured by a tax on consumption. (Note: I haven’t been clear enough that the “revenue neutrality of the tax” is very important – this only makes sense if we are cutting more distortionary taxes as a result (eg income taxes).)
However, I would go a step further. We should be taxing the rental equivalent of ALL properties with GST – as the rental equivalent (when you own a house) is consumption. Now remember this doesn’t just impact on renters, it depends on the incidence of tax. As a result, it will lead to lower net of tax returns to property investors – net returns that are more closely related to the relevant net returns among other asset classes!!
Part of the reason that New Zealand has overinvested in housing is because of favourable tax treatment. A clean up of GST in regards to the housing market, combined with a revenue neutral increase in GST rates, would have a big impact on the housing market.