http://www.tvhe.co.nz/2009/06/03/the-myth-of-over-investment-in-housing/

“It doesn’t imply that property investors will want to leverage themselves up any more. But neither does it imply that they will leverage up any less, which was Brian’s argument for taxing it.”

I see. Well I agree with you on that bit – it does not imply that they will leverage less – unless we think that the lower rate of return (from the change in the treatment of rents) will lead to lower levels of leverage, which is a bit indirect.

“when you buy a car you pay GST at the time of purchase, not on the flow of services that you consume over the years”

True.

“A capital gains tax seems more appropriate than GST.”

A capital gains tax is the answer insofar as we are taxing income. However, if we are looking at taxing consumption then we need to make sure that this tax is appropriately set up as well. I see the CGT and GST issues as separate in this sense – apart from the underlying idea of revenue neutrality and a revenue target.

It doesn’t imply that property investors will want to leverage themselves up any more. But neither does it imply that they will leverage up any less, which was Brian’s argument for taxing it.

“In every other industry the consumption value of their product is taxed.”

Not strictly true – for example, when you buy a car you pay GST at the time of purchase, not on the flow of services that you consume over the years. (And if like me you bought before 1987 you pay no GST at all.)

If in turn you rent out that car, yes you incur GST on the rental payment, but you also get a rebate on your expenses. And if you rent it out at below cost, then net net you’ll get a GST rebate that offsets a fraction of your losses. The problem is that you’d never run a rental car company that way – but you can do it with housing, since you’re counting on a capital gain at the end of the investment. Solution? A capital gains tax seems more appropriate than GST.

Note. I would say that I agree with you that, if a the tax is already being implemented further up the value chain we don’t need it at the end. Would that be a fair representation?

My main concern in that case is transparency – I like my consumption tax to only be on consumption, so that we can see where it falls out. However, is there are significant transaction costs of doing so I can see why we might not.

However, on the issue of property speculation I do not agree – as ultimately, the tax still falls on consumption it doesn’t matter if the interest GST is netted out.

I agree that, insofar as new house construction is taxed with GST, this would be a double tax. But in that case, construction firms should be able to get a rebate then we should tax people based on consumption.

Furthermore, new housing stock isn’t the sole determinant of the consumption value of the housing stock – additions and alterations add value, and have to be captured.

@Miguel Sanchez

“Property investors already have an incentive to aggrange their affairs so that (interest on mortgage) > (rent collected). So if you apply GST to both legs then you get (GST rebate on interest payments) > (GST paid on rent collected)”

But this does not imply that they would want to leverage themselves up anymore. As when we look at the cost and benefit the GST rebate and cost wash out, just leaving us with just the GST paid on rent collected!

“And if you apply it to rents only (or even imputed rents), then it’s not a value-added tax, and actually puts housing as a disadvantage to all other goods and services”

In this case we are taxing the consumption value of the property. In every other industry the consumption value of their product is taxed. As a result, I do not think it puts property at a relevant disadvantage.

Indeed.

But we can split the points here in order to think about GST.

First, when it is only on rent, then there is no refund.

Secondly, when we pop it on the interest for an investor as well there is a refund of the GST paid on investment – but not the GST that gets paid from the rental service. This is exactly how we want it to be, as we only want the “rental service” to be effectively taxed once.

In this case, as long as demand is not perfectly inelastic, some of the incidence of tax will fall on the landowner.

Furthermore, there is no incentive to “excessively leverage” beyond what we have now – as the GST refund is ONLY on GST that is paid, as you said it is a rebate.

Yes – which is what Brian Fallow is arguing for (hence the title of his column). If you tax rents only, then it’s not a value-added tax and shouldn’t rightly be called GST.

Oh, and GST does NOT fall on the final transaction – it’s collected at every stage in the supply chain, based on the value added at each stage.