Careful with the CGT “silver bullet”

In New Zealand people are looking for a lot of ways to solve many perceived problems with a quick policy solution.  One that is being suggested is a capital gains tax.

The feeling is that we are facing several issues:

  1. We aren’t saving enough
  2. We have too few houses
  3. We are spending too much on houses
  4. Houses is unaffordable

And for some reason a capital gains tax is seen as the solution.  I have one question though – how?

By introducing capital gains taxes we are taxing savers at a higher rate, so we will save less.

By taxing capital gains we are focused on taxing the change in the resale value of property.  Ok cool, but where do we count that?  If an individual subdivides and builds a new house we probably woudn’t … but if an individual does up a property we may count that as capital gains.  So depending on where we define the boundary of the tax we will surely be increasing the tax on investing in the supply of property … and if we are worried we have “too few houses” for some reason then this won’t help.

Now prices are meant to fall because we don’t have a “bubble” from “investors” being “morons” or something, that’s nice – but surely the observed drop in house prices in the first instance will be due to the future tax liability that has now been thrown on property.  This does nothing for “affordability” of housing services for people, as if you buy a house you have to pay the tax, and if you are renting the cost depends on the supply of property (and household income).

I’m all for treating asset classes the same, most definitely.  But I am perplexed that we believe introducing a tax on something will make it more affordable (as that is the thing people seem most concerned about) – so if you would like to tell me in comments that would be much appreciated.

UpdateAndrew Coleman goes through the long-term consequences here of a compensated capital gains tax (so other taxes are cut).  Cool, interesting stuff.  Although the CGT in this increases rents – which makes sense to me, but is different to some of the comments I keep hearing.  And of course Seamus at Offsetting has written a bunch of good posts on the issue.

  • http://twitter.com/MarkHubbard33 Mark Hubbard

    I think related, perhaps this is because of how the Keynesians (who rule ideology) don’t understand savings. There’s an interesting quote on Cafe Hayek this morning; quoting a portion of it:

    “… But Keynes broke their fetters: here, at last, was theoretical doctrine
    that not only obliterated the personal element and was, if not
    mechanistic itself, at least mechanizable, but also smashed the pillar
    into dust; a doctrine that may not actually say but can easily be made
    to say both that ‘who tries to save destroys real capital’ and that via saving, ‘the unequal distribution of income is the ultimate cause of unemployment.’ This is what the Keynesian Revolution amounts to.”

    From: http://cafehayek.com/2012/11/quotation-of-the-day-461.html

    Or a worse spin, perhaps the real target of the Bernard Hickeys’ et al, is to destroy the notion of private savings, because they think the State must drive the economy in this mythical, and destructive need, for ‘equality’. It’s a political agenda here, nothing to do with economics (and economics be damned).

    Sorry, a bit clumsy, not a lot of time … (I was driving solely to my last sentence).

    • http://tvhe.co.nz/ Matt Nolan

      Hi Mark,

      I think Keynesian can be a pretty broad term.

      I suspect that what is going on is many people think “house prices are high, they are expensive” then they think “the prices are being bid up” then they think “if we reduce all the bidding the prices will come down”.

      But this is a bit lazy to be honest – if prices were solely too high, we would be running around building too many houses to get that “return” on them, and then we’d experience what the US did. That hasn’t happened, suggesting there is more at play.

      And then, when we think through it, if we are obsessed by affordability a CGT seem especially weird. As Coleman’s piece shows, we can expect rents (the cost of the housing service) to rise following the introduction of a CGT.

      So I think it has more to do with a misinterpretation of what a CGT does than it has to do with a strict agenda.

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