Outbreak Of Commonsense...

... In New Zealand (spotter's badge: Dearieme):

Reserve Bank chairman and economist Arthur Grimes is proposing a $12 billion land tax, higher gst (1) and slashing personal tax rates, but says the idea is "a personal one".

A 1 per cent a year land tax to raise more than $12 billion and raising gst to 15 per cent would allow for a cut in personal income tax to just 20 per cent, with low-income earners paying no tax...

Finance Minister Michael Cullen, also at the meeting, questioned how people would pay the land tax if they owned property that was not earning an income (2), but he would not comment further...

Dr Grimes said his idea would allow for zero tax on incomes up to $9500, 10per cent tax on incomes between $9500 and $38,000 and 20 per cent on all income above $38,000. "This sort of tax structure would raise enough revenue for the Government to provide funds for existing social services, while encouraging people and firms to add extra value," he said.

A land tax combined with lower income tax and higher gst rates is a very appealing package, says former Reserve Bank governor Don Brash. "If the trade-off were a substantial reduction in income tax rates there would be a lot to commend it," said Dr Brash, the former National Party leader. "It doesn't surprise me, because Arthur Grimes is a very smart economist."

Westpac chief economist Brendan O'Donovan said: "Anything that helps flatten the tax system is going to be good to motivate people." High tax rates were a disincentive to work and investment, and a drag on productivity. He favoured a flatter personal tax system with a higher gst rate to encourage savings and discourage consumption.

The downside of rates or land taxes was that there could be cases of elderly people being forced out of their homes in wealthy suburbs, he said (3). It could be a dampener on house prices, depending on how much of the tax could be passed through in higher rents (4).

A land tax could make life difficult for older people on low fixed incomes or for some farmers and Maori making small returns but sitting on valuable properties. Dr Brash said if people were "asset-rich and cash-poor" they could sell some of their assets or borrow against them to pay the tax...

Dr Grimes said his idea would encourage investment in human capital, new plant and equipment, and research and development. It would also encourage high-value activities to locate in New Zealand...(5)

1) Boo to higher gst, which is their equivalent of VAT, The Worst Tax Of All.

2) Land/location generates income directly (because that's where your business is) or indirectly (if you want to live in a high wage area, you have to pay higher rent or mortgage). Or else it would have no value. For most people, they will lose on the LVT swing and gain on the income tax roundabout. If not, it's simplest to see LVT as a tax on consumption of land, i.e. personally benefitting from 'communal efforts' (TM Friedrich Hayek).

3) Exemptions, discounts, deferment. To be fair, pensioners are least likely to benefit from income tax cuts.

4) It probably would 'dampen house prices', whether that's A Good Thing or A Bad Thing depends on your point of view. As to 'passing on', the upper limit to the amount that can be 'passed on' is the amount by which the tenant's or purchaser's income tax is reduced, so the calculation is quite circular (and supports my theory that we could replace all taxes with LVT).

5) Well obviously. Such a tax can't encourage physical land or infrastructure to relocate from New Zealand, can it?