TOP enjoy the minor party privilege of innovative thinking.
TOP has always been a party with innovative tax and economic policy ideas. This is the privilege of being a minor party. They know they will not have to implement their policies or be accused of failing to keep their promises. However, it also provides discussion and challenge around the incumbent policy settings.
TOP’s ‘fair’ tax policy is to help out those who are struggling to afford the basics needed for a good life. They use as tax as a tool to achieve this by initially introducing more progressivity into the income tax system, and by introducing a land tax.
However, the second phase of their policy seems to reduce the progressivity in the income tax system and relies more heavily on a land tax to fund the social spending programmes they propose – including a tax-free universal basic income.
TOP’s first phase of their tax policy for this year’s election comes under the banner of “save, shift, switch”. This describes the three parts of TOPs proposed tax policy. Save: a tax-free threshold up to $15,000 providing a tax cut for all taxpayers. Shift: changing the tax brackets to significantly increase the marginal tax rates for higher income earners. Switch: the introduction of a tax on the value of unimproved residential land.
The effect of TOP’s proposed policies in phase one is to introduce more progressivity into the tax system. This is achieved through the change in tax rates and the introduction of a tax on land. TOP state that their shifting tax brackets and tax-free threshold will make a difference to the 1.7m families on low-medium incomes. This is true. However, even at an individual income of $250,000,
TOPs tax policy results in a modest reduction of income taxes.
It is not until the highest 45% tax rate applies on income above $250,000 that income taxes begin to increase from current levels. Phase two of TOPs tax policy proposes a flat tax rate of 35% for all personal, company, and trustee income, alongside a tax-free universal basic income of $16,500 for each citizen and resident between 18 and 65 years. This is less progressive than phase one – any progressivity would be achieved via the land tax.
The proposed land tax is 0.75% on the unimproved value of the land. In phase two, this would increase to 1.25%. Generally, this could be regarded as a progressive tax as landowners tend to be wealthier than non-landowners. The proposed land tax does not include improvements so luxury houses are not part of the tax base, neither does it matter if the land is free of encumbrances such as a mortgage. TOP state the intention of this policy is to “re-orient our economy towards productive work and away from unproductive land ownership”.
TOP also propose, like many of the parties, to remove the BLT and interest deductibility restriction. Alongside these tax policies aimed at rebalancing New Zealand’s investment away from land, is a requirement for rental investors to have a 100% deposit when purchasing existing homes. This means existing homeowners would no longer be able to leverage their equity, often earned through increases in the market value of their property, to purchase more housing.
TOP’s proposed land tax could mean some substantial increases in taxation for those who own property in New Zealand’s more valuable areas. Using TOPs ‘tax switch calculator’, properties in more highly valued areas of Auckland result in land tax calculations of $20,000 at a land tax rate of 0.75%.
While a taxpayer may receive a small reduction in their income tax liability on wages or salary, their land tax liability could result in quite a hefty increase in overall taxation. A tax base other than a flow of money comes with its challenges – how to collect it and how the taxpayer funds it.
It is easy to see TOPs objective with respect to their tax policy direction. We have had a sustained period of over investment in land. They see tax as a tool to shift investment away from residential property and also, perhaps, introduce more progressivity into the tax system at the same time. The tax cost, especially after the implementation of phase two, is borne by residential property owners – including owner-occupied houses.
Alison Pavlovich is a senior lecturer in the School of Accounting and Commercial Law. She has a strong commercial and academic background in taxation.