Capital Gains Tax

[drew]

Te Whetu all you comments i mostly agree with. The point i was simply making is that a constant rate of inflation can be dealt with. If we know its going to be say 5% or 10% then all prices can simply be indexed to the expected inflation rate. It would be a little problematic but Brazil has coped with high inflation for a very long time now. Thats not to say inflation is not harmful but when it fluctuates year on year is when it really makes a mess of things.

What form the property tax takes has different advantages/disadvantages, a CGT is less likely to drive off capital. But it's also harder to implement (and would need to be higher) than a FDR tax. I'm actually rather unconcerned which it is but we should really have I just feel we need something.

The houses and land cant leave the additional capital required to build new houses certainly can leave or not come at all.

I'd argue this, but not now... and can certainly see some arguments which could be made on your side. What does history show us? I'm sure property taxes have been introduced and the impact recorded in other places in the world. Do you also say that a CGT would increase prices (I'm assuming not)?

I think testing empirical evidence against impacts of a CGT on property prices is a very difficult task and studies always need to be discounted due to potential bias.

I think you should base your opinion on basic economic reasoning on what impact a CGT is likely to have. Prices are only signals and are a function of supply and demand. Whenever a govt taxes something it is expected to reduce both demand and supply. Maybe check out duncan macgregors posts in the property section - he correctly points out how regulations, red tape and unreasonable costs being imposed on the building of houses that has caused the high prices in NZ.

The basic problem in the housing market is there are not enough houses. There is no shortage of land in NZ either. During the last 10 years or so prices kept rising in the housing market. We had the most fertile conditions to create an oversupply of houses with low interest rates, rising GDP, general public confidence etc. Instead the only oversupply occurred in central city apartments because that was the only area in which the market could quickly and cost effectively create new housing units in response to price signals.

So a CGT will reduce demand somewhat but people still need to live somewhere so the demand is a bit inelastic. The bigger concern is what a CGT will have on supply. Also it might make it more difficult to sell or rather people will be more reluctant to sell if they cannot pass on all of the cost to a buyer. Either way, supply will be restricted and costs will go up.

I remember over a year ago reading an article by John Whitehead about how house prices were a problem and he blamed everybody from greedy mums and dads, property hoarders, the banks etc. Everyone was to blame except of course the govt. If you want to fix the housing market we need more houses - in that case we should be encouraging the speculators and high prices because thats the only way more houses will be built. If you try to force the prices down then, as is typical in the wonderful world of economics and counter intuitive unexpected consequences, you will end up with even higher prices.