Biggest problem is the fact that you can buy an investment property, rent it out. If the rent doesn't cover the mortgage and other property expenses, meaning you have to contribute some of your wages to cover the mortgage. This means you make a loss on the property which can be offset against the tax you paid on your PAYE job. This tax refund is essentially free money. Which means you still get a benefit from owning a rental property even if there is never any capital gains. And the mortgage payments are simply "forced savings".
And under the previous Labour Govt, you could often also qualify for working for families if you previously didn't due to earning too much. National got rid of that in 2008. Which is why house prices went up heaps when labour was in power, but rents didn't go up much. Yet rents started going up more when National got into power. (So higher rents are definitely John Key's fault, for those who like to blame everything on him). But getting rid of that subsidy was still the right thing to do. This proves that tax rules definitely influence rents.
Now the government needs to get rid of that big tax dodge. Due to it causing excessive housing investment as well as not collecting as much tax. Easiest and fairest way of doing that - Outlaw all tax deductions against PAYE income. (Except donations) This is intended to get the desired result without many side effects.
And for taxing capital gains - First of all the ideal tax system is one where all income is taxed equally. And one where taxes don't influence decisions of investment, sales, (Wether or not to buy or sell an asset such as a house) or jobs ect.
How I propose to achieve that - Make kiwisaver operate on a "before tax" basis. Meaning you can contribute to kiwisaver out of your before tax income. But you then pay tax on your withdraws. Allow withdraws to purchase a house tax free if you don't currently own a home (even if you previously did own a home). If you sell a house you can buy another house with the sale money tax free. Or put the entire amount into kiwisaver tax free. This means that you can buy and sell houses, and move money between a house and kiwisaver tax free. But if you spend that money on anything else or gift it to anyone - you pay tax. And if you die, your estate pays tax on the money that gets distributed. (no tax on things like funereal costs and legal fees to manage your estate).
The overall intention of this - tax will eventually be collected on all capital gains. But only when it is eventually spent. This is to stop capital gains tax changing peoples decisions on wether to sell their house or not. And it will mean people selling to move. Or switching between being an owner occupier and renting out their house while they pay rent elsewhere. Wont be penalised. People will be discouraged from withdrawing everything from kiwisaver at once for a big spend up - as they will pay more tax to do so. And to help stop excessive inter generational buildups of wealth. As homeowners can currently gift deposits to their kids (either in cash or via use of equity in the parents property) to allow them to buy houses at young ages and skip the rent trap. Meaning they also buildup wealth to again pass on in turn to their kids. While those stuck renting are trapped. And only a few can escape.
As the big problem with a simple capital gains tax - is that not as many people sell their houses. As they will have to pay tax if they do. But this causes prices to increase as there are not as many houses for sale. And a capital gains tax that exempts the family home encourages people to over capitalise their homes. And makes it less likely that landlords will upgrade their rental properties.
And this will also mean that tax on a property, will finally be the same as tax on money earning interest in the bank (at least in kiwisaver). As in both cases investment returns can be compounded without paying tax - meaning your investments grow alot faster. And you only pay tax when you decide to spend that money. So will encourage more savings.
There is still the problem of restrictive planning rules making houses harder to build. And more expensive than they need to be (which is a separate but still very big issue, That I also have ideas on how to solve). And any changes to discourage property investment will cause rents to rise. Until the property market and wider economy rebalance.
So what do you think - any big problems apart from people who currently own property not wanting to pay tax? Or should I start my own political party?
