Opportunity Party Unveils Tax Reform Plan with Universal Basic Income

Opportunity leader Quilae Wong's tax and spending reforms are three parts that must be taken together. Photo: Tim Murphy

The financial policy package from the Opportunity party suggests 70 percent of taxpayers would be better off, 20 percent not materially affected and 10 percent worse off.

Prime Minister Christopher Luxon and I are in the 10 percent – we both own lots of property.

When someone squeals about paying more to the government under Opportunity’s policies, you should recognise pretty quickly why they’re sweating.

Overall, the package is fiscally neutral so they’re wrong. Perhaps it’s because they’re in the 10 percent enjoying the fruits of the huge loophole in our income tax regime.

What should be clear but is not generally recognised is that the reform proposed, designed to redirect investment to where it boosts productivity (by discouraging it being directed to where it does not) comprises three elements:

• Ensuring all capital income to be taxable – removal of the tax loophole for owner occupiers of housing
• Universal Basic Income – so not just for superannuitants and beneficiaries
• Flattening of income tax rates, with a big reduction in the progressivity

To critique the package you need to take account of the net effect of all three elements, not just pick on one. So let’s summarise each element.

Closing the income tax loophole

As I’ve discussed on many occasions in many forums, New Zealand has a giant loophole in its income tax regime. We do not tax all of the income generated from ownership of property. We tax some of it, but the single largest element left out is taxing the income you receive from owning and occupying your own home. Let me explain what that income is.

When you have $500k in the bank you earn interest and pay tax on it. When you put that $500k into a house and live in it you enjoy a roof over your head each year and don’t pay tax on that benefit. That benefit is called imputed rent and is included in the national income accounts. In no way is this equitable having imputed rent exempt from income tax – it is a loophole.

So strong has this tax-free benefit been that we all want to shelter ourselves from tax by owning as many houses or owning the most expensive mansion we can afford. We spend on housing far more that is warranted simply for shelter, we do it for the tax-free benefit – and that has driven house prices through the roof over many decades. Christopher Luxon and I know this, which is why we own so many houses. When I was in politics I used to say I never rent them out, tenants just dirty the carpets. What I meant was that is not why they’re owned – rent is a secondary reason only.

Now before we proceed any further, just stop until you get your head around this simple point. There is a loophole in our income tax regime in that some forms of capital provide income that we do not tax. You have to accept this point before you can address the questions around the best way of addressing it. If you’re stuck here and can’t get the point, don’t read any further, you’re not ready. Stay here and ask for help.

Okay if you’re across this simple precept, you’re ready to proceed. By deeming the income from property ownership to include the benefit of shelter, we can assign a value to it. Let’s say it’s 3 percent of the value of the property – that’s a simplification, we could more accurately measure it by assessing what the market rent for such a property would be. The deemed income of 3 percent, though, is a lot easier to calibrate.

By the way, government already deems income on some forms of capital assets and subjects it to income tax; namely on foreign shares owned by New Zealanders where the deemed income currently is set at 5 percent of the value of the shares each year. If your tax rate is 39% percent you might pay up to almost 2 percent of that deemed 5 percent in tax each year.

So what’s being proposed here for property is nothing new.

Now, other forms of income that you are earning from a property and declaring for tax purposes, matter. If you’re renting it out for part of the year say, then the 3 percent annual imputed income needs to be reduced accordingly. The imputed rent is not an additional tax, it is tax arising from closing a loophole, wherein income you receive (in terms of use of the property) is not assessed at all.

In addition, capital gains are not taxable in this reform. Capital gains are not income they are windfalls and capital losses similarly are defined as negative windfalls. You’ll not find any national accounts that measure income comprehensively, including capital gains on domestic assets.

Understandingly, a beef some have with this reform is that taxes need cash to be paid, whereas imputed income is deemed, it is not cash. So where is the cash supposed to come from?

This reminds me of the same question about paying local body rates – or insurance. The answer is that you make provision, you balance your cash incomings with your cash outgoings.

This is true as a general principle, however does not help answer the question of how we might transition from the current regime to one that has closed the tax loophole around owner occupied property. Clearly the cash requirements are going to rise, and if the transition is overnight, such a change would cause financial mayhem.

There’s a few mechanisms for transition.

• Do it in stages so the deemed rate of income starts at 0.5 percent of the value of the house say, rather than 3 percent and is worked up over years
• A second way is to enable those without the cash to pay the IRD via a reverse mortgage or equity claim in the property
• And a third and more common way, will be to use the cash relief provided in this package via the UBI or negative tax rate regime that is part of the package. This removes the cashflow issue for most people.

And of course any combination of the three is possible. The point is this is merely transition and can be managed.

2 The Universal Basic Income

Government already provides a lot of universal income – healthcare, education and superannuation are examples. Some are cash, some are in kind but at some stage in our lives we are universally entitled to these benefits. This is what governments do, they make beneficiaries of us all – and thank goodness, without public goods we would be a very different society.

It is hard to fathom then the phobia some on the right have about the UBI. The UBI is just another example of paying taxes and receiving universal access to benefits, some delivered in kind others in cash.

The trick is setting the UBI at a level below the level at which it’s an incentive to hang about and smoke dope, but it’s high enough to enable dismantling the bulk of targeted welfare. Remember our current regime provides welfare payouts to families with $135,000 of household income – imagine the expense and inefficiency of the infrastructure in place to administer that.

One of the major concerns for economists over recent decades has been the low growth in real wages and the phenomenon of labour compensation rising more slowly than labour productivity. While closing the loophole in the income tax regime will help address the low productivity performance through steering capital towards more productive endeavour, it’s the UBI that will address this issue of labour getting squeezed out of the fruits from production.

The advent of AI portends to be the latest step in the technological revolution that is automating many of our production processes and marginalising the contribution of large chunks of our workforce.

In the economics profession we always dream of a Utopia where the machines do all the production and we humans can have a life of leisure – or at least work for enjoyment not so much out of necessity. That’s fine but only insofar as those hours not at the workbench don’t crimp our incomes. We still would like an acceptable and rising income – and if the machines are doing the production why can’t we?

The UBI (or negative income tax) is a way of procuring that, alongside better and better universal healthcare and education and superannuation.

3. Flattening the income tax regime

The final way of ensuring that the tax and welfare reform package is budget neutral is to lower the higher tax rates imposed on income currently, and flatten out the whole regime.

This provides an incentive to earn more income and removes the plethora of schemes we all come up with to avoid the higher rates of income tax.

It is flattening of the tax rate schedule that provides the ability to ensure the reform package is all about changing the tax base, not about raising the amount of the net tax (tax less benefits) take.

The reform package here should appeal to everyone except those of us that have built up our capital by virtue of the loophole in our income tax regime that has made ownership of residential property so bountiful.

The flipside of decades of such neglect is that current generations are really struggling to afford a roof over their head. The entrenched self interest of some older voters doesn’t care about that.

Gareth Morgan

Economist Gareth Morgan set up the Morgan Foundation and is former leader of The Opportunities Party. More by Gareth Morgan

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21 Comments

1. So capital gains remain untaxed (dismissed as windfall), wealth and income inequality doesn’t matter (eg reducing progressiveness of income tax) , we still under-resource universal basic services (e.g. revenue neutral, nothing about direct monetary financing of infrastructure). Great plan that.

2. Opportunity would be criticised that it’s a “leftist party” only interested in increasing taxes so the approach has been to be tax neutral. Nobody suggests that there isn’t a need to consider other taxes but let’s work to reset the current unbalanced system first. Let’s give IRD the tools to chase tax evaders, whose estimated cost to the NZ economyis $1-5B annually, and all those international companies taking billions out of the economy yearly and paying virtually no tax. Other assets may also be covered in the future but wealthy people like their property and this is one way of making sure they can’t escape tax.

3. Some of us just scape into a home and have a little garden. We live simply and carefully and budget closely our dwindling savings. Then whammo – an enormous rise in rates. And we’re 75. Or 80.

To consider a land tax as well as that is terrifying.

We’re not property magnates. We’re small town old people living so we can walk to the supermarket and stay out of the dreary rooms of the local ‘rest’ home.

Please just tax the really wealthy- like Luxon and Morgan.

1. Hard to argue with that.

2. I don’t agree with you, Andrew. Taxation isn’t the only toolkit a government must play with. A fairer tax system which simplifies the collection of tax whilst being neutral overall would be a good first step.

Then we can talk about the other things we could be doing.

1. And when basic public services are clearly underfunded under the current tax/public borrowing regime should we really be sticking to ‘neutral overall’?

2. Well, what we are currently doing doesn’t appear to be working – so how long do we continue with the status quo hoping something will change?

3. It is a pity that Gareth helps ruin an otherwise excellent analysis by talking about him and the PM being clever chasing tax free capital gains through their housing investments. It would be better to hear that wealth was being used to invest in productive assets, especially those that help New Zealand to transition to a high income, high employment economy. We also need to invest in moving away from fossil fuels so there are plenty of opportunities to make useful investments in that sector.

4. I think you find that GM invests in more than just houses, its just that we’re rewarded for putting more into housing than is justified and frankly, if you could, you’d be mad not to. Putting more into funding paying infrastructure and productive ventures will set up NZ to have a higher productivity economy. I agree that the LVT/CI policy frightens some pensioners with little other income apart from Super, and the prospect of finding cash for a LVT when they’re not benefiting from any increased income. But, if you have sufficient lead in time, you can elect to reduce that commitment, or defer any payment until your carried out feet first or require residential care without it seriously impacting your life. Doing the calculations, even if if LVT was charged af the proposed full rate of 1.75% (its far more likely to be phased in over 5-10 years) , I estimate that after 20 years, 80% of the value of your house would still be intact. Is that too much to face? For many this won’t be a major issue at all unless they’re at the control of grasping children. If you want Universal Super, that you’ve never paid for in your taxes, health care, free public transport, etc something has to give here because too many are not contributing via this tax loophole, and we’re going backwards because of the bulge of babyboomers heading into retirement and their associated costs (I’m one of them). If we need to find more tax to fund better heathcare or other public benefits (and don’t get me started on tax evasion and the big businesses that pay virtually no tax in this country) then we can have that discussion.

5. ” For many this won’t be a major issue at all unless they’re at the control of grasping children.” What kind of comment is this? It is one from (like the writer of this article) who has no understanding of the position of most working NZers. I’m sure Dr Carey and his cohorts want to leave a legacy for their children – are you then saying that your children are “graspers”? Do they know this ? But you do not speak for my children nor many others. And herein lies the problems with these theories: they are lead and invented by those with the most to gain, those who will hardly notice the change if it was ever made. It is more TOP down theory with little understanding of the basic needs of working NZers.

6. Gareth Morgan & Qiulae Wong are examples of that “entrenched self interest” Gareth Morgan talks about. Quite happy to exploit all the loopholes while they exist, then after THEY reap the rewards, lecture the rest of us “older voters” & those who “hang about & smoke dope” on why things must change.

7. It is not tax avoidance that drives people’s desire to own their own home. It’s rent avoidance and the wish for security and self-reliance. Wage and salary earners rarely have a “plethora of schemes” to avoid paying higher income tax. You imply that I am dense because I cannot see how imputed rent is income, when I spent decades paying off a mortgage, entirely so that I wouldn’t have the threat of increasing rent or eviction hanging over me in retirement.

8. So why don’t you want that for others? Too many are locked out of the housing market because they can’t get enough together to get on the ladder because of expensive rents snd housing prices. Owning your own house is about security (but also we need a lot more long-term rental housing) but it shouldn’t come at the expense of a balanced tax system or others trying to get on the ladder.

9. This seems like déjà vu to me, another unproven socio/economic theory being hoisted upon us like the one we had with Roger Douglas. The idea of the wealthy living the life of Riley in their mystical AI-driven utopia while those without jobs having to prop up the budget neutral and corporate controlled state through land taxes seems like an extension of the grotesque ever-increasing wealth and income disparities that are plaguing societies. Land taxes are going to drive many of us off our land and the UBI isn’t going to help if there’s no work. I think instead of this theory we need to be looking at the ramifications of an AI-driven and natural-resource hungry world and what that means for society and the biosphere.

10. I’m sorry, but I think all the earlier contributors here have not read properly what Gareth has actually written. Please re-read it carefully. (PS I’m not an Opportunity Party member and I don’t even like Gareth Morgan)

11. Talk about the occasional blindness of the theory. This reveals a huge lack of understanding of what makes their fellows citizens tick. We strive to build the family security of owning a home. This requires a mix of hard work, thrift, and long term committment – the same qualities that also make a society tick. We pay our many taxes along the way to this home ownership. Such an outlandish tax idea that will never fly. Incidently, how misleading can the name of a party be. “Opportunity?” Exactly the opposite I think.

12. I am thrilled that the conversation about creating a fairer tax system is so active. I think tax systems throughout the world are appallingly unfair and I want that to change. I think this article is excellent. There are things I like about what is being proposed and things I don’t. What I want is fundamental change to make things fairer for all citizens and I hope it happens.

13. I applaud Gareth’s outline of understanding Opportunity’s tax and spending structure. I feel that many of the negative comments display either a determination to ignore his instruction “Now before we proceed any further, just stop until you get your head around this simple point…… If you’re stuck here and can’t get the point, don’t read any further, you’re not ready. Stay here and ask for help.” Remember, the package is fiscally neutral. For the change to work it requires an acceptance of the whole package, the acknowledgement that it will take some time to successfully bed in and an awareness that the end result will be a more equitable society. No-one can claim that our present society has any semblance of equibitily nor any pathway to equibility under our present tax system. I find it disturbing that so much of our discourse is about “jobs”, which are seen as a suitable way of distibuting wealth and contribution to society. When one looks at the poor wages being paid to many, at the large and growing number of unemployed, as well as the vast number of poeple who carry out volunteering (unpaid) work, the present system is grossly inequitable.

14. Well, what we are currently doing doesn’t appear to be working – so how long do we continue with the status quo hoping something will change? I appreciate you are a proponent of Modern Monetary Theory and perhaps that might be your proposed solution, but I have to say I find Gareth’s arguments convincing, balanced and fair.

15. Taxing imputed rent and introducing a Land Tax would be the final straw for those who are asset-rich but cash-poor, relying entirely on Super. Forcing retirees to pay yearly taxes on ‘deemed’ income or land values they don’t actually see in cash is a disaster. Why not fix the housing loophole and address inequality by clipping the ticket at the end instead? Implementing inheritance taxes and strict rules on Family Trusts would ensure generational wealth is shared back with society, akin to countries like the UK and US. Taxing this massive, untaxed wealth transfer—which is running at approximately $27 billion per year—when property passes to the next generation makes far more sense than squeezing retirees out of their family homes while they are still living in them.

16. The value of a house etc is taxed by local councils as “rates”. It is not missing. It may not be uniform across regions though and could be done better, no doubt. But where is the Capital Gains Tax???

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