NZ’s Great Income Tax Experiment of 1989 has propelled property prices & house sizes to soar upwards since 1990, dooming younger generations to renting longer, requiring them more time to save for a house deposit & having to pay up to buy oversized houses.

♦ In a paper titled Housing, the ‘Great Income Tax Experiment’ and the intergenerational consequences of the lease,  Andrew Coleman shows how the 1989 tax experiment ignored the potential impacts on land values, house sizes & property prices as govt chased a short-term revenue kick but doomed future generations.

• The tax experiment went horribly wrong and it created distortions in NZ’s tax settings – thus, Coleman suggests to adopt a neutral income tax system.

• The distorted tax system incentivises people to buy & bid up the price of better located land when a neutral tax system would not, making land prices artificially high that future generations will be paying.

• On rents, the system creates incentives to become a landlord rather than lend money, allowing landlords to bid up house prices rather than lower rents.

• Coleman outlines 3 possible solutions that would allow for an intergenerational transfer:

1. Do nothing “and keep a tax system that’s particularly distortionary on housing markets.”

2. Create a political consensus to tax imputed rents and capital gains on an accrual basis.

3. Move back to ‘exempt exempt tax’ system (EET), like the rest of the world, an option Coleman is now throwing his weight behind, due to the political impossibilities of option 2.

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