Between the lines: House tax cries out for more rational debate

By JIM EAGLES

Reaction to the interim report of the McLeod tax review provides a classic demonstration of the conflict between what may be economically desirable and what is seen as politically palatable.

The most controversial of the report's suggestions was, of course, for a tax on the equity in houses.

There is, as it happens, a very strong economic argument for some such measure. It is the view of a range of economists that a major reason for New Zealand's poor savings record and the fact that we have to import much of our investment capital is the national obsession with investing in residential property.

The OECD Economic Survey of New Zealand published late last year noted that not only was New Zealand's savings rate lower than in most developed countries but the use of those savings appeared to be less efficient in maximising growth.

That, it concluded, was because the tax system encouraged people to put all their resources into buying a house and paying off the mortgage rather than a more diversified range of assets.

Even the average Australian - and Australia is hardly a shining light on the international economic scene - now has three or four times as much invested in the capital markets as the average New Zealander.

If we want to make better use of our investment capital to maximise growth, it seems logical to consider removing the tax advantage that applies to investment in houses. That way, over time, New Zealanders might put their money into other investments and help develop an internationally competitive and broad-based economy.

Foolishly imagining that such an important issue might at least be worth debating, the McLeod committee boldly proposed placing housing investment on the same footing as other investments.

Its proposed property tax would cost the average householder maybe $1000 a year, raising $750 million, which could provide an offsetting reduction in income tax, also favoured by the McLeod committee.

But has the suggestion received the intelligent consideration it deserved? Have opponents of the committee's tax proposal put forward alternative means of achieving the same economically desirable end? Has there been widespread discussion of ways to encourage more home-grown investment capital? Not a chance.

The very idea - probably along with all the other thoughtful proposals in the report - has been buried under an avalanche of invective, started by some emotive raving on talkback radio, pushed along by cheap point-scoring by Opposition politicians, and given added momentum by Government attempts to distance itself from any risk of embarrassment.

The New Zealand tradition of investing in housing is, it seems, a cow so sacred that it may not even be looked at in a rational manner.

Sadly, that is all too typical. There seems almost universal agreement that the New Zealand economy is performing poorly and we need to do things differently. But any time a different way of doings things is suggested it is howled down precisely because it is different.

Worse still, far from showing leadership in having ideas debated in a sensible fashion, our politicians jostle to lead the populist stampede away from any thought of taking the necessary tough decisions.

So the McLeod committee's proposals - like so many other practical suggestions for improving the country's economic performance - have been dumped on the policy scrapheap without ever being seriously considered.

So long as that is the standard of economic debate and the level of political courage shown there is little chance of the economy being transformed any time soon.