KEY POINTS:
A friend of mine went to one of those investment seminars a while back. The kind that promises to show you how you can make lots of money by using the equity in your home to buy a rental property.
A few months later she bought her first investment property. Of course, she intended to sell it again when the time was right, to make what she hoped would be a substantial amount of tax-free money. In the meantime, she told me triumphantly, her tenants were paying off the mortgage.
It seemed fair enough to her. She wants to be able to look after herself in her old age, and regrets she didn't get on the property track earlier.
Besides which, anyone with any sense or gumption was doing the same thing: buying a few properties, pocketing the tax deductions, then flicking them for a profit. It was practically a national pastime.
I doubt she gave much thought to the kind of social environment she was helping to create.
Investors like her may have done more to push up house prices than any other single factor, but criticism of such investment activities has been muted, even as we count the social and economic costs of home ownership moving beyond the reach of most New Zealanders.
What will we do when our nurses and firemen can no longer afford to live anywhere near our cities? Never mind, at least some of us will be having comfortable retirements.
You can't blame people for taking advantage of tax deductions and the absence of a capital gains tax on the sale of property. If anything, we're inclined to be a little too admiring of their financial opportunism. No wonder investors see themselves as smart, fiscally prudent people who deserve their hard-earned gains. So woe betide any politician or party that dares to come between housing investors and their untaxed capital gains.
"The Government is not interested in a capital gains tax, either in the short term or the long term," said a spokeswoman for Michael Cullen back in 2000, after an OECD report recommended broadening our income tax base by including capital gains in a more comprehensive way. "Basically, it is political suicide in New Zealand."
The Tax Review 2001 became just as allergic to the idea after its proposal to tax the net equity component of owner-occupied and rental houses "met with such widespread opposition that no government is likely to implement it in the near future".
Fortune may favour the brave, but our tax treatment of housing undoubtedly favours the property speculator.
An analysis by two tax experts, American Leonard E. Burman and New Zealander David White, published in the New Zealand Journal of Taxation Law and Policy in September 2003, argued that our system - where "capital gains are taxed in different ways under different circumstances and often, but not always, not at all" - was complicated, difficult to administer and unfair.
"It is horizontally inequitable because taxpayers in similar positions may end up paying much different amounts of tax depending on how they structure their investments or where they are made.
"It is vertically inequitable because the general exemption of capital gains most benefits taxpayers with very high incomes. Thus, wealthy taxpayers with many untaxed capital gains pay less tax as a share of income than their lower-income counterparts whose income arises primarily from wages."
The paper argued that while there wasn't a perfect way to tax sales gains, not doing it "especially when income tax rates are high, creates a huge incentive for tax practitioners to find investments that can earn tax-free income. The result is economic waste and inequity between those who can take advantage of the loophole and those who cannot or do not."
Those who can, but choose not to, include management consultant John Robson, who wrote to me recently decrying "the investment rort that's doing both New Zealanders and New Zealand a big disservice".
Robson says he won't invest in property on principle. He argues that two features of the tax regime are costing the country billions in lost tax: the inequitable tax subsidy investors can claim on their properties that homeowners cannot; and the fact that although property bought for capital gain is already taxable under current legislation, it's seldom declared as such.
"There's no need for new rules, just enforcement of the current ones."
Get rid of those incentives and we might achieve what Alan Bollard's heavy-handed hiking of the official cash rate has failed to accomplish - stop speculation in its tracks, but without the collateral damage of high interest rates Bollard is willing to inflict on the rest of us.
Robson calculates, on the basis of an estimated 464,000 investment properties worth $153 billion, that the cost to the public purse could be as much as $8 billion. Imagine what a difference that could make to the quality of our public education and health.
