By BRIAN FALLOW economics editor
Taxing people's equity in both owner-occupied and rental housing is one of the ideas put up for debate by the McLeod tax review.
The review's interim paper, released yesterday to promote discussion, also:
* Favours a flatter, but not flat income tax scale
* Concludes that any increase in tax should be to GST, but if the Government can cut tax it should cut income tax first
* Favours the abolition of excise duties on tobacco, alcohol, gaming and petrol on the grounds that they are inefficient and hit the poor hardest
* Is open to a carbon tax, but warns against New Zealand getting ahead of the international pack
* Favours retaining the present tax treatment of retirement savings
* Rejects a comprehensive capital gains tax
* Rejects a financial transactions tax or a Tobin tax (on international foreign exchange transactions)
* Favours the abolition of gift duty and cheque duty
* Suggests a $1 million cap on the amount of income tax any individual pays.
The review chairman, Rob McLeod, acknowledged that the proposal for a tax on housing would be controversial.
"But we would be derelict in our duty if we didn't put it up for debate," he said.
The OECD had identified housing as a large gap in the tax base.
The present concessionary treatment of housing was one reason New Zealanders held an unusually high proportion of their savings in bricks and mortar.
The option under consideration, similar to one in use in the Netherlands, uses the risk-free return method.
It takes the value of the house at the start of the year, less any debt owing on it. That figure is then multiplied by the inflation-adjusted return on a risk-free investment such as a one-year Government bond and the end amount is taxed at the investor's tax rate.
For example: David and Ruth own a $200,000 house with a $100,000 mortgage. His marginal tax rate is 39c in the dollar, hers is 21c. The real, risk-free return is 4 per cent.
The taxable "income" from their owner-occupied house is therefore $4000, which is split equally between them, so he pays an extra $780 in tax and she pays $420.
The review said that the extra tax raised of $750 million a year should be applied to reducing income tax.
Mr McLeod said the impact of the tax would fall more on the rich than the poor and it would depress the value of houses as buyers took account of the extra tax.
The rationale for the tax is that if the money tied up in a house were used elsewhere it would most likely generate income.
Deloitte tax partner Thomas Pippos said the risk-free return method introduced an economic concept of income which was very different from traditional concepts.
Applied to housing, it was not too different from the concept of imputed rentals, which the review had rejected.
PricewaterhouseCoopers tax partner John Shewan said he did not share the view that such a tax would be quite straightforward to implement.
"I can understand the economic rationale behind it, but I see severe liquidity problems with imposing tax on illiquid assets such as houses.
"Their solution is to consider a loan scheme, where a taxpayer without the cash to pay the tax could borrow it from the Government at a market interest rate.
"But based on our experience of the student loans scheme, any tax which requires people to borrow over long periods of time has some significant practical issues associated with it."
But he said he applauded the intellectual depth and dispassionate nature of the issues paper, which is more than 200 pages long, and it would be the basis for tax policies of a number of political parties for years to come.
There will now be a second round of submissions before the final report is presented to the Government in October.
Finance Minister Michael Cullen declined to comment on the report, but said there would be no significant changes to the tax system without a mandate from the next general election.