Originally posted on LinkedIn
I love coming home to visit. Clean air and water, bird song that makes me weak to my knees. News headlines so delightfully provincial, they’re as likely to make you smile as make you cry. Coming home during an election period is even more satisfying, because the political debates are so refreshingly clear and to the point.
This year is of particular interest as tax dominates. Land and wealth taxes are finally getting the attention they deserve. But much of the debate seems to be missing a key nuance: what should we tax? That is just as important as how much.
New Zealand taxes work.
We tax wages and salaries, businesses and consumption – the things people do to earn a living.
What we tax much less consistently is the wealth people receive simply because they own something valuable: what economists call unearned income. That distinction matters because much of the inequality New Zealand is experiencing is not being created by dramatically different wages, but by the extraordinary difference between those who own valuable assets and those who do not.
And nowhere is this more obvious than land.
It is perfectly reasonable to say that people invest their hard-earned income in property. They save for a deposit, take on a mortgage, maintain a house, and make improvements. They are entitled to the return on the value they create.
But another component of property wealth is routinely overlooked: the value of the land itself.
Land does not become more valuable because the owner has worked harder at owning it. Its location becomes more valuable because other people have built roads, schools, businesses and transport networks around it. Because thousands of people have chosen to live and work nearby. Because a government have changed zoning rules and invested millions in infrastructure. Because the view is a stunner.
The owner may have bought the land. But they did not create its locational value.
Nature and community create that value. When the community creates wealth, it is reasonable to ask why the community isn’t receiving a dividend.
This is the missing point in much of New Zealand’s land-tax debate.
The choice is presented as one between taxing hardworking people and leaving property alone. But a well-designed land tax is not a tax on the houses people build or the improvements they make. It is a charge on the value of a scarce natural resource — the value that arises from owning a particular location.
That distinction matters because taxing land is fundamentally different from taxing work.
Taxing an extra hour of work can discourage that work; taxing improvements can discourage investment. But taxing land does not make Auckland’s location less central, Wellington’s harbour less useful or Christchurch’s infrastructure less valuable.
The land cannot move offshore.
This is why economists have long regarded taxes on land as highly efficient. The OECD has described a pure land tax as preferable to taxing investment, and has repeatedly identified property taxation as one of the less economically damaging ways to raise revenue.
Yet New Zealand has built a remarkably strong preference in the opposite direction.
The OECD’s latest assessment says our system is one of the most housing-biased in the OECD. Owner-occupied housing pays no tax on imputed rent or capital gains, encouraging households to put a disproportionate share of their wealth into housing. The result is higher house prices, lower ownership among younger people, and less capital available to productive businesses.
This is not simply a question of fairness between homeowners and renters.
It is about what kind of economy we want.
When we leave large streams of unearned wealth lightly taxed, we encourage people to compete for ownership of the assets that generate that wealth. Investment quickly becomes hoarding instead of genuine backing of great ideas.
And then we wonder why a young New Zealander can work hard, pay tax on every dollar they earn and still find themselves further and further behind someone who happened to be born to the right parents.
That is not a failure of individual effort, rather a failure of the incentives we created.
There is a deeper principle here, and one that New Zealand has actually understood in other areas of economic policy.
Consider natural resources.
When a company extracts a publicly owned mineral, the government does not simply say: “Well, you found it first, so it’s yours.”
The Crown owns petroleum, gold and silver, uranium, and significant mineral resources. Companies granted the right to extract those resources pay royalties so the public receives a financial return.
The principle is hardly radical: if a resource belongs to all of us, the person given the right to exploit it should not receive the entire economic benefit. The public should receive a return.
So why should land be different?
Land is not manufactured. Nobody produced Auckland or created Wellington’s harbour.
We can build houses, factories, and infrastructure.
But we cannot manufacture another piece of Auckland.
The economic value of that scarce location is therefore fundamentally different from the value created by the labour and capital applied to it.
And yet, we increasingly allow that socially created value to become private wealth.
This is the real issue behind the land-tax debate.
It is not about punishing people for owning homes.
It is about deciding whether the enormous gains generated by growing society should flow primarily to those who own the underlying land, or whether some should return to the society that created them.
Countries prosper when they understand the difference between wealth creation and wealth capture.
We should want people to become rich by inventing things, starting businesses, solving problems, building houses and providing valuable services – stuff Aotearoa is hugely famous for.
But becoming rich because you control a scarce asset whose value everyone around you created is different.
The first should be encouraged. The second should generate a public dividend.
This is why the land-tax debate should not be reduced to whether homeowners can afford another bill.
The bigger question is whether New Zealand is willing to shift taxation away from earned incomes and toward unearned incomes.
That could do more than make our tax system fairer. It could change the direction of our economy: rewarding productive investment rather than property speculation, making it easier to build and invest, and returning some of the value communities create to the communities that created it.
New Zealand does not have a shortage of wealth.
We have a problem with who gets to capture it.
A country with natural resources this abundant should not have children going to school hungry. Poverty at this scale is not inevitable. It is the consequence of choices about what we tax, own, and distribute the wealth our community creates.
I look forward to coming home next time to a debate about tax reform that focuses on the practical work of reform, rather than endless hand-wringing about the politics of it.
Rayna Fahey is the Executive Director of Prosper Australia and is originally from Aotearoa New Zealand.
