It has now been six days since National unveiled its tax plan – eons ago in the 24/7 news cycle – but the credibility problem with it just won’t go away. Tax cuts are never a free lunch. The revenue for them has to come from somewhere. It can be from either (or both) new taxes or by spending less, relative to GDP on the likes of health, education and welfare.

Obviously, cutting the key social services used by people most in need, while peddling tax cuts that mainly benefit those least in need could be a bad political look for National. (Some voters will still recall National’s systematic rundown of public health a decade ago.) This time around, National is claiming it will obtain the revenue for its tax cuts from (a) wider taxes on online gambling, (b) higher levies on immigration visas and (c) a new tax on foreign buyers of wealthy homes.

In each case, National has exaggerated how much revenue its proposals would generate. Take for example, that 15% tax on foreign buyers purchasing New Zealand homes worth $2 million or more. National says this would eventually generate $740 million a year, on average. Really? As Jack Tame pointed out on Q&A last weekend, this would require New Zealand to be willing and able to sell (and tax) a “fantastical” number of $10-20 million mansions in prime locations around the country, every year.

Along this yellow brick road, ushering in foreign buyers at the top end of the housing would also have ripple effects likely to make cheaper housing significantly more unaffordable. In Auckland on current CoreLogic estimates, a whopping 15% of homes would be laid open by National to price competition by foreign buyers. So would 11% of the homes in already scarcity-plagued Queenstown. In the process, sellers with homes in the $1.5 million to $2 million bracket would be incentivised to raise their prices to attract in those foreign buyers with their deeper pockets. If the aim is to keep housing affordable for the squeezed middle class, Labour’s ban on foreign buyers makes far more sense than National’s tax.

The tax National is proposing would combine the worst of both worlds. It would heat up parts of the housing market, while failing to meet the revenue targets that National is touting. Let’s explain.

Problems, failings and Canadians

As others have pointed out, the proposed 15% levy would be incompatible with the international tax treaties that New Zealand has signed. Academic tax experts (cited By Jack Tame) have pointed to “non-differentiation” provisions in those treaties that forbid discrimination against foreigners in favour of locals in investment contexts. National has already conceded that similar non-discriminatory provisions exist in our free trade trade agreements with Australia and Singapore and have therefore ruled out taxing foreign buyers from both those countries. So subtract them from the potential revenue.

Ironically, National has been citing the tax experts opposed to Labour’s proposal of taking GST off fruit and vegetables as proof of the fallacy of this policy. However, National is flatly ignoring the (equally damning) verdicts by tax experts on National’s foreign buyer tax. Funny that.

Interestingly the gambit by which tax expert Robin Oliver says the tax could conceivably co-exist with the tax treaties - i.e. by not taxing foreign buyers from China as Chinese nationals but using Chinese locals instead as channels for the funds – would be a dodge that would carry a reputational risk to this country. More importantly, it would open the door to such massive avoidance as to gut the revenue targets on which National is depending. Other jurisdictions (e.g. British Columbia) cracked down on that option, for precisely that reason. They wanted to discourage tax avoidance.

National is skating on very thin ice here. Yesterday morning on RNZ, National’s campaign manager Chris Bishop airily dismissed the criticisms of the tax experts by citing British Columbia which – he alleged – has done exactly the same thing as National is proposing to do here, and suffered no repercussions.

Hmm. Bishop is being misleading. Currently, British Columbia is more in tune with Labour’s ban than with National’s tax. As of January 2023 British Columbia (B.C.) and Ontario imposed a two year ban on foreign buyers of residential properties situated in a number of designated high value urban and provincial locations.

In sum, British Columbia’s four year experiment with a foreign buyer levy is a cautionary tale, not a happy precedent. Early on, B.C found a 15% levy inadequate for purpose, and raised it to 20%. At the time of implementation in 2018, the MetroVancouver housing market was massively overheating: foreign purchases were running at 17% of all transactions and 23% of total transaction value. Most of these foreign buyers were from China.

Unhappily for National’s rosy $740 million revenue expectations... After the imposition of the tax, the sales numbers across British Columbia plummeted:

Foreign purchases dropped into the low single digits in the aftermath of the tax to 2.6% of transactions in 2017. The 2018 BC Budget, under a new NDP government, increased the foreign buyers’ tax to 20% and expanded its scope beyond Metro Vancouver to include the Fraser Valley, the Capital and Nanaimo Regional Districts on Vancouver Island and the Central Okanagan Regional District. Since then the share of foreign purchases has fallen further to 2.5% in 2018, 2.0% in 2019 and 1.3% in 2020. In the rest of the province the foreign share fell from 2.4% in 2017 to 1.4% of transactions in 2020.

Note: Those sales declines began pre-Covid. However, the precipitous drop was not entirely due to the foreign buyer tax. In 2017, China began to regulate the capital outflows of its citizens, and it could easily do so again, given the currently shaky state of China’s economy. Meaning: China’s anti-capital flight regulations could further dampen National’s likely revenue returns. The B.C. example should be telling us that such a tax – if fairly and efficiently applied -will push the buyer numbers far below what National needs to make its tax cuts vs tax revenue balance stack up.

Unless, of course...

But you may well ask – what if National, in its quest for foreign buyers to shore up its tax revenues, unconditionally opened the floodgates? After all, a Wild West approach to home purchases by foreigners would be consistent with the centre-right’s chronic aversion to making the wealthy comply with regulations. But here’s the thing: There would still be a constant tension between National’s desire to maximise the numbers of foreign buyers on one hand, with its need to make the tax difficult to avoid on the other, in order to meet its revenue targets. National has barely begun to engage with how to walk that tightrope.

Again, since Bishop has raised British Columbia as a precedent, it is worth asking whether a National government would impose similar pre-conditions to those that the Canadians found to be necessary, to reduce tax avoidance. Such measures should be a priority here as well, assuming that National is not simply waving around the foreign buyers levy as a flimsy pretext on the campaign trail to validate its tax cuts.

Questions, questions. As indicated above, a 15% levy won’t do much to deter the ultra-wealthy, but let's assume for the sake of the argument that it might do so. With that in mind, would National allow exemptions to the tax for foreigners who are permanent residents and/or spouses of New Zealand citizens? The answer (so far) seems to be yes, it would... That would be fair, but it would also further eat into the revenue gains.

As a condition for waiving the tax – or allowing the sale at all - would a National government require foreign buyers to demonstrate they are using these homes in New Zealand as their prime residence, on an annual basis? How many days per year of residency might be mandatory to legally avoid the tax? Would National also require foreign buyers to take up residency within a fixed period – say 90 days - after the property transfer has been registered? Has National even begun to think about such provisions?

These residency pre-conditions are important. Otherwise… Surely we don’t want to enable scads of foreigners to buy up bolt-holes in New Zealand’s most desirable locations, lock the door, and depart until nuclear war or the climate apocalypse makes them embrace New Zealand’s geographical isolation? Chances are, those wealthy individuals will be from countries that have made the climate apocalypse inevitable.

And furthermore...

Moving right along… Would a National government exempt from the 15% tax, any refugees and migrants who may have bought a home here before gaining a permanent residency visa? (British Columbia did.)

Now we get to the Robin Oliver problem/solution. Would the tax be imposed on residential home purchases made by (a) corporates and/or trusts or individuals that are funnelling the funds from a foreign based head office, foreign country, or from a beneficiary of the trust who is not a permanent resident here, but where a New Zealand citizen is acting as an agent? British Columbia cracked down on these “joint venture” housing purchases by foreigners, given that otherwise, a local citizen could readily serve as a figleaf to enable the purchase to proceed, and the tax to be avoided.

This misuse of trusts and local corporate partners to help avoid tax is particularly pertinent in New Zealand, given the extent of the lucrative links at directorship level between China’s banking sector and previous leaders (e.g. Jenny Shipley, Don Brash, John Key) of the National Party. For all the tough talk about China as a defence threat, neither major party has a consistent track record of being tough on China-as-investors.

As British Columbia does, would there be different tax treatment for purchases of residential homes as opposed to purchases of apartment complexes above or below beyond a certain overall number of units?

Moreover, and again following the British Columbia example, if a residential home was located on a rural farm property, would it receive the same, or different tax treatment with respect to the 15% levy as say, a McMansion

purchased in metro or suburban Auckland?

BTW, if we’re really talking about precedents to deter property speculation: Singapore offers a useful example:

Singapore has property transfer taxes with different rates aimed at restricting certain types of buying. No tax is paid when buying a first residential property, but the tax is 17% for a second and 25% for third and subsequent properties. In addition, corporate entities must pay 35% tax and foreigners 30%.

In British Columbia, the foreign buyers tax sits alongside a raft of other property tax measures that are cumulatively meant to put a dent in speculatively driven hikes in house prices. We’re not simply talking about a meaningful capital gains tax, although the lack of one here is relevant. The so-called B.C. “Additional School Tax” for instance, imposes a small percentage levy on sales of homes worth $2 million to $4 million and an extra levy again on those worth over $4 million. But both of New Zealand’s major parties are chronically allergic to taxing wealth.

Doing the Reverse

National seems to be happy as a clam about property speculation. Gosh, it is even proposing to encourage property speculation by reducing the so called “bright line test” period to only two years, after which properties could be readily on-sold with no transfer tax or capital gains tax consequences. National is also wooing property speculators and landlords with the promise of them being able to make multi-billion dollar tax deductions (overall) on the interest payable on their speculative investments.

All year, the media focus has been overwhelmingly on the shortcomings of the government. Yet the paper thin facade of National’s credibility as an alternative government – and as a competent economic manager - is being blown away by the first gentle breezes of media campaign scrutiny. Funny that. To what extent has the media been complicit in this lopsided (lack of) substantial analysis of both the major contenders, and both of their potential coalition partners?

Footnote: Currently, National is throwing what sportspeople call a “Hollywood” – an over-reaction designed to win a sympathetic penalty, over some attack ads that the CTU has been running. Good grief. Those ads dared to say that Christopher Luxon is a rich guy out of touch with the challenges facing ordinary Kiwis. Perish the thought.

The media response has been fascinating to behold. It has chosen to give vast amounts of oxygen to National’s protestations of injured innocence. Tom Wolfe once described the media as a Victorian Gentleman. Meaning, as Anna Sussman put it, that the media often seems “determined that in all matters of national importance the proper emotion, the seemly sentiment, the fitting moral tone, should be established and should prevail; and all information that muddied the tone and weakened the feeling should simply be thrown down the memory hole.”

So… Down the memory hole with Luxon describing the poor as “bottom feeders” and ditto the memory of him going overseas and telling his hosts that New Zealand has gone soft and is full of whiners. Not to mention the year long trashing by Luxon of Labour as a bunch of chronic incompetents. Not to mention – on the out of touch front - the Luxon-led opposition of National to minimum wage increases and Fair Pay Agreements. Also relevant in this context: Luxon’s support for employers to fire people at will via 90 day trials and for landlords to be empowered to evict renters at will via ‘no fault” evictions. And so on. Is Christopher Luxon out of touch with the struggles of ordinary people doing it tough? Heaven forfend!

In sum… Luxon is the leader of a party that stands for certain policies. He has said certain things in support of those policies. The CTU is holding him to account because, in its view, these policies and stated intentions promise to do harm to its members. Criticism, and accountability, is what happens in a robust democracy. Memo to RNZ: It is not a novel “ personal” attack to criticise the leader who is out there actively campaigning as the embodiment of his party’s regressive policies.

It is also not an “American-style innovation” to claim that the on-the-record comments of Luxon – a man putting himself up to be the country’s next prime minister – arguably make him an unfit contender for the job. American style ads? Barely 48 hours ago, National held an American-style campaign launch that glorified Luxon as the incarnation and standard bearer of the party’s essence. If it covered the CTU ads at all, the likes of RNZ should have been examining the basis for the ads – not helping National to the chaise longue, and waving the smelling salts under its nose.

Footnote Two: For a small but telling example of National’s out-of-touchness, consider this tweet by senior National MP Chris Bishop, the party’s campaign manager. In it, Bishop treated the cancellation of Wellington’s Shelly Bay luxury homes development as evidence that “Wellington’s housing crisis just got worse.” Shelly Bay style million dollar plus apartments as a solution to the housing crisis???? Keep in mind that this hand-wringing is coming from a senior MP in the same political party that sold off large swathes of state housing when it was last in power.

Song for National

While the media helps Christopher Luxon to the divan for a good lie down, this track seems kind of appropriate:

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