Are we too prejudiced to clearly see the possibilities around land tax?
The uproar around Crafar Farms has shown that, for some reason, the public is unhappy with the idea that New Zealanders can sell land overseas. Let’s ignore the fact that some of the complaint is xenophobic – on some level people do believe that land is really owned by society as a whole, and that this social value of the land gets lost when it is sold overseas.
This is all well and good, but you don’t solve this problem by banning land sales – you solve it by taxing land.
Now I’m sure that final sentence has made everyone reading either angry or confused. How could I dare to suggest we tax land, and how could taxing land ever solve this issue? However, the idea that taxing land is the clearest solution comes from looking at what land ownership in New Zealand really entails.
Land ownership in New Zealand is based on the concept of ‘fee simple’ title. In this way an individual or group owns the land, but their rights over the land are limited by the set of regulations, laws, and taxes set by government.
As a result, we can view land ownership by private individuals as equivalent to a perpetual lease on land from the government. In this way, the government is the real ‘owner’ and can dictate the minimum set of standards that have to be applied when the land is used, as well as setting a ‘rent’ for the use of the land.
This rent is a land tax. There are three arguments I hear against land sales that are not just the result of prejudice. These are:
1. We are worried that people in New Zealand may sell the land for too little.
2. We are worried that if someone else buys the land, they will use it in a damaging way.
3. Society owns the land and it is part of our ‘social contract’; selling it overseas breaks this.
The first argument is effectively nonsense.
The person who loses out when the land is sold for too little is the person who sold it – not the rest of New Zealand. They sold the land voluntarily, and we shouldn’t regulate to protect people from their own stupidity.
The second argument may have more merit. If we think that foreign owners are less involved with the community, their actions are less likely to represent the set of social goals and beliefs of that community.
However, this forgets that the government has the ability to regulate and set laws – the government as the voice of society can tell the landowner that it has to meet certain minimum standards, and pay certain taxes, thereby protecting these values.
The third argument is in fact the justification for a land tax. If society owns the land, the government can set a tax on all landowners (foreign and domestic) who value this. Bingo!
Blocking voluntary transactions on the basis of nationality is verging on racism – even if many of the people involved are well-meaning. By looking at land ownership and what it entails it should be obvious that the real solution is transparent and clear regulation combined with a tax on land.
Matt Nolan is an economist at Infometrics and blogs at www.tvhe.co.nz.