“Rich folk know how to not pay taxes”: An interview with Shamubeel Eaqub (Part 2)

This is the second part of a two-part interview with Shamubeel Eaqub, author, along with Selena Eaqub, of the book Generation Rent: Rethinking New Zealand’s Priorities. The interview took place on 9 November. In the first post, I asked Shamubeel about security, quality and cost in the private rental sector. In today’s post, he discusses tax, density, and Nimbys.

Elinor Chisholm: You write about our capital gains tax (CGT), and the problems we have in actually making it work. What’s the difference between what we have at the moment and what opposition parties advocate, or advocated, for?

Shamubeel Eaqub: In principle there’s no difference between what Labour and Greens would advocate and what is already in legislation. Essentially the current legislation says that if you own property with the intent to profit from the capital gain, then you have to pay tax on that gain. But there is no test for how you would define that intent, and that’s the problematic part. Our idea was, why don’t we make it a rules-based thing? So, if you rent it out, then it’s a business, and it should be liable for tax, both in terms of a business [for rental income] but also as a capital gain [when it is sold].

I think the Government went a little bit of the way towards that [in May]. They went for the speculative element, saying that, “if you’re turning the property over very quickly, within two years, and you’re not living in it, it’s rented, then you are liable to pay tax.”

We [still] need clarification of the rules. The word “intent” is too vague. The fuzzier the regulation, the harder it is to implement– everyone has the incentive to argue that they don’t fall within the net.

 EC: So why did Labour recently announce that they had dropped the idea?

 SE: I was at the Labour party conference – I spoke there – and somebody asked me about the capital gains tax, and I was like, “we already have one, and the National government sneaked it in in the Budget, so why do you guys need a new one?”

I think it’s partly because like the public, the politicians themselves don’t know the tax code. So everybody’s going off inventing stuff when a lot of what we need is small regulatory change at the margins.

 EC: In your book you discuss negative gearing. This is a problem you read about all the time in Australia, but rarely here. Why is that?

SE: Negative gearing is a very simple concept. Essentially you borrow money against your rental investments, so that your mortgage payments exceed your rental income, so that you don’t have to pay any tax on that income. And then you can use the debt for other stuff. In Australia, they’ve used it as a big marketing gimmick to flip houses over. In New Zealand it also happens, but it’s simply not been used as a tool for people to get into investment properties. But the reality is it happens in New Zealand just like it happens everywhere else.

You’ve seen the narrative in Australia, right? It’s seen as a form of welfare for the rich. I think it’s very fitting. I think in Australia, it is the top richest 10% that gets the majority of the benefits of the negative gearing. It’s unsurprising: rich folk know how to not pay taxes.

Also, we don’t ring-fence losses. If you make a loss on your rental income, you can offset it against your personal income. So that brings down your total income and your tax liability. That’s very lucrative for a lot of people. It should at least be that investors have to ring-fence their investment property income from other income. Like we do with [other types of] investments. If you have a business, if you make a loss, you don’t pay tax, but if you make a profit you pay tax. Again, we’ve made a special exemption for investment properties. It should be treated like a normal business.

 EC: You write in the book that discussing the concept of taxing imputed rents “would help educate the public about the way the tax system is biased towards the relatively affluent home-owning class, while the poorer renting class miss out” [p.75]. Let’s talk about that.

 SE:I very rarely talk about [taxing imputed rents] in public, because it’s one of those things that are for the die-hard people who look at the full picture. An imputed rent tax is politically impossible. We wrote about it essentially just to try and describe to people that there is a value to having your own home. There is a transaction that’s takes place. Rent would have paid if that house was rented, and taxes would have been generated. But because you own it, and you’re both the renter and the owner, it doesn’t go through the formal market, so there is no tax to be paid.

So for us it was one of the things we needed to get in [the book] for people to appreciate how to think about their own home.

 EC: Talking about imputed rent taxes, as well as taxes for property investors, is interesting because it means homeowners are also part of the story. The fact that we don’t tax imputed rents is one of the reasons everyone want to own their own home. I first came across the notion when I was writing a blog post criticising an article that was saying that state tenants are subsidised. And I was trying to say, yes, but everyone’s subsidised in his or her housing in some way.

SE: Yes and no. We’re starting from the premise that we want to promote homeownership. So there is a bias in our culture and the outcome we want to reach. So I start from the assumption that New Zealand wants to have more people in homeownership. So we’re willing to have some incentives in place to make that happen. Not taxing imputed rent is part of that story. It’s a good thing to have your own home because there’s all these other benefits in terms of your engagement with community, and so on.

[Taxes on investors are] a little bit different because investment can go all the way from investment in order to rent out the property and get a reasonable profit, to investment simply to get the capital gain, while neglecting your duties as a landlord. These duties are sacrificed when all the incentives are geared towards generating capital gain. We’ve set it up so the case for investing in rental property is not the rent. It’s the capital gain. And the tenants are a little bit incidental, and you don’t really want them, and really what you’re trying to do is just have sufficient cash flow and use as much of the tax system as you can to just get by. But in ten years time the capital gains would have compensated you handsomely for that investment.

EC: So changing the tax setting around rental housing, so that it’s more about rent than capital gain, might encourage landlords to focus more on getting tenants in for the long-term?

SE: Exactly. The reality is professional landlords already do that. And the challenge is that professional landlords are a very small part of the landlord market. It’s not a very professional sector, it’s not held to a high standard, it’s not consistent.

Renting is detrimental for quality of life because of these bad rules, regulations, systems, processes. It’s hard because culturally we have neglected renting – it’s always been transitory, short-term, for young people. It’s a “you’ll get out of it” kind of mind-set. But that’s no longer true. So many people are renting for such a long period of their lives.

EC: Along with reforming our tax regulation, you also discuss the need to “deal with Nimbys”. You talk about how the true costs of not having density – not enough houses for people – should be made clearer. You give the example of how a car driver thinks of only personal costs, and not the societal costs of driving, such as congestion and climate change – but nevertheless these costs do exist. That’s an example people use to advocate for a carbon tax, say. But when you apply it to the Nimby problem, and getting more density in our cities, what are ways we might account for this cost?

SE: It’s a challenging one. If you look internationally, there’s no perfect example of how to overcome the Nimby problem. [In the book] we talk about the Texas Municipal Utility Districts as a scenario. Texas should never be held up as a model state, ever. But they managed to build enough houses and their houses are pretty affordable. Part of what they’ve done is make it so that the true costs of the development are borne by the people who live there. I don’t think we can go that far but it’s about making sure that the land that captures value, also experiences costs.

One of the best ways that we could do this is to tax value, and tax land. If you had a tax that was related to the value of land you would have incentives, as long as you had the option to provide density, to build more, to generate more income from the land, in order to pay that tax. And you could still have the choice not to build on it.

That still doesn’t get away from what do you about your neighbours building something [that you don’t like]. And it’s that externality that’s really challenging. If it affects the value of the land, then people have the right to feel aggrieved, and they should be compensated.

There are no easy answers. But there is a disconnect: we want to privatise all of the gains, but we want the public to take care of all the costs of densification. That doesn’t work. We need to find a balance there but I’m not quite sure what the tool is.

EC: Balancing local democracy and building more houses can be uncomfortable.

It’s exactly why public policy is so difficult. It’s not an easy problem to fix. It’s a problem that exists everywhere, and it’s always very hard. People will resent the high-rise being built higher than the high-rise that was there before. There’s always the tension because people don’t like change. But we’ve got to find the balance between the public good and the costs. What is that mechanism and where do you draw the boundaries?

There is no right answer per se. But we have no reason not to [find that balance]. Because the Nimbys have so much say and they’re stopping everything at the cost of the city and the cost of the wider population.

I don’t think the process for planning is truly representative, it’s just done by submissions. It’s the developers and the neighbours. There’s no representation for future generations, there’s no representation from middle New Zealand.

With thanks to Shambueel Eaqub. This interview was edited for clarity and length.