David Farrar: Demolishing the tax cuts for landlords lie

Liam Hehir provides an excellent factual take of what Labour claims is a tax cut for landlords. Read the whole thing. Some extracts:

What’s this “tax cut for landlords” business that I keep hearing about?

The coalition government promised to restore interest deductibility for residential property investors. This allows them to deduct mortgage interest expenses from their taxable rental income This is in line with general taxation principles for most businesses.

Will all landlords benefit from the move?

No. The extent to which landlords benefit depends on their individual financial situations, such as the size of their mortgage and the interest rates they pay. Those with mortgages will be able to deduct their interest costs when working out their taxable income. Landlords without mortgages (for example, Christopher Luxon) will see no benefit from this policy change.

Does this mean landlords are getting a tax cut?

No, landlords are not receiving a tax cut. Restoring interest deductibility allows landlords to deduct mortgage interest expenses from their taxable rental income, aligning with standard business practices. This deduction acknowledges that interest is a legitimate business expense, ensuring landlords are taxed on their true net income.

But they’ll be paying less tax won’t they?

Yes, many landlords will pay less tax as a result of restoring interest deductibility, but this does not equate to a tax cut in the traditional sense. It is instead recognition of the cost of financing business operations, ensuring taxes are assessed on true economic income. That is why it is a standard feature in most tax systems.

Isn’t that just a semantic quibble?

It may seem that way, especially to those unfamiliar with tax details. However, the distinction is crucial. Calling it a “tax cut for landlords” has Trump-like, populist appeal but implies undue favouritism. In reality, landlords are currently subjected to unfair treatment, and the reform will simply restore equal tax treatment, aligning them with other businesses.

He also does a good analogy:

Okay, so how much will tax revenues be reduced as a result?

The restoration of full interest deductibility for landlords will reduce tax revenues by $2.9 billion over four years. This cost is $800 million higher than originally planned due to an accelerated implementation agreed upon by National and Act.

Is that material in the scheme of things?

The $2.9 billion cost of restoring full interest deductibility for landlords over four years is significant but manageable in New Zealand’s overall fiscal context. It’s a fraction of the total budget. However, it is notable given the deficit and overall economic pressures, the government will need to balance this policy with its broader fiscal strategy to get debt under control.

Can you explain this in rugby terms?

The team is trailing by 27 points. Banning interest deductibility is like cheating to get a penalty kick. At best it closes the gap by 3 points, which is noticeable but not game-changing move.

Allowing interest to be deducted means playing fairly according to accepted standards of conduct but missing out on the 3 points as a result. The team needs to find other ways to make up the difference.

What Labour did would be equivalent to National passing a law saying that organic farmers can’t claim staff costs off tax.

David Farrar runs Curia Market Research, a specialist opinion polling and research agency, and the popular Kiwiblog where this article was sourced. He previously worked in the Parliament for eight years, serving two National Party Prime Ministers and three Opposition Leaders.