More evidence of how the Government has flown in the face of official advice over taxing housing and capital gains has now emerged.

Documents released last week under the Official Information Act show Treasury in 2013 proposed lowering the personal tax rate and suggested replacing the lost revenue with a number of alternatives.

And Treasury says cutting corporate tax rates could mean our high level of overseas ownership would see the benefits go overseas.

“Personal income tax cuts may have greater economic benefit than corporate income tax cuts in New Zealand” the paper said.

“ This is primarily because most of the benefits of personal tax cuts would accrue to residents, whereas a larger proportion of the benefits of corporate income tax cuts ’leak’ overseas to non-residents given New Zealand’s high level of foreign capital ownership. “

And Treasury proposes a capital gains tax to replace the revenue lost from the personal tax cuts

“The resulting loss in revenue would need to be offset by base broadening such as a capital gains tax, which would address weakness in current system and reduce the tax advantage towards housing.

“Alternatively this could be offset through new tax bases, such as a land tax and considering the merit for further environmental taxation over time, both of which would shift the tax burden away from mobile and more distorting tax bases.”

But clearly Treasury recognised that the Key Government was highly unlikely to agree to a capital gain tax.

“While from first principles, the ideal reform would be to broaden the tax base through a more comprehensive capital gains tax, an alternative option worth considering would be the application of the Risk-Free Return Method to housing. “

Essentially this process would tax rent and the hypothetical rent that an owner occupied house could receive if it was rented out.

They also suggested incentivising investment.

“Reducing tax on interest income may also be worth considering.

“Modelling suggests it would be likely to result in an increase in private savings and reduce pressure on domestic demand, similar to a personal tax reduction.”

The Treasury proposals follow on from similar proposals made by the International Monetary Fund in 2011.

The Prime Minister rejected the IMF advice at the time but his reasons for doing so look less credible now that Treasury has released its own study.

 Asked whether the implementation of one or the other could allow government to reduce income taxes to give people more income to spend, he replied:

“At the risk of repeating myself from last year, we looked at a land tax, and land taxes, one, reduce the value of land in New Zealand, by definition, and it has an impact on every single homeowner in New Zealand.”

In fact as the Treasury document shows – the answer to that question is actually “yes”.

These Treasury documents have the potential to be a political embarrassment not only for the Government but also the Labour Party.

Labour has now abandoned tis support for capital gains tax which it promoted during the last election.