Oh for a department that takes less

Federated Farmers president Bruce Wills says fewer taxes will help the economy grow:

The best translation I’ve found for Te Tari Taake, IRD’s Maori name, is “the department which takes”. “Taking” is the existential truth about taxes, including Labour’s proposed capital gains tax. Given taxes take money off people after they’ve earned it, is it possible taxes can directly grow an economy? Of course not.

While taxes support economic and social endeavours, economies grow by people taking risks and being rewarded for those risks. Right now, we need to grow our economy and that means exporting goods and services. The challenge we all face is how to expand the economic cake so that everyone can get a slice, whether that’s a farmer, a factory worker or a primary school teacher.

More taxes and higher tax rates don’t necessarily mean a higher tax take but they do hamper productivity.

Conversely fewer taxes and lower tax rates can lead to a higher tax take because people are rewarded better for working and risk taking and don’t waste time and energy trying to avoid taxes.

What’s now before us all is a clear choice. In the “red corner” Labour has gone where David Lange and Michael Cullen feared to go. Lange was blunt, saying a capital gains tax “is the sort of tax you introduce if you want to lose not just one election, but the next three”.

Over in the “blue corner” is the partial privatisation of state assets and a gradual reduction in the Government’s overall size. Perhaps Chris Trotter was right when he suggested we are a nation of socialists, but it’s also a question of degree.

Even Labour voters own properties, businesses, shares and even farms.

Labour doesn’t appear to understand that and also underestimates the large number of people who don’t own assets yet but aspire to in the future.

For farmers, the prospect of yet more asset taxes on top of taxing agriculture’s biological emissions is fairly unattractive.

Farmers are already included in the Emissions Trading Scheme (ETS) and like everyone else are paying extra for fuel and energy.

Labour’s plan to fast-track agriculture into the ETS is something else, though. While New Zealand may be the odd one out in the OECD for not having a capital gains tax, this logic equally applies to the ETS; New Zealand is the “odd one out” for bringing biological emissions into such a scheme. Strangely, all this talk about gleaning tax income through the ETS seems to have skipped right past its intended purpose, to reduce emissions.

It would be bad enough if Labour’s policy was intended to reduce emissions, but it’s not. It’s a simple tax, imposed on farmers to be redirected elsewhere.

A capital gains tax, central to Labour’s revenue model, doesn’t raise much money until 2018. To meet what could be seven heavy budget deficits, the choice is either to borrow more or to cut spending. Greece, which has a capital gains tax, remains “Exhibit A” as to why borrowing is extremely risky.

Meanwhile, a close examination of government spending is notably absent from Labour’s policy.

Of course it is, they spent up large through the good times and have no idea how to cut things back now there’s very real need for restraint.

We also hear much talk from politicians about building an entrepreneurial culture but, to do that, risk-takers need to be rewarded for those risks they take.

No capital gains tax and reasonable personal and company tax rates are big positives in attracting people, ideas and capital to New Zealand. Shouldn’t we be extolling this internationally?

This proposed capital gains tax includes foreign currency transactions making it like a financial transactions tax on exporters.

Labour’s proposed tax will make things a lot worse for exporters already struggling with a high kiwi dollar. It will hit them hard, whether that’s a dairy company or a movie studio.

Exporters buy currency hedges in order to smooth exchange rate volatility and their overall financial risk. Taxing this is baffling and will only increase risk when exporters least need it.

Exports are one of the major ingredients in the recipe for recovery, holding them back will hobble economic growth.

The United States also has a capital gains tax and while it benefits accountants and lawyers, it did not prevent or minimise the sub-prime-fuelled real estate bubble.

As the fallout from this continues today, all a capital gains tax does is create added compliance costs and complexity. In a financial version of “Whac-a-Mole”, regulators move on one side while an army of expensive advisers counter that move on the other.

A CGT didn’t stop Australia’s housing bubble either. Does anyone know of any country where it did?

So perhaps the biggest question voters need to ask themselves is one of trust. If a capital gains tax is introduced by any party, there’s absolutely no guarantee a future government won’t widen its scope. As the GST increase shows, a proposed capital gains tax of 15 per cent is not cast in stone.

All it takes is a regulatory amendment. With more loopholes than Swiss cheese to make it electorally palatable, it seems more like a bureaucratic throwback to the 1970s.

Oh yes, once the tax is established, it could easily be increased.

Rather than believe a tax will save the economy, it is time to have a discussion about growing the economic cake for all New Zealanders. On current evidence, that is the one discussion we’re not having.

A department which takes less would help.

So would more of what National is doing – encouraging savings, investment and export-led growth.

9 Responses to Oh for a department that takes less

  1. Ali says:

    A Capital Gains Tax is the only way to ensure that all everyone actually pays tax. It closes off avenues for moving taxable income into areas where no tax will ever be paid, in other words it helps prevent tax evasion. Overseas examples show an increase in income tax to govt revenues when a CGT is introduced. Its interesting to note that most economists and the reserve bank support the introduction of a CGT, the list is much longer of supporters than that of detractors. The old ‘NO Tax or minimal TAX’ argument only helps those that already have wealth and prevents others from attaining it. A CGT is FAIR to all.

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  2. Andrei says:

    A CGT is FAIR to all.

    FAIR a much abused word, often used by children in an attempt to gain something that others have and that they don’t.

    e.g. it’s not FAIR that Angela Dobson has a pony and I don’t.

    Kid’s learn that life is unfair, sometimes very unfair and learn how to live with it – taking pleasure when things go their way and sucking on it when they don’t.

    Labour supporters don’t however grow out of childhood appeals to “FAIRNESS” of course defining FAIR in any manner that suits their agenda and remaining oblivious to the fact that to achieve their notion of FAIRNESS they actually usually have to be UNFAIR to someone else.

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  3. homepaddock says:

    Ali – a “clean” CTG with few if any exemptions might close off avenues for avoidance.

    People favouring a CTG in general aren’t necessarily in favour of Labour’s plan.

    It’s so complex, complicated and has so many exemptions accountants and lawyers will be able to drive large trucks through the loopholes.

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  4. Deborah says:

    You would think that the Feds would be embarrassed to have a President who is so ignorant that he says something like this.

    The best translation I’ve found for Te Tari Taake, IRD’s Maori name, is “the department which takes”.

    ‘Taake’ is a transliteration of ‘tax’, as about a minute on Google would have shown Bruce Wills.

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  5. homepaddock says:

    Taxes, takes – a difference without distinction 🙂

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  6. david winter says:

    It certainly seems like bad news when an encyclopedia thinks your jokes aren’t funny

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  7. Rimu says:

    Farmers pay tax on whatever is left over after expenses are deducted. Workers pay tax on all income, BEFORE expenses are deducted.

    New Zealand is the second easiest country to do business in the entire world. http://www.3news.co.nz/NZ-second-easiest-place-in-the-world-to-do-business-survey/tabid/419/articleID/70903/Default.aspx

    Quite whining.

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  8. homepaddock says:

    “Farmers pay tax on whatever is left over after expenses are deducted. Workers pay tax on all income, BEFORE expenses are deducted.”

    Those are working expenses not living or other personal expenses. Farmers pay tax on income used for that just like everyobody else.

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  9. Roger Barton says:

    With reference to Rimu: Don’t you get tired of NZ’s standard of financial literacy?
    Tax law in NZ is the same for all businesses. The oddity about LIVESTOCK farming is that our livestock are subject to the limitations of a gestation period. Good that at least we can replicate the parent models, hopefully with genetic improvement, BUT we can’t wind the handle faster. We are on 24 hours a day now unlike a factory situation which may be single or double shift and able to double or half production if it so needs/desires (usually for commercial reasons).
    If we choose to ignore tax law then we stand the chance of suffering the public indignity of having done so, it’s called prosecution!!
    3 accounting years ago we lost $127,000 in that year. A combination of drought and pricing slaughtered us along with our balance sheet diving considerably. As a business owner we are subject to the vagaries of the market. In that year we invested considerably in grazing and cartage and received a payback in reasonable production the following year.
    If being in business was the obvious panacea to a wage earners financial issues then I’m surprised that more individuals don’t break away from being an employee and take a risk in setting up their own business.
    After all it’s that simple isn’t it RIMU?

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