Cost of higher fuel tax

02/07/2019

An extra four cent tax was imposed on motorists yesterday.

The direct cost is obvious – it will be more expensive to buy fuel.

The indirect costs won’t take long to take effect – higher prices for everything that has a transport component.

That will hit individuals, community organisations and businesses.

And for what?

. . .Half-way into the “year of delivery,” and all we’re seeing is key projects delayed, down-sized or discarded. The public are seeing noticeable asset deterioration at a rate we haven’t seen previously. It’s across New Zealand, Forum members advise, not just Auckland. . . 

Where’s the money gone? What exactly has it been spent on? Auckland transport users certainly aren’t seeing the benefits.

The rest of New Zealand isn’t seeing any benefits either.

We’re paying higher prices for fuel and getting less spent on roads.


Time to target tourists?

17/06/2019

Cataclysmic headlines tell us we’re facing a climate crisis.

Councils are declaring climate emergencies.

People are marching demanding action to reverse climate change.

But how many are actually doing anything that will make a real and sustainable difference?

In spite of what it’s trying to tell us our government isn’t.

Its carbon zero bill is largely political and bureaucratic posturing that ignores the science.

If it was really serious about doing something that made a real difference it would stop trying to reduce farm production here which will only increase emissions as other less efficient producers increased their production to fill the gap.

Instead it would target tourists, taxing travel for any but essential reasons.

Farming produces food which people need for survival.

The benefits from tourism are purely personal.

Tourist taxes high enough to compensate for the emissions from travel aren’t being imposed and haven’t been suggested as a serious solution.

Does this mean that the government hasn’t got the courage of its climate change convictions, has got another plan it has yet to tell us, or doesn’t really believe there’s a crisis?


Tax Freedom Day at last

01/06/2019

We’re nearly half way through the year and have only just got to Tax Freedom Day:

A media release from the Taxpayers’ Union says:

From today until the end of the year you are finally working for yourself, and not the taxman, says the New Zealand Taxpayers’ Union.
 
‘Tax Freedom Day’ marks the day on which New Zealanders have collectively worked enough to pay off the cost of government for the year.
 
Taxpayers’ Union spokesman Louis Houlbrooke says, “For the average New Zealander, getting to work on Monday represents the first day they’re working for themselves.”
 
“This year’s total government expenses have been forecast to suck up 41.5 percent of the economy. That means, if a taxpayer wanted pay off their share of government expenses as soon as possible this year, they would have to work sacrifice all their wages from January the 1st, until today, June 1st.
 
“Today is worth celebrating, but it’s a shame we had to wait so long to pay off the politicians’ expense card. Unfortunately, government spending increasing faster than economic growth means the continuation of the trend of a later Tax Freedom Day.”
 
“Some other groups chose to observe Tax Freedom Day earlier this year. But our chosen date – based on OECD figures – takes into account local government and spending paid for with debt, meaning it reflects the full burden of government on taxpayers.”

And on the eve of Tax Freedom Day, the government pushed through an increase to fuel taxes under urgency:

The Taxpayers’ Union is slamming the passage of legislation hiking the price of petrol at the pump to see that more than 50 percent of the price paid will soon be tax. Union spokesperson, Jordan Williams says:

“Clearly ‘wellbeing’ is just marketing fluff.  Petrol taxes are highly regressive – they hit the poor, those in regional New Zealand, and those who live on outer suburbs the hardest. It’s one of the cruelest forms of tax.”

“Rushing these new petrol taxes through Parliament under urgency is disgraceful. They are a total breach of the Prime Minister’s ‘no new tax’ election promise.  And Labour know it.”

“Pain at the pump underscores the fact that big-ticket Budget announcements come at a real cost, regardless of the fuzzy wellbeing language the politicians use to promote them.”

Petrol was more than $2.45 a litre when we passed through Omarama earlier this week. Tax is already too big a contributor to that.

Taking more money from everyone and adding to the cost of everything will not contribute to wellbeing.


Rural round-up

01/05/2019

Gas tax won’t cut farming emissions – Neal Wallace:

A capital gains tax is off the agenda but farming leaders are warning the imposition a suite of new taxes and regulations is pending.

In addition to farmers paying a greenhouse gas emissions tax of $50 million a year the Government is expected to impose tougher regulations on freshwater quality, aerial cropping, winter grazing and feedlots.

“When you look at everything else coming down the pipeline, if I was asked to pick one we were prepared to lose it would be this one, the one we have won,” Federated Farmers vice-president Andrew Hoggard said of the capital gains tax.

Prime Minister Jacinda Ardern also ruled out water and fertiliser taxes as suggested by the Tax Working Group. . .

Top dairy title revealed tonight – Yvonne O’Hara:

Dairy farmer Emma Hammond, of East Limehills, felt honoured when she was nominated for this year’s prestigious Fonterra Dairy Woman of the Year award.

The only South Island-based finalist, she and the other three women will hear if they are winners during a dinner this evening at the Allflex Dairy Women’s Network’s conference in Christchurch.

”For us to be recognised for what we do and get that acknowledgement is humbling,” Mrs Hammond said. . .

Farm management whizz ‘well on track‘ – Sally Rae:

At 19, James Matheson set a goal of having $1 million equity by the time he was 30.

Now 26, the Gore farm manager is ”well on track” to achieve that, sitting at between $700,000 and $800,000.

It has been a meteoric rise for a young man who had never previously considered a career in the dairy industry.

Now he and farm owner Chris Lawlor were endeavouring to help other young people follow a similar path through an innovative initiative. . . 

Highlife on top of the world – Andrew Stewart:

Setting up a tourism venture on a farm not only provides a second income but also acts as a public relations exercise to help bridge the rural-urban divide. And when it includes luxury glamping and breathtaking views the visitors cannot fail to be impressed. Andrew Stewart took a look.

In terms of spectacular views, Angus and Sarah Gilbertson’s farm is up there with the best. 

Rising to 600 metres above sea level at the highest point, the panorama on a clear day encompasses all the mountain peaks of the central plateau, Mount Taranaki to the west and the clear blue waters of the Tasman Sea far to the south. 

Between these stunning landmarks are great swathes of some of the most productive farming country in New Zealand that connect the landscape in various shades of green. It’s the sort of view you can’t help but stop and enjoy and this is part of the reason the Gilbertsons created their glamping business five years ago. . . 

The 10 biggest stories in farming over the past 25 years – Jamie Mackay:

My final chat on Newstalk ZB with the laconic Larry Williams was a great excuse to take a trip down memory lane.

Larry was stepping down after 27 years at the drive helm on ZB, while I was blowing out the candles on an accidental radio career spanning a quarter century in rural broadcasting.

For our penultimate ZB cross the week earlier I’d turned the tables on Larry and, without warning, asked him some unscripted questions. Much like his metronomic golf swing, he’s sometimes hard to get off script, but on this occasion he took up the challenge with good humour. . . 

Hunt on for ‘M.bovis’ study project manager – Sally Rae:

The search for an assistant research fellow to project manage a study on the impacts of Mycoplasma bovis on farmers and their communities has attracted a high level of interest.

In January, it was announced the University of Otago would undertake a study on the emotional, social and psychological impacts of the bacterial cattle disease on southern farmers and farming communities.

The two-year study, due to start this month, will look at the impact of the eradication programme on farmers specifically and the wider community more generally. . . 

Medicinal cannabis firm Pure Cann New Zealand gets $6 million investment– Rebecca Howard:

Pure Cann New Zealand, which counts former Air New Zealand boss Rob Fyfe as its executive chair, has secured $6 million from Australia’s Cann Group for a 20 per cent stake in the local medicinal cannabis company.

The investment will be made over stages with the initial 10 per cent to be completed on or before August 30 and a further 10 per cent when New Zealand regulations come into force and Pure Cann’s board approves the construction of its commercial cultivation facility.

The New Zealand government anticipates introducing new regulations, licensing requirements and quality standards governing medicinal cannabis usage by the end of this calendar year. . . 

 


No CGT but . . .

18/04/2019

The government is not going to adopt a capital gains tax .

The backdown has cost $2 million and 18 months of uncertainty but Simon Bridges point out there will be more taxes:

“While the Government has backed down on a Capital Gains Tax, there are still a range of taxes on the table. They include a vacant land tax, an agricultural tax and a waste tax.

“Prime Minister Jacinda Ardern says she personally still wants a Capital Gains Tax and that our tax system is unfair. New Zealanders simply can’t trust Labour when it comes to tax. 

“The New Zealand economy has suffered while the Government has had a public discussion about a policy they couldn’t agree on. Put simply, this is political and economic mismanagement. . . 

The government asked a question, the answer to which its three constituent parties couldn’t agree on.

Remember James Shaw saying:

“The last question we should be asking ourselves is, ‘can we be re-elected if we do this?’ The only question we should be asking ourselves is, ‘do we deserve to be re-elected if we don’t?'”

Labour and the Green Party had to swallow a big dead rat, served to them by Winston Peters:

. . .It wasn’t even an hour after the Prime Minister had put the final nail in the coffin that is the capital gains tax (CGT) when RNZ asked Mr Peters whether Labour will be expecting his party’s support on another issue in return for losing this flagship policy. Mr Peters fired back: “May I remind you, the Labour Party is in government because of my party.”

No reading between the lines necessary. . .

New Zealand First is polling under the 5% threshold, it couldn’t afford to alienate the dwindling number of its supporters.

The capital gains tax, if not dead, is buried while Ardern is Prime Minister, but the threat of other niche taxes is still live.

 


$5b extra cost with CGT

07/04/2019

BusinessNZ has worked out the proposed capital gains tax would impose an extra $5 billion on the economy :

BusinessNZ has released an analysis of additional costs to the economy that would accompany the direct costs of New Zealand’s proposed capital gains tax.

It shows compliance costs of $1.6 billion, administrative costs of $210 million and deadweight costs of $1.5 – $4.2 billion, over five years.-

BusinessNZ Chief Executive Kirk Hope said the Tax Working Group’s report did not include compliance, administrative or deadweight costs, and these needed to be made explicit to enable public debate about costs before the Government made its decision on a capital gains tax.

Goodness me, how surprising.  The people proposing a tax based on an ideological view of fairness didn’t include the costs.

Compliance costs include Valuation Day requirements for all business assets to gain a valuation to enable the imposition of the capital gains tax.

Administrative costs are IRD’s costs of collecting the tax.

Deadweight costs are the costs of reduced economic output resulting from changes in supply and demand caused by the imposition of a tax. . . 

Those who want the tax keep repeating the same theoretical argument about fairness.

Those opposing it keep finding real, practical reasons why it isn’t fair, will add costs and sabotage the economy.

There’s more on this at BusinessNZ


CGT based on dodgy stats

05/04/2019

Assertions about the impact of the proposed capital gains tax are based on dodgy numbers.

Troy Bowker writes:

The Tax Working Group (TWG) used an unreliable survey by the Department of Statistics as the basis for its argument that the majority of the proposed capital gains tax (CGT) will be paid by the top 20 per cent of households measured by wealth.

Repeatedly, since the final report was published, Sir Michael Cullen has quoted the “statistic” to the media that 82 per cent of the assets that will be subject to CGT are owned by the top 20 per cent of New Zealand households measured by net worth.

He goes on to state (as factual) the second 20 per cent of wealthy households will be responsible for another 11 per cent , then only 4 per cent for “middle” New Zealand.

In reality, this information is based on what most reasonable people would describe as little more than guess work.

It has been used for political purposes to argue that the majority of the public have nothing to worry about, and it will be mostly the “rich” that will pay CGT.

If it is correct (which it isn’t), it’s a very good argument for Labour and the Greens who desperately want to see a comprehensive CGT implemented.

The problem for those wanting CGT is that the data is completely unreliable and should never have been used. We need to know why public officials used it in the first place when they knew, or ought to have known, it was dodgy statistics. . . 

The stats came from the annual Household Economic Survey (HES) carried out by Statistics NZ.

It was done by conducting interviews of 8000 households, out of approximately 1.7 million households, in New Zealand. That’s only 0.47 per cent of households — s a ridiculously low sample size.

The other reason it is unreliable is most of the information provided is unverifiable. The Department of Statistics asks all sorts of questions about the assets and liabilities of each household and records the answers given. People can guess, underestimate or overestimate or not even volunteer information.

As you can imagine, it’s an extremely invasive and intrusive process that attempts to delve into the most personal financial information of New Zealand homes.

By the Department of Statistics own admission, it contains data that is so unreliable they cautioned against its use. . . 

In spite of the caution Treasury used them in its report to the TWG.

It beggars belief that Treasury decided to use this information in its report to the TWG.

Senior Treasury officials who wrote this report to the TWG obviously knew the information couldn’t be safely relied upon.

Hidden in the fine print of the Treasury report, it states “care should be taken when interpreting wealth estimates because the confidence intervals around any point estimates vary widely”.

In layman’s terms, this is like Treasury saying to the TWG: “You probably shouldn’t be using this information as we really don’t know if it’s accurate and some of it’s completely unreliable.”

This raises some very serious questions about the probity of the process that need answering by Finance Minister Grant Robertson, and the TWG chair Michael Cullen (who is still on the Government pay roll). Hopefully he’s still being paid to answer the question of why the TWG used this data.

Did the TWG specifically request Treasury to dig up statistics to support the political argument that only the top households would pay CGT? Did the TWG know the data they were using was largely unreliable? Treasury obviously had concerns about using it and told the TWG in its report. So why did the TWG use that data? Does the Finance Minister now accept this data is unreliable and shouldn’t have been used for political purposes to justify Labour’s proposed CGT?

These are very serious questions that need to be answered and answered publicly.

The reality is, we don’t have enough reliable information to draw any conclusions at all about which households will pay the most from the proposed CGT.

We do know, however, that there are hundreds of thousands of farmers, business owners, lifestyle block owners, bach owners and sharemarket investors who will pay a lot more tax if Labour are successful in implementing CGT.

There are an awful lot of hardworking ordinary Kiwis who don’t consider themselves wealthy who will pay CGT if Labour are successful in convincing Winston Peters to support it.

For Labour to use these dodgy statistics to mislead the public would be to underestimate the intelligence of the voting public of New Zealand.

The CGT debate has a long way to go. But Labour need to come clean and be honest about the many hundreds of thousands of middle income Kiwis who will pay CGT. They also need to answer some serious questions about how, and why, the HES was used to support the main argument on fairness by the TWG.

This proposal is the most significant tax reform in many years in New Zealand and we deserve better than public officials using dubious and unreliable data to support a preconceived political agenda.

Significant tax reform should not be based on dodgy stats for both ethical and practical reasons.

Ethical because it’s wrong to base assertions on wrong numbers, and practical because if the stats are dodgy there can be no certainty about the outcomes.

It’s not just who would pay how much that matters, but how much tax a CGT would raise.

If the stats on which the assertions of who would pay what are dodgy the conclusions on how much that would raise are also completely unreliable.

The TGW was told any proposals must be revenue neutral – that is, the amount raised by any new tax would be offset by cuts to old ones.

There can be absolutely no certainty about how much it would raise and therefore how much other taxes could be lowered if the whole proposal is based on numbers based on guesswork.

Almost all those favouring a CGT do so based on an ideological and political idea about fairness. 

There is nothing fair about assertions based on dodgy numbers and a tax full of loopholes that would disincentivise investment and sabotage the economy.

 


CGT will hit everyone

04/04/2019

The Taxpayer’s Union has launched a campaign to axe the capital gains tax (CGT) :

New Zealand’s tax system is admired around the world for its simplicity, affordability, and fairness. The capital gains tax proposed by Sir Michael Cullen’s Tax Working Group would put all of this at risk.

It is bureaucratic, costly, and would be the harshest in the world. It will curtail entrepreneurship and investment, meaning a reduction in all New Zealanders’ economic prosperity.

The rate is one of the world’s highest, it would be unfairly levied on inflation, it would require costly and fraught asset valuation, and in many cases it would break the Government’s promises by targeting the family home.

New Zealanders deserve better than this unfair tax.

    • It unfairly taxes people with assets for inflation
    • It will unfairly tax 350,000 home owners who live on a lifestyle block even if they only have one home
    • It will unfairly impose billions of dollars of compliance costs on 500,000 small businesses
    • It will unfairly tax farmers who sell a farm in order to buy another farm
    • It will unfairly lead to higher rents for over a million tenants
    • It is an unfair double tax on 500,000 business owners who already pay company tax
    • It will unfairly benefit tax lawyers and accountants who can exploit American-style loopholes
    • It will unfairly advantage foreign owners of New Zealand shares and disadvantage 800,000 New Zealand investing in local companies

Who will be affected by the CGT?:

Anyone who owns a business, including a farm, shares, bach/crib/holiday home, lifestyle block bigger than .45 hectares,  or rental property; anyone who claims expenses for a home office; has intellectual property, anyone who owns a home and moves into a rest home without being able to sell it within a year, or buys another and can’t sell the first within a year, or goes overseas for a while; anyone who buys a section for a new home that isn’t completed within a year;  any homeowner who forms a relationship with another homeowner;  and anyone who has taxable assets and migrates.

A lot of people would be hit by the tax directly but everyone will be hit indirectly when costs go up and the economy slows.

Even Inland Revenue advised against it:

Tax officials advised the Government 15 months ago that our small companies, start-ups and innovators were better off without a Capital Gains Tax, Leader of the Opposition Simon Bridges says.

“Even before Sir Michael Cullen and others were named to the Tax Working Group in December 2017, Inland Revenue officials told the Government that the absence of a Capital Gains Tax in New Zealand was ‘potentially advantageous to start-ups’.

“Not having a Capital Gains Tax is ‘advantageous’ to every Kiwi willing to give it a go by starting a small business and creating jobs. People who take risks with smart ideas and build something bigger than themselves shouldn’t be discouraged.

“Governments should encourage innovators because smart people will take us to a better future. We need people who take risks and stretch themselves because the ones who succeed create more jobs.

“The Government was also told that the lack of a Capital Gains Tax ‘indirectly incentivises’ people to put more of their own money into a venture because they have the chance of a better return when they sell. That could be somebody who wants to stop working, sell the business and retire. . . “

That’s another consequence that would hit a l9ot of people – disincentive to invest and carry out succession as aging farm and other business owners hang on instead of selling.

The economy is slowing.

If it’s going to reverse that the government must take a much more frugal approach to its own spending and axe the CGT.


Politics changed, facts haven’t

28/03/2019

Sir Michael Cullen is being paid $1000 to sell the capital gains tax.

It’s a task made more difficult by records of his views on a CGT  which the parliamentary library holds from his time as an MP:

Stuff reported that although the chairman of the Tax Working Group once called a capital gains tax “extreme, socially unacceptable and economically unnecessary”, he has since changed his mind.

New documents compiled by the Parliamentary Library for the ACT party reveal just how far he shifted since leaving Government in 2008.

The 84 pages of research included every reference Cullen ever made in the House in reference to a CGT between 1987 and 2008. . . 

They include:

. . . “I think it is extremely hard to make that connection between a capital gains tax and the affordability of housing, insofar as there has never been a theoretical argument put forward about a capital gains tax on housing. It is more in the direction of a level playing field around investment; it is not around the notion that it will make houses cheaper. Indeed, it is very hard to see how it would necessarily make houses cheaper,” Cullen said at the time.

On June 20, 2007, when Bill English asked Cullen about explicitly ruling out a capital gains tax, he responded saying: “One of the problems with a capital gains tax – apart from the fact that if it were done, it should apply to all asset classes—is that countries overseas that have capital gains taxes have significant inflation in house prices on occasion”.

Then on June 21, 2007, he was asked about the possibility of combining ring-fencing with a capital gains tax on all investments except the family home, and more Government investment in low-cost rental housing.

He responded saying: “I think it is fair to say that, if one was looking at a capital gains tax, which I am certainly not, it would apply to all asset classes. I think the arguments in favour of such a tax, which probably 20 years ago were quite strong, become much, much less strong in the intervening period of time, for a whole host of reasons. So I think that that is actually not a very worthwhile avenue to explore, not least because it comes, in effect, at the end of a process, rather than trying to address the over-investment at the start of the process”. . . 

He says he was Finance Minister at the time and following the government line.

When asked why he changed his mind, he quoted John Maynard Keynes: “When the facts change, I change my mind”.

What facts have changed? It wasn’t a good idea then and it still isn’t, for the same reasons.

As Robin Oliver, former deputy head of Inland Revenue, former Treasury advisor, an expert on the tax system, and one of three dissenters on the Tax Working Group said:

There’s a strong argument for taxing capital gains, as you put it, in theory, the problem is the practicality and of making it work. . .

Kathryn Ryan asked him if, all things being equal and as a tax expert would it be good to do it and her replied:

In the actuality of what you have to do to get such a tax in place, no.

Most of the arguments in favour of a CGT are theoretical ones based on a notion of fairness, whatever that is.

Most of the arguments against it are practical based on facts including that it has done nothing to rein in house prices elsewhere and has led to overinvestment in housing, underinvestment in business, and acts as a handbrake on succession.

The politics have changed but the facts haven’t.

A CGT with exceptions as recommended by the TWG would be expensive to administer, contain loopholes which would only provide work for lawyers and accountants, promote over-investment in housing, stifle investment in productive assets, and result in lower tax revenue in tough times when capital gains fall.


Govt can’t cope with CGT oppositon

08/03/2019

The normal course of events for government working groups is to do the work, submit a report and leave what happens next to the politicians.

That this government feels the need to keep the chair of the Tax Working Group, Sir Michael Cullen, on at  $1000 a day to explain and defend the group’s recommendations is a sign the politicians don’t think they’re up to explaining and defending it themselves.

Paying a working group chair $1000 a day might be the going rate while he’s actually chairing for a day but continuing to pay him that to lobby is outrageous:

The Tax Working Group process has become blatantly politicised with the Government’s decision to pay Sir Michael Cullen to continue lobbying for a capital gains tax, says the New Zealand Taxpayers’ Union.

Taxpayers’ Union spokesman Louis Houlbrooke says, “The advertised purpose of the Tax Working Group was to deliver an expert-driven appraisal of the tax system along with a series of recommendations. That advice has now been received, but Sir Michael is still being paid over $1000 a day to argue for higher taxes. Funding for expert advice is one thing, but taxpayer-funded public campaigning is outrageous.”

“If the National Party set up a Steven Joyce led Working Group and paid Mr Joyce to get on radio and attack the Labour Party and advocate for lower taxes, the political left would rightly get up in arms. It’s the same principle here: expert advice should not be politicised at taxpayers’ expense.”

“Grassroots organisations like the Taxpayers’ Union campaign using voluntary donations. Proponents of the capital gains tax should try to do the same.” . . 

Paying Cullen is in effect a government vote of no-confidence in themselves and their ability.

Government MPs have had remarkable little to say on the TWG’s report, with the exception of James Shaw who asked if the government deserved to be re-elected if it didn’t introduce a capital gains tax (CGT).

That it needs to hire the group’s chair to speak for it, shows it doesn’t deserve to be re-elected anyway.


Rural round-up

28/02/2019

Farmers tired of bearing blame – Hamish Walker:

Farmers are working hard on improving water quality and should be supported, writes Hamish Walker.

It’s all farmers’ fault didn’t you know?

Those fenced-off waterways, new sediment traps, wetlands, all the riparian plantings, not cultivating near waterways, strategically winter grazing and everything else farmers do on-farm to protect the environment, it’s still all their fault.

What is it, you ask?

Well, Fish & Game’s anti-farming crusade would have you believe it is the water quality issue, one solely caused by farmers. . . 

Farms firmly in taxman’s sights – Neal Wallace:

Agriculture will be firmly in the sights of the tax collector should the Government adopt the Tax Working Group suggestions, which propose a suite of environmental taxes and a broadened capital gains tax.

The group recommends including agriculture in a more tax-like emissions pricing scheme, introducing a nitrogen tax and taxing those who pollute and extract water, though it concedes establishing a mechanism to do that is problematic.

The report says more work is needed to develop tools to more accurately estimate diffuse water pollution and extraction but in lieu of such a system it recommends a general fertiliser tax. . . 

Applications open for Trans-Tasman agribusiness management programme :

Applications for the prestigious Rabobank Business Management Programmes have opened for 2019, with the Farm Managers Programme – the course for up-and-coming young farm leaders – returning to New Zealand for the first time in a decade.

Announcing the opening of applications for this year’s intake for the two residential programs – the Executive Development Programme (EDP) and the Farm Managers Programme (FMP), which are designed for progressive New Zealand and Australian farmers looking to take their businesses to the next level – Rabobank New Zealand chief executive Todd Charteris says it is fantastic news to have the Farm Managers Programme returning to Kiwis shores for the first time since it was last held in Christchurch in 2009.

Ahuwhenua finalists named:

The three finalists in this year’s Ahuwhenua Trophy for the top Māori sheep and beef farm have been announced.

They are Whangara Farms, Gisborne; Te Awahohonu Forest Trust – Gwavas Station, Tikokino near Hastings and Kiriroa Station – Eugene & Pania King, Motu, near Gisborne. . . 

Gold and silver found on conservation land in Coromandel – Gerald Piddock:

OceanaGold​ has discovered gold and silver buried under conservation land on the Coromandel Peninsula.

But a local environmental group has vowed to fight the multinational company every step of the way if it decides to mine the precious metals.

The discovery after exploratory drilling at Wharekirauponga, inland from the holiday resort town of Whangamatā lies near the Wharekirauponga Track in the Coromandel Forest Park, which is classed as Schedule 4 land. . . 

 

Farmers launch ‘Mission 4 Milk’ to help promote the white stuff

A new campaign has been launched by dairy farmers to promote the health benefits of milk to the public.

Mission 4 Milk is a campaign which sets to raise awareness about how milk can be part of a healthy lifestyle.

The campaign states: “With the rise of plant-based alternatives, the reduction of free milk in schools, and the shift away from milk marketing, the average shopper doesn’t know why they should drink milk.

“But cow’s milk is packed full of essential, natural vitamins and nutrients – many of which you won’t get anywhere else. It’s great for your bones, it’s great for your teeth, and perhaps most importantly – it’s great for your brain.”


What’s fair?

28/02/2019

Definitions of fair include: treating people equally without favouritism or discrimination and: without cheating or trying to achieve unjust advantage.

By either of these definitions attempting to make the tax system fairer is doomed. To take a lot more from some people than from others in very similar circumstances is not fair.

There’s rarely a tax the left doesn’t like and it is particularly enamoured of capital gains tax.

A CGT might be fair in theory but as one of the three dissenters to the Tax working Group’s recommendations, Robin Oliver, said, he’s against it in practice.

There’s a strong argument for taxing capital gains, as you put it, in theory, the problem is the practicality and of making it work. . .

Kathryn Ryan asked him if, all things being equal and as a tax expert would it be good to do it and her replied:

In the actuality of what you have to do to get such a tax in place, no.

Oliver is a former deputy head of Inland Revenue, former Treasury advisor and an expert on the tax system whose views should be taken seriously.

He gave several examples in the interview of how the CGT as recommended would not only not be fair but would lead to perverse consequences including making it more attractive for foreigners to invest in New Zealand and for New Zealanders to invest overseas, and for people to hold on to assets and businesses when without the tax they would be better to sell them; and that it would have made little difference to the housing boom.

He also said that the current law on the bright line test has low compliance and we should make current rules work before starting to think of highly punitive  ones.

That would be fair.

 


What’s fair about this?

27/02/2019

A comprehensive capital gains tax that was inflation indexed and set at a modest rate could be okay.

The CGT proposed by the Tax Working Group fails on all three points.

One of the motivations for contemplating a CGT at all is fairness.

But Liam Hehir gives some examples that show how what’s proposed is anything but fair:

John is a supermarket manager and Alice has a small business as an in-home childcare provider.

They deduct part of their mortgage interest and outgoings from her taxable income, which helps them make ends meet.

Because they do this, however, they will have to pay Cullen’s tax when they sell their home.

Justin and Dana also have a house and children. Dana has a well-paying job as a dentist, which enables Justin to be a stay-at-home dad.

They have no need to use any part of their home for business purposes so will reap capital gains on their home untouched by the Cullen’s tax.

Terry is an IT contractor who worked hard to get on the property ladder.

Because house prices are expensive, he needs rent paying flatmates. He dutifully includes the rent in his tax return and claims a deduction for expenses.

When he decides to move he will become liable to pay Cullen’s tax on part of the sale proceeds.

Nick has a master of fine arts degree. It hasn’t led to a well paying job, but he is lucky to be supported by a family trust fund.

This has enabled him to buy a house and a number of paintings, some of which have become valuable in their own right. Nick decides he wants to travel the world on a voyage of self-discovery. He sells his property and art and incurs no liability to pay Cullen’s tax. . .

He gives several other examples which show how arbitrary and unfair the CGT proposal is.

There are plenty more, for example: Sue and Sam are lower order sharemilkers who save enough to buy a block of land on which they graze young stock. They get the opportunity to go 50-50 sharemilking, would have to sell the land to buy cows. Having 33% taken off them for CGT wouldn’t leave them enough to buy the stock without taking out a sizeable loan.

Pam and Pete are lower order sharemilkers on her parents’ farm. They save enough to buy a small block of land on which they graze young stock. Her parents give them the opportunity to go 50-50 sharemilking and gift them the money to do it.

It’s not hard to think of many more examples where the CGT will stop people getting ahead and it would also be far-reaching.

Contrary to the Prime Minister’s assertion that a CGT would affect very few people it will hit a lot and David Farrar lists those who will have to pay.

The list of 20 is only those who will pay directly. It doesn’t include everyone who will be affected indirectly, which will be everyone who buys goods or services from any business i.e. everyone.

There would be small tax cuts but they wouldn’t go far once costs start rising because of the CGT.

Whether you call it fairness or politics of envy, the motivation behind the CGT is to reduce inequality but it won’t do that.

The wealthy will find ways to avoid it and even if they don’t would still have plenty left.

Middle income people will have a third of their modest savings and investments eaten by the tax and they, like the poor will be hurt further by rising prices.

The CGT as proposed will not reduce inequality. It will provide a perverse incentive to over-invest in owner-occupied homes and it will apply a hand brake to the risk taking, innovation and investment which promote economic growth which creates jobs and – the government’s new word of the moment – wellbeing.

 


Sunday soapbox

24/02/2019

Sunday’s soapbox is yours to use as you will – within the bounds of decency and absence of defamation. You’re welcome to look back or forward, discuss issues of the moment, to pontificate, ponder or point us to something of interest, to educate, elucidate or entertain, amuse, bemuse or simply muse, but not abuse.

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There can be no such thing as ‘fairness in taxation.’ Taxation is nothing but organized theft, and the concept of a ‘fair tax’ is therefore every bit as absurd as that of ‘fair theft.’ – Murray Rothbard

 


Better taxes

23/02/2019

Better taxes are simple taxes.

The Tax Working Group’s capital gains tax proposal is complicated with all the costs and opportunities for avoidance that go with complications.

Better taxes encourage what we need more of.

The TGW’s CTG proposal would tax savings and investment.

Better taxes discourage what we want less of.

The TGW’s CTG exempts the family home which would encourage even greater investment in housing.

Better taxes reward hard work, thrift and delayed gratification.

The TGW’s CTG would tax businesses and exempt art, cars and yachts.

The TGW’s CTG is a bad tax.

 


More than a CGT

22/02/2019

The proposed capital gains tax (CGT) has got most of the attention, but worryingly there’s more, including the proposal of a water tax that would affect everyone:

IrrigationNZ says a proposed nationwide water tax would affect all Kiwis, and there needs to be more discussion about how this would impact households, farmers and businesses.

“The Tax Working Party has recommended the government consider introducing a water tax on all types of water use including hydro-generation, household use and commercial water use,” says Nicky Hyslop, IrrigationNZ Chair.

“This would result in higher power and food prices for households and businesses and higher rates bills to pay for the irrigation of parks and reserves as well as direct water tax on household and business water use.”

An increase in the cost of production inevitably leads to an increase in the cost of what’s produced.

The working party is proposing that the water tax could be used to fund the restoration of waterways.

“While we all want to see cleaner rivers, often the solutions to improving rivers require people to change their existing practices both on farm and to prevent urban wastewater discharges into rivers. Just allocating money will not be the most effective solution,” says Mrs Hyslop.

This was proposed before the last election and was rightly criticised for taxing the good to clean up after the bad.

“We need to think about whether a water tax is equitable as water use varies hugely across regions based on rainfall. For example a Christchurch resident uses an average of 146,700 litres of water per year, while the average for a New Zealander is 82,800. Someone living in Christchurch would pay nearly twice as much in a water tax as someone living elsewhere and would also pay more in rates because in a dryer climate the Council will use more water to irrigate their local parks. Is taxing dryer regions such as Canterbury, Otago, Hawke’s Bay and Marlborough more heavily with a water tax a fair way to fund river restoration nationwide?”

Mrs Hyslop says there are similar equity issues for farmers and growers.

“Some regions receive a significant amount of rainfall and farmers don’t need to use irrigation. Central Otago receives less than half the rainfall of Auckland, so farmers and growers rely on irrigation to grow stonefruit, wine and for pastoral farming to provide feed for animals. Only 7% of farmers use irrigation nationwide – why are those farmers being targeted to pay a tax which 93% of farmers won’t pay when there are many regions which have very poor waterways but little use of irrigation?”

Generally waterways with more irrigation are cleaner than those with less or none.

Mrs Hyslop says that a water tax on hydro-electric power generation would also add to power bills for households and businesses and this tax doesn’t make sense at a time when the government wants to encourage the use of renewable energy to meet climate change targets.

The poor already struggle to pay their power bills, why make it worse for no environmental gain?

“Currently a number of regions are suffering from very dry conditions and we need to be developing more water storage as climate change is predicted to bring more frequent droughts in the future,” she adds.

“We disagree with the suggestion in the report that introducing a water tax will encourage greater investment in water storage. If you look at the most recently approved water storage project – the Waimea Dam – a price increase for the dam construction nearly resulted in it not being built. Introducing a new tax on water use will add to be long-term costs of this and similar projects and make them less viable and less likely to be built. We really need more investment in these projects to ensure we have enough water to supply our growing population and get through more frequent future droughts.”

“We also have concerns that farmers and growers in many regions may face significant water tax costs in excess of $10,000 a year which will make it more difficult to fund the environmental improvements we all want to see to improve waterways,” she says.

“The report discusses how a water tax will encourage more efficient water use. There are already a number of existing incentives that encourage efficient water use including electricity costs and regulatory nutrient limit rules which require farmers to only use water when needed. The biggest improvements in water use efficiency come from modernising irrigation systems.Farmers and irrigation schemes have already invested $1.7 billion to modernise their systems since 2011, resulting in significant improvements in water efficiency. Introducing a major new tax will reduce farmers ability to replace an older irrigation system with a more water efficient model.” 

The capital gains and water taxes aren’t the only monsters unleashed by the TWG .

The Tax Working Group has gone much further than a Capital Gains Tax with a raft of new taxes targeting hard-working New Zealanders, National Leader Simon Bridges says.

There are eight new taxes including; an agriculture tax, a tax on empty residential land, a water tax, a fertiliser tax, an environmental footprint tax, a natural capital enhancement tax, a waste levy and a Capital Gains Tax.

“This is an attack on the Kiwi way of life. This would hit every New Zealander with a Kiwi Saver, shares, investment property, a small business, a lifestyle block, a bach or even an empty section,” Mr Bridges says.

“For farmers, who are the backbone of our economy, this is a declaration of war on their businesses and way of life. They would pay to water their stock, feed their crops and even when they sell up for retirement.

“Labour claims this is about fairness, but that’s rubbish. The CGT would apply to small business owners like the local plumber, but not to investors with a multi-million dollar art collection or a super yacht who won’t pay a cent more.

“The TWG has recommended one of the highest rates of Capital Gains Tax in the world. The Government would reap $8.3 billion extra in its first five years from ordinary Kiwis – small business owners, farmers, investors, bach and lifestyle block owners. After 10 years it would be taking $6 billion a year from Kiwis.

“It will lead to boom times for tax lawyers and accountants and even Iwi advisers, given recommendations for exclusions that include Māori land in multiple ownership.

“We believe New Zealanders already pay enough tax and the Government should be looking at tax relief, not taking even more out of the pockets of New Zealand families.

“National says no to new taxes. We would repeal a Capital Gains Tax, index tax thresholds to the cost of living and let Kiwis keep more of what they earn.”

The government keeps trying to counter the accusation it’s not a good economic manager.

Introducing new and higher taxes is not the way to do it.

It should be aiming for higher quality spending not more spending and reducing the burden of tax to allow us all to keep more of our own money.

 


CGT would hit middle hardest

22/02/2019

It there’s such a thing as a fair tax, it’s not one based on misplaced envy as the Tax Working Group’s capital gains tax appears to be.

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Fairness is desirable but not at any cost and  it’s best achieved by helping the poor up not pulling the better-off down, especially when those who will be hit hardest are those with modest investments, not the really wealthy, and worse still, they’d be hit by one of the most penal CGTs in the world:

The Tax Working Group’s report released today proposes a broad-based top rate of 33% capital gains tax (CGT).

The New Zealand Initiative argues in a new policy note, The Pitfalls of CGT, that headline rate would immediately push New Zealand to the top of the international CGT rankings among industrialised economies, just behind Denmark and Finland.

“The proposal is conspicuous by a lack of exemptions and concessions around business investment, so a full rate would arguably qualify New Zealand’s CGT regime as one of the harshest in the world,” said Dr Patrick Carvalho, Research Fellow and author of the note.

“Worse, given New Zealand’s recognisably low-income tax thresholds by international standards, a new CGT would disproportionately hit middle-income earners already struggling to invest for retirement.”

“New Zealand should be cautious about siren calls for a top-ranking CGT. Trying to punch above our weight can sometimes place us in the wrong fight category,” concludes Dr Carvalho.

A good tax would foster investment that would help businesses grow, produce more and employ more.

A good tax would encourage and reward thrift and delayed gratification.

A good tax would improve productivity and promote growth.

The CTG as proposed would do the opposite.

New Zealand needs foreign investment because we don’t have enough of our own capital. The CGT would aggravate that by making investing overseas more attractive than investing domestically:

The Tax Working Group (TWG) proposals released this morning would skew New Zealand investors away from local assets, distort the KiwiSaver market and mangle the portfolio investment entity (PIE) regime if introduced, according to the founder of the country’s largest direct-to-consumer managed fund platform.

Anthony Edmonds, InvestNow founder, said while the TWG final report includes some welcome reforms, overall the capital gains tax (CGT) recommendations would add cost, complexity and confusion to New Zealand’s relatively efficient managed funds market.

“For example, the TWG’s plan to increase tax on New Zealand shares by applying CGT while leaving the fair dividend rate (FDR) tax for offshore shares unchanged would naturally drag capital offshore at the expense of local assets – at a time when New Zealand needs to fund major infrastructure projects,” Edmonds said. “In trying to discourage people from investing in residential property, the TWG has created a tax disincentive for Kiwi shares, which can only distort investment allocation decisions.”

Essentially, the TWG recommendation to tax unrealised capital gains on PIE funds marks a return to the ‘bad old days’ when Kiwis paid more tax on managed funds than direct share investments. . .

Concern over the housing shortage is one of the motivating factors for a CGT but It won’t improve home affordability in the long term:

Bindi Norwell, Chief Executive at REINZ says: “In the short-term there may be some initial relief in house price affordability as investors look to sell their property to avoid paying CGT. This may create opportunities for first home buyers.

“However, in the long term it’s likely to push house prices up as people look to invest more money in the family home, as there will be less incentive to invest in rental properties or other forms of investment e.g. equities.

“This will also have a flow on effect for the rental market with fewer rental properties available for tenants, thereby further pushing up weekly rental prices when they are already at an all-time high.

“The report even recognises that any impact on housing affordability could be small, therefore, we question whether all of the administrative burden and cost to implement GCT is worth it? Especially as CGT coming at the end of a raft of legislative changes the housing market has faced recently including the foreign buyer ban, ban on letting fees, insulation, healthy homes and ring fencing. . .

A tax that results in fewer and more costly rentals and more expensive homes is not a good one.

Nor is a tax that is fatally flawed:

Today’s Tax Working Group report recommendation for a new capital gains tax will not address residential housing affordability but it will penalise business owners and create costly complexity in our tax system, meaning it is fatally flawed, according to Business Central.

“New Zealand’s tax system is envied worldwide. The proposed capital gains tax increases compliance costs without boosting productivity,” says Business Central Chief Executive John Milford.

“Business Central agrees with the conclusions of the minority view on the Tax Working Group.

“A capital gains tax is just another cost on business, nothing more. . .

It would hit small and medium businesses hardest:

Key areas of the Tax Working Group Final Report released today were disappointing, says Canterbury Employers’ Chamber of Commerce Chief Executive Leeann Watson. . . 

Ms Watson says the proposed capital gains rules should not be implemented because of the significant impact on small and medium-sized enterprises (SMEs).

“We support the Government’s review to ensure that our tax system is fit for purpose for a changing business environment. However, there is very real concern that taxing both shares and business assets under a comprehensive capital gains tax regime would create double taxation.

“This could disadvantage New Zealanders owning shares in New Zealand and create inconsistencies around overall taxation on investment.”

Ms Watson says a capital gains tax would be unlikely to achieve the desired outcome for business.

“There is concern around the effect for capital markets in a capital constrained economy with a long-term savings deficit. Adding further tax on the savings and investment of those New Zealanders in the middle-income bracket won’t drive the deepening and broadening of the capital base that we need for business investment, which is higher productivity and wages.

“While the impetus behind the changes are aspirational, there is little to indicate they would significantly reduce overinvestment in housing or increase ‘tax fairness’. In addition, there is concern that additional administration costs and investment distortions could outweigh any benefits and potentially discourage much-needed investment and innovation by locking businesses into current asset holdings.

“It is vitally important that we remain competitive as a country and are not continuing to add further compliance for business and in particular small business, who represent 97% of all businesses in our economy.”

Ms Watson says there needs to be a viable business case for any changes to the current tax system.

“There seems to be a real focus on ‘fairness’ in the system design, as opposed to revenue-building, so we need to be careful that any tax changes are for the right reasons and are backed by a clear, practical and sustainable business case. We currently have a fairly simple and efficient tax system that should be kept and better enforced, with changes to specific rules where needed.” . . 

The costs of a good tax would not outweigh the benefits:

The Employers and Manufacturers Association (EMA) says the key issue in the Tax Working Group’s proposal released today is that the cost of its capital gains tax rules will outweigh any benefits.

Chief executive Brett O’Riley says any gains from such a broad-based capital gains tax would be eaten up by administration and other costs, leaving little revenue.

“Fundamentally the proposed capital gains rules don’t address the Tax Working Group’s objectives of reducing over-investment in housing and increasing tax fairness,” he says.

Mr O’Riley is also concerned that capital gains tax on business assets could discourage investment and innovation, locking businesses into their current asset holdings. He says there are other policy settings that could be changed to increase investment in different asset classes, away from property.

“I also fail to see how taxing growth on the value of assets from the proposed commencement date of 1 April 2021 would work, because it would be open to conflicting valuations,” he says. “It could also act as a further disincentive to growth when New Zealand already has issues with business not growing from SME’s into larger scale operations and a CGT may also limit the availability of capital to reinvest in businesses as smaller businesses face an additional tax bill.

“It’s difficult to see any benefits for the business community from implementing the proposed capital gains tax rules, as taxing both shares and business assets appears to be double taxation,” says Mr O’Riley.

It is relevant to note that a number of the Tax Working Group do not favour its recommendations on capital gains tax. The minority view summary is available here

One reason for dissension was compliance costs:

Former IRD Deputy Commissioner Robin Oliver was one of the 11 in the Tax Working Group.

Along with two others from the group, he believes the costs and bureaucratic red tape involved in adopting all the capital gains options outweigh the benefits.  

“We didn’t agree that this was in the best interest of the country to go the full extent, particularly in the business area, taxing share gains which result in double taxation,” he said.

“To get a valuation for all business assets in all parts business and all business will easily cost over a billion dollars in compliance costs. The amount of revenue you’ll get is relatively minor.”

As for taxing shares, Mr Oliver said it would result in New Zealanders who invest in New Zealand companies paying more tax when foreigners investing in New Zealand companies will pay no more tax. Furthermore, New Zealanders investing in foreign companies will pay no more tax.

“The obvious conclusion is New Zealanders will own less New Zealand companies and more foreign companies, and foreigners will own our companies,” he said. . . 

The proposed tax is no panacea for fairness:

Deloitte tax partner Patrick McCalman warns that a CGT is not a panacea for tax fairness.

“At one level, there is an attractiveness in the argument that a ‘buck is a buck’ and everyone should bear the same tax burden on every dollar earned. However, when one delves into the detail of the design, other issues of fairness emerge,” says Mr McCalman.

“For example, is it fair that property could pass on death without an immediate CGT cost, while gifts made during one’s life would be taxed? For family businesses, wouldn’t it be more productive to be able to pass assets from generation to generation before death,” he says.

“Accordingly, we need to be cautious as to how much ‘fairness’ a CGT will introduce. It may simply change where the ‘unfairness’ is perceived to sit within the tax system, creating new tax exemptions that would distort where investments are made.”

Complicating matters further is the political dimension. And MMP only exacerbates the political difficulty and increases the likelihood of whatever ultimately sees the light of day being less coherent from a policy perspective. . . 

The Deloitte paper raises several questions about fairness:

At one level there is an attractiveness in the argument that a “buck is a buck” and everyone should therefore bear the same tax burden on every dollar earned. However, when one delves into the detail, other issues of fairness emerge including new tax exemptions which would distort where investments are made – in effect, in seeking to create fairness, the proposal creates a number of layers of unfairness. For example:

    • With a CGT applying at full rates with no inflation indexation, is it fair that someone who buys an asset is taxed on the full amount of any gain when part of that gain is simply inflation? How will they be able to re-invest in a new asset if the inflation element is taxed?
    • Is it fair that the family home and artwork are excluded but most other property is not? Consider a plumber who has a $500,000 house and a $500,000 commercial building who would be taxed on the disposal of the commercial building. Should they have instead bought a $1,000,000 house, rented a business premise and enjoyed a tax free capital gain?
    • Is it fair that that investors in New Zealand shares would pay tax on capital gains but investors in foreign shares would continue to be subject (as they are presently) to the 5% FDR rate (even if gains are less or more)?
    • Is it fair that small business (turnover less than $5 million) could sell assets and defer the CGT bill if they reinvest the proceeds, while medium and larger size business cannot?
    • Is it fair that property could pass on death without an immediate CGT cost but gifts made to children during one’s life would be taxed?
    • Is it fair that there are proposed tax reductions for KiwiSaver to compensate for CGT but not for other forms of investment?

At one level, true fairness can only exist if all asset classes and forms of remuneration are subject to the same tax rate. But even then, anomalies will always arise. . . 

The proposed tax would be especially bad for farming and farmers:

Federated Farmers has said from the outset that a capital gains tax is a mangy dog, that will add unacceptably high costs and complexity.

“There is nothing in the Tax Working Group’s final report, released today, that persuades us otherwise,” Feds Vice-President and Commerce spokesperson Andrew Hoggard says.

“A CGT would make our well-regarded tax system more complex, it will impose hefty costs, both in compliance for taxpayers and in administration for Inland Revenue, and it will do little or nothing to ease the housing crisis.”

It is notable that even the members of the working group could not agree on the best way forward, with three deciding a tax on capital gains should only apply to the sale of residential rental properties and the other eight recommending it should be broadened to also include land and buildings, assets, intangible property and shares.

“Federated Farmers believes that the majority on the tax working group have badly under-estimated the complexity and compliance costs of what they’re proposing, and over-estimated the returns.”

The recommended ‘valuation day’ approach to establishing the value of assets, even with a five-year window, will be a feeding frenzy for valuers and tax advisors, “and just the start of the compliance headaches for farmers and other operators of small businesses that are the driving force of the New Zealand society and economy. . .

Farm succession is difficult enough as it is.

A CTG would make it harder still and encourage older farmers to hold on to their farms. That would lead to more absentee ownership and leasing with less investment in improvements as happens in other countries.

New Zealand doesn’t have a lot of many wealthy people and while those relatively few would pay more with the CGT as proposed, if their accountants and lawyers didn’t help them find ways to minimise their liability, they’d still be wealthy.

The many small business owners and more modest investors would not. They’d have the reward for their hard work and thrift cut back and lose enough of the value of their investments to hurt – unless they’d invested in art, cars or yachts which would be exempt.

That sends the message that such luxuries are good while investing in businesses and productive assets is not.

Where’s the fairness in that?


CGT deliberately harsh so won’t be implemented?

21/02/2019

The Taxpayers’ Union says the Tax Working Group’s recommendation for a capital gains tax is one of the most aggressive in the world.

Sir Michael’s group was supposed to deliver ‘fairness’. Instead, he’s given something Kiwi taxpayers should fear.

In our recent report, we outlined Five Rules for a Fair Capital Gains Tax, but any notion of fairness has been flagrantly disregarded by the Working Group. It fails most of our tests.

As expected, the Group is proposing a full-scale capital gains tax, among other measures such as environmental taxes.

The only assets excluded from the proposed capital gains tax are small family homes and art – commercial property, businesses, publicly listed shares, and every other type of enterprise will be slammed by this tax:

    • Capital gains will be charged at 33% for the majority of taxpayers – one of the most punitive capital gains tax regimes in the world, and more than twice the rate proposed by the Labour Party at the 2011 and 2014 elections.  
    • There will be no inflation adjustment – even paper gains will be hoovered up by IRD.
    • Revenue neutrality only applies for the first five years: while the group proposes changes to income tax thresholds (see below) most of the revenue from a capital gains tax is forecast to be collected after five years — after ‘revenue neutrality’ has expired.
    • ‘Valuation Day’ is imminent: taxpayers will be forced to value their assets within five years, or must rely on rough and ready evaluations (such as rateable value for land).  

Even though the Government explicitly ruled out taxing the family home, properties larger than 4500m2 will in fact be taxed. The message to regional New Zealand is that their lifestyle blocks, farms, and semi-rural properties don’t deserve the protection given to Wellington and Auckland penthouses and townhouses.

Iwi-owned businesses will pay a discounted rate (17.5 percent, compared to 33 percent for other businesses).

In short, the proposal is as bad as we could have feared.

It is a costly, bureaucratic, and seemingly envy-driven tax grab. It threatens New Zealand’s prosperity, drives up housing costs, and punishes responsible investors.

You can read the Tax Working Group’s final report here.

Proposed sweetener with changes to income tax appear to be spin rather than substantive

While the Working Group supports adjusting the bottom tax threshold, they propose coupling this with an increase in the second tax rate from 17.5% to 20.5% to increase ‘progressivity’.

From an economic incentive perspective, this is a terrible move. Even though many taxpayers will receive a small tax cut, middle-income earners would face a higher marginal tax rate on additional earnings, which reduces the incentive to take on more hours, skill-up, or take-on extra responsibility at work.

45.6 percent of earners fall within the second tax bracket, hundreds of thousands of earners could be affected by this distortion in incentives – the cumulative economic effect would be massive. . . 

What government in its right mind would introduce a tax to fear rather than a fair tax, one that is costly, bureaucratic, and seemingly envy-driven and a disincentive to savings and investment?

If I was a conspiracy theorist I’d say the TWG has deliberately made it too harsh so that it would be political suicide to introduce it, but that’s probably just wishful thinking.


CGT gets it back to front

21/02/2019

If there’s such a good thing as a good tax, it’s one that discourages things we don’t want and encourages things we do.

That’s where the Tax Working Group was handicapped from the start when the government ruled out any CGT on the family home.

A CGT hasn’t had any impact on keeping house prices down in other countries, but if, as we’re constantly told New Zealander’s over-invest in their houses, taxing other capital gains and leaving houses alone will only make matters worse.

We’re also told, with good reason, that New Zealand lacks savings and investments. Why then would a government introduce a tax which disincentives them?

If has been widely forecast the Tax Working group’s report recommends a CGT on savings, investment and businesses and not on family homes, it will be getting the tax the bad more and the good less rule back to front.

It will almost certainly get a lot more wrong.

The Taxpayer’s Union provided five rules for a CGT:

To be fair, a new capital gains tax must abide by the following:

  1. No Valuation Day: Any capital gains tax regime should exclude a valuation day approach in favour of grandfathering assets into the system upon sale, as was the case in Australia when it introduced a capital gains tax.
  2. Indexation for Inflation: Any capital gains tax regime must discount for inflation, so taxpayers are taxed only on their real capital gains, rather than nominal gains.
  3. Revenue Neutrality: Given the Government’s surpluses, any revenue from a capital gains tax must be used to fund tax cuts in other areas so that the total tax burden does not increase overall.
  4. Roll-Over Relief: Tax should be paid only on sale – not death. Further, there should be roll-over relief when capital raised from a sale is then immediately invested in the same asset class.
  5. Discounted Rate: Any capital gains tax should apply at a discounted rate, instead of at the full personal income tax rate, to avoid New Zealand having one of the highest capital gains tax rates in the world.

The TU has also provided 19 details to look out for in the recommendation for a CGT:

Details to look out for include:

  • Rollover relief:
    • will the capital gains tax apply on death or just on sale of an asset;
    • will the tax apply if capital is simply being recycled within the same asset class (selling a smaller farm to purchase a larger farm, for example)?
  • The rate:
    • will there will be a discounted or lower rate, like in Canada, Australia, the United Kingdom, or the United States?
  • Revenue neutrality:
    • will the revenue be offset with tax cuts;
    • if so, who will receive them;
    • will revenue neutrality be maintained in the medium-to-long term as CGT revenue grows?
  • Family home exemption:
    • will there be exemption exclusions for large properties (will lifestyle blocks be subject to the tax?);
    • will there be a ‘maximum value’ for the family home;
    • how much tax will be payable if there is an exemption exclusion?
  • ‘Valuation Day’:
    • will asset owners be required to value their property and businesses;
    • if so, will it be at their expense, or will the general taxpayer be required to pay;
    • if the general taxpayer is required to pay, what will be the estimated cost of ‘V-Day’;
    • how much time will taxpayers have to obtain asset valuations;
    • if valuations are not obtained, will other ‘default valuations’ be used?
  • Exemptions:
    • are there any sectoral exemptions (e.g. racing, fisheries);
    • will Maori authorities pay capital gains tax, if so, at what rate;
    • how are vehicles, boats, antiques etc. treated?
  • Trusts:
    • at what rate are trusts taxed;
    • will they be taxed on accrued or realised gains?

Fairness, which is the supposed motivation for introducing a CGT, is very much a matter of opinion but if the proposals from the TWG don’t meet the five rules, it will be anything but fair and do more harm by disincentivising savings and investment.

 


What’s fair?

14/02/2019

The government and many of the groups supporting it put a lot of emphasis on fairness, but what’s fair?

National policy is to adjust tax brackets to take account of inflation which Professor Norman Gemmell, chair in public finance at Victoria University, says is only fair:

 Tax economists have long advocated that keeping income tax thresholds constant in real terms (by adjusting them upwards as prices rise) should be the norm. But this indexation is much less important for tax on wages than it is for tax on capital gains – a crucial point in the current climate. . . 

Capital income, such as capital gains from house sales or interest payments on bank accounts, are much more vulnerable to this “indexation problem”.

Consider a simple capital gain example. If house prices rise by 5 per cent but “general” inflation is 2 per cent, the real capital gain for homeowners is 3 per cent, not 5 per cent. Now suppose that a 33 per cent tax rate payer buys a bach for $100,000 and sells it one year later for $105,000. The CGT liability on the sale is $660, due to the general inflation of 2 per cent, plus $990 for the additional house price increase (the “real” gain).

So the extra tax levied on the inflation component is a whopping two-thirds as big as the “real” tax liability (or 40 per cent of the total). In other words, with a CGT, failing to allow for general inflation means a huge additional tax bill.

What does this all mean for the TWG advice and a Government concerned with “fairness”? First, adopting National’s indexing of income tax thresholds would be a good idea, and not just for transparency reasons. It is the fair thing to do for taxpayers right across the income scale, who otherwise pay more tax simply because prices have risen.

Also, if the Government decides to go ahead with a CGT, designing out the “inflation problem” is much more important, due to the size of the tax distortion it creates. It is also important for fairness.

Otherwise, what superficially looks like the same tax rate being applied to all income actually means that the effective tax rate on capital gains (and interest income) is much higher than the same rate on income earned as wages. 

Surely that’s not fair?

Even if a CGT is inflation indexed, would it be fair?

Only if you’re a socialist who think that people who work hard, pay the costs and take the risks,  forgo personal spending, to save and invest, and pay taxes on earnings from that work, savings and investment should then be taxed again.

A CTG is a classic envy tax, aiming to bring middle and upper income people down down rather than helping the poor up.

Is it fair that the government is looking at raising more tax rather than letting people keep more of their own money?

Leighton Smith shows a better way:

 . . . the Swiss government must get approval from its voters by virtue of referendum to give themselves a pay rise or change tax rates. In 1975, the voters declined a government request for a tax increase. A prominent Swiss citizen, responding to a question of what happens next, replied “the government will have to live on what it has, like the rest of us.” But it doesn’t stop there. The Swiss have a separation of powers between taxing and spending, in the belief that temptation to overspend is omnipresent. Unfortunately, we in New Zealand could be returning to the ideology of the politics of envy. The introduction of any tax policy that enriches the accounting industry is bad policy. . . 

A government that keeps telling us its a good economic manager should not need more tax, in fact the reverse is true.

Healthy surpluses are a clear sign it’s already taking too much for us. There is no need for new taxes, and certainly not one that would benefit tax accountants and lawyers most.

Better taxes are simpler taxes. A CTG would be complicated and in spite of the aim of fairness which is behind the motivation for its introduction, would not be fair.

 

 


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