CGT would hit middle hardest

February 22, 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.

No photo description available.
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?


A plot so cunning . .

February 1, 2019

The play opens in a private room with a well stocked bar.

Simon raising a glass: Well done Jim, your report‘s upset every employer group and business organisation in the country.

Jim: Thank you. (takes a sip of whiskey) You don’t think I’ve overdone it?

Paula: No, not at all. It’s just what we need – recommendations so ridiculously pro-union and anti-employer and worker, even the really left-wing media will have to admit it would be madness to follow them.

Just look at the media releases.

The EMA says  Fair Pay Agreements make no economic sense, the Canterbury Employers Chamber of Commerce says they’re not fit for the future of work, and BusinessNZ says the compulsory nature of fair pay agreements and the risk of industrial action and productivity loss are key concerns.

Amy: You sounded really convincing, as if you believed what you were saying. And it’s so cleverly designed to handicap growth, hamstring productivity and act as a hand brake on innovation that it can’t possibly be actioned.

Simon: I was only a kid but I remember Mum and Dad talking about how the unions used to wield all the power, hold businesses to ransom, and how hard it was when workers were forced to strike ran out of money to feed themselves and their families.

Paula: We’ll have to be careful about that because a lot of people would have been too young to really remember what it was like, they might think we’re just scaremongering.

Amy: Even farmers who hadn’t been born in the 60, 70s and early 80s know the stories of how hard it was when the freezing workers kept striking so they couldn’t get stock killed, even when they were running out of feed and facing very real animal welfare issues.

Paula:  Good point. And of course the threat of all those Christmas flights being cancelled gave younger people a taste of what could happen and reminded older ones what used to happen – ferries dock-bound every school holidays because the wharfies or cooks and stewards were on strike.

Simon: Those so-called failed policies you introduced have sure saved workers and businesses big and small a lot of heart ache, Jim. Our productivity over the last few decades hasn’t been anything to celebrate but think how much worse it would have been with national awards, compulsory unionism and all the trouble that went with them.

Jim: takes another sip of his whiskey,  swallows, Yeah, I guess that’s why I’m worried about the report. People are going to think I’ve gone gaga recommending we go back to those bad old days.

Simon: Ah well, we all make sacrifices for the good of the party, Jim. You know how much we appreciate the ammunition you’ve given us, and of course we know there’s no risk of anything too serious going through because your friend W-

A knock on the door sounds. Paula opens the door and tales a note from a secretary.

Paula: It’s for you Jim. She hands it to him.

Jim:  takes another sip of whiskey, smiles. Ah yes, speak of the devil, Winston has just phoned, he wants me to call him.


Higher min wage = higher prices + fewer jobs

December 20, 2018

The minimum wage will go up to $17.70 next April, the highest relative to the average wage in any country in the developed world.

On the surface it’s good news for workers.

Below the surface there are risks to jobs and the very real prospect of increased taxes and prices eroding any benefit of higher wages.

Wellington Chamber of Commerce chief executive John Milford points out, it needs to be at least matched by an increase in productivity.

“Research shows that any minimum wage increase has a cascading effect on workers paid above the minimum wage too. This particularly hits SMEs who are unable to pass on or manage their costs easily.

“We urge the Government to accelerate productivity-enhancing policies such as investing in strategically important transport networks, freeing up labour supplies to desperate primary industry employers, and raising the quality of tertiary education graduates.

“MBIE’s minimum wage review estimates the employment restraint impact from today’s announcement at 8,000. But Kiwis have already started to see an impact from the significant minimum wage hikes foreshadowed.

“The past four quarters added 6,000 new jobs per month on average, a marked slowdown from the preceding two years when over 10,000 new jobs were added per month on average, despite the currently hot labour market. . . 

Milford also points out that without tax reform much of any increase will be clawed back in tax.

The Employers and Manufacturers Association also points to problems if wage increases aren’t matched by increased productivity.

 The EMA’s Chief Executive Kim Campbell says, “When you take into account the current rate of $16.50 (up from $15.75 per hour) that came in on April 1 this year, you are looking at a 27 per cent increase in the minimum wage over a four-year period.

“That change was 4.8 per cent (75 cents), to be followed a year later by another 7.3 per cent ($1.20) increase on April 1, 2019. New Zealand already has the highest minimum wage in the OECD relative to the average wage.

“These are significant costs for business to swallow, particularly for those in the small-to-medium [SME] sector or for those large employers with significant numbers of young and entry level staff on the minimum wage.  

And who pays?

Mr Campbell said it was uncertain what impact such a large increase might have on the hiring intentions of employers but he expected such a large wage increase to be passed on in charges to customers and consumers.

“We do know that large increases in minimum wage structures in Canada and the United States led to large increases in unemployment numbers, but we are in an already very tight labour market in New Zealand where employers simply cannot find the staff they need.

“I think we are more likely to see increases in costs to consumers as a result, as many employers are already working to very skinny margins.

“Minimum wage increases also tend to flow through an organisation as other, higher-paid employees want to retain their pay relativity levels and seek adjustments to their own wage rates.

“That puts additional payroll pressure on employers who may also opt out of offering additional benefits to new employees to maintain differentials with existing staff.”

Mr Campbell says the main concern is that while additional costs and conditions were being heaped on employers through multiple changes in employment legislation, there was no focus on measures to boost productivity.

“There is no research anywhere in the world that shows simply boosting wages (and therefore costs) leads to an increase in productivity,” Mr Campbell says.

It doesn’t increase productivity and it can and does have other perverse outcomes.

When wages for resthome carers was increased the difference between their wages and that of registered nurses led to some nurses opting to work as carers rather than nurses.

The added responsibility and stress that came with the nurse’s role simply wasn’t enough to justify the smaller difference in pay.

Arbitary increases in wages also leads to employers seeking ways to do more with fewer staff.

A friend who is in horticulture increases mechanisation every time changes to wages and conditions make it more expensive and difficult to employ people.

Nationals employment spokesman Scott Simpson says:

“You simply can’t just legislate your way to prosperity – if you could you’d simply make the minimum wage $50. But artificially inflating wages is no substitute for an economic plan. . .”

The plan that’s needed for increased productivity to sustain higher wages must include tax reform – at the very least a change in tax brackets to reflect inflation.

It must also include other policies which encourage businesses to take the risks and make the investments necessary the for growth which safeguards existing jobs and provides opportunities for new ones.

 


More strikes in last 9 months than past 9 years

June 26, 2018

Labour is supposed to value workers, why are so many striking when that party is leading the government?

The worrying increase in strike action under this union-friendly Government will slow our economy, make it harder to do business and affect the access of New Zealanders to public services, Opposition Leader Simon Bridges says.

Union friendly isn’t necessarily worker friendly.

“After less than nine months of this Government 32,000 workers have been involved in industrial action, or signalled their intention to be – compared to just over 27,000 that undertook strike action in the entire nine years of the previous Government.

“And the strike action is escalating.

“Today 4,000 core public servants at MBIE and IRD as well as 150 Wairarapa meat workers announced they would undertake industrial action, following on from the likes of bus drivers and cinema and port workers who have repeatedly disrupted businesses.

“On top of this, around 49,000 teachers are also considering their options.

“That’s around 81,000 workers involved in or considering strike action this year.

“All this is going to make it harder for New Zealanders to do business and access public services like healthcare.

“National supports higher wages and the average wage increased by $13,000 under the previous Government, but the way to do that is to grow the economy while this unrest unleashed by the Government will just slow it down.

“Already the uncertainty is impacting peoples’ quality of life and ultimately the economy. With business confidence already low Labour needs to put the needs of the public and economy first, not its union backers.

“The situation will only get worse when Labour’s proposed employment law reforms are implemented, which are specifically targeted at strengthening unions and weakening the ability of New Zealanders to run their businesses.”

Kim Campbell, chief executive of the Employers and Manufacturers Association also says proposed changes will make it worse:

In a world in which collaboration and flexibility are key to the modern workplace, it seems strange we are trying to reinvent an industrial relations framework which appears built on a foundation of “them” and “us”.

Let’s get the elephant in the room out upfront. Yes, some employers are poor operators, but the employment relations system is effective at addressing this. The financial and reputational costs are high for employers who breach employment laws or seek ways around them.

But the law does not catch all such operators, many workers are exploited and I agree there are problems to address.

My question is, why address this with a major law change seemingly based on the premise that all employers are bad and all employees are vulnerable?

Enforcement is a key part of a functioning framework and more labour inspectors seems an obvious solution.

We need an industrial relations framework that enables employers and employees to have the flexibility to meet the growing demands of the future of work, not stifle it. Recently, IAG and Lion NZ pushed the need for flexible working policies, saying these benefit both staff and employers. This embodies the sentiment that employers want to work alongside modern, forward-thinking unions that offer solutions to help move the business forward. . .

Proposed changes will take employers and employees back to last century, not equip them for this one.

 


Can’t get prosperity by decree

October 26, 2017

The Employers and Manufacturers Association says the minimum wage increases announced by the government could “bring the economy to a grinding halt”.

Employers and Manufacturers Association (EMA) chief executive Kim Campbell said the initial increase was not much more than what a National-led Government would have implemented.

However, he saw the $20-an-hour target as too high and it meant New Zealand would have among the highest minimum wages in the world.

“The first step was well signalled… and it’s not very responsible signalling it so well in advance because it sets up inflationary expectations,” he said.

“You can already see a reflection of that in our exchange rate, which has gone down because overseas they can sees that New Zealand’s costs are going up.

A drop in the exchange rate will make our exports less expensive overseas but it will add to the cost of imports including clothes, fertilizer, fuel, machinery, medicine and vehicles.

“Exporters are going to do a bit better but you’d have to do the sums to see how they land but it will all turn into an inflationary spiral which is a really good way to bring the economy to a grinding halt.”

Campbell said businesses would be worried by what the cost increases would mean for them. . . 

Businesses have got used to gradual increases in the minimum wage and have factored them into their planning.

But getting to $20 by 2021 is too much too fast for many.

We had dinner out on Tuesday evening.

The business owner, unprompted, told me she was very worried about the new government. “People already say dining out is expensive, but if we have to pay too much more for wages we will have no choice but to increase prices.”

That’s how the inflation spiral starts – with wage increases which aren’t related to productivity increases or other cost decreases.

And that’s what drives business owners to look at ways to reduce staff numbers, including more mechanisation.

Robots are expensive now, but improvements in technology and increases in production will bring prices down.

You can’t get prosperity by decree and attempts to reduce or eliminate poverty by imposing unrealistic rises in wages will threaten business sustainability and job security.


%d bloggers like this: