Shouldn’t wait to be asked to apologise


Andrew Little maligned tax expert John Shewan when he was first appointed to examine New Zealand’s trust rules more than two months ago.

Last week Little retracted his statement. He didn’t say he  was sorry and did say he hadn’t been asked to apologise.

Shewan said that was misleading and he had asked Little for an apology because Little had dilly-dallied so long in setting the record straight.

Little shouldn’t have to have been asked to apologise for what he said.

He was wrong to make the unfounded accusation in the first place. He compounded that by waiting so long to admit he was wrong and compounded his error again by not apologising when he made the admission, regardless of whether or not an apology was requested.

His original attack was an attempt to discredit the government, just as his misguided and misinformed attack on Earl and Lani Hagaman who have now launched defamation proceedings against Little.

They too were caught in the political crossfire.

Personal attacks on politicians aren’t edifying but they are unfortunately accepted as a normal part of parliamentary discourse.

Politicians casting aspersions on people outside parliament is fortunately more unusual and even more unacceptable.

An MP who does that and is subsequently proven wrong should not only admit the mistake s/he should  apologise, and do so at the earliest opportunity.

Little’s refusal to apologise shows he isn’t sorry and therefore probably hasn’t learned from his mistake.

A matter of trust


The left hoped this morning’s release of the Panama papers would be a bomb that would blow up the Prime Minister.

As has happened every time they’ve tried it, all they’ve delivered is a damp squib.

Rather than being a critical blow to the Government, political commentator Chris Trotter says so far, the Panama Papers revelations have been “meh”.

The entire database of 11.5 million documents will go online on Tuesday morning, but some New Zealand journalists — led by Nicky Hager — have been given early access.

They’ve revealed 61,000 of the documents, leaked from Panamanian firm Mossack Fonseca, mention New Zealand. But there is no evidence our zero-tax foreign trust rules are being used for illegal purposes. 

That looks like a big number but 61,000 is less than one percent of the 11.5million documents in total.

“Like a good leftie I was salivating this morning at the prospect of what I was going to come across at [6am],” Mr Trotter told Paul Henry on Monday.

“I read it and I went ‘meh’. This will be the best that they’ve been able to find to date.” . . 

“If you’re going to bring down a Prime Minister… then you’ve got to have something that links the Prime Minister not only to something that has the perception of dodginess but that is actually illegal. Nothing to date that I’m aware of has pointed to any kind of illegality at all,” says Mr Trotter.

“It will be a major issue for a little while, then, as has happened so often before, the Prime Minister will move on.”

While Mr Hager says the Panama Papers conclusively prove New Zealand is a tax haven, PricewaterhouseCoopers tax expert Geoff Nightingale says the present rules are “orthodox” and “not uncommon”.

“We need to think about our reputation — it’s a critical business asset. But there’s nothing broken around the tax treatment of these foreign trusts. These are foreign assets and foreign income of foreigners — all we’re doing is administering them.”

New Zealand is a tiny blip on the international radar. Any damage to our reputation will come from opposition politicians, conspiracy theorists  and the media who are trying to make this look like a scandal when it isn’t.

The OECD consistently ranks our tax rules highly; the government has appointed a tax expert to do a review and has undertaken to make changes should the review deem that necessary.

It’s a matter of trust. Our laws and regulations are robust and trusted internationally and should the review uncover any problems they will be addressed.

The key difference between New Zealand and a proper tax haven is we have rules around disclosure.

“We don’t want to be facilitating illegal international activity and we don’t want to have a reputation for that, and the way we deal that is by being clear about who we’re dealing with and what are the assets and where is the income being distributed.”

Mr Nightingale says a review undertaken by John Shewan, former PricewaterhouseCoopers chair, should be broad enough to fix any reputational issues.

“It’s got the disclosure rules in there, it’s got the anti-money laundering rules in there.”

New Zealand has disclosure rules with several countries. If other countries don’t want us to disclose information on trusts affecting their nationals and companies that is their issue not ours.

Any risk to our reputation is one of perception, and that perception is not based on reality but the ridiculous claims New Zealand is a tax haven when it  isn’t.

“Failed” policies didn’t fail


The left love to blame economic, social and political ills on the “failed” policies of the 80s and 90s,.

But did the policies fail?

John Shewan, retiring PWC chair, found scant evidence  of that:

It is commonly asserted that the economic policies adopted in the 1980s and early 1990s failed. Little or no evidence is usually offered in support of that claim. I have a vivid memory of ‘old New Zealand’ and I find it an astonishing view.

The evidence that the reforms of that era were successful is persuasive.

New Zealand’s economic performance improved significantly following the reforms.

In the 16 years from 1991/1992, New Zealand enjoyed one of its longest uninterrupted economic expansions since World War II. Real GDP grew by over 70 percent at an average rate of 3.5 per cent a year. Real GDP per capita grew by an average of over 2 per cent a year.

Productivity grew more strongly in the ten years from 1991 than in either the decade Budget 2012 to 1991 or after 2001. Unemployment fell to levels not experienced in the 1980s.

Inflation, a perennial problem before the reforms, has been low and stable.

The Government’s Budget surplus and debt positions were in much better shape following the reforms than they had been before them.

While it took some time for the benefits of the reforms to become apparent, it is unrealistic to have expected the economy to move rapidly into high gear from its parlous state in 1984. There were longstanding and deep-seated problems to be addressed. There were longstanding and deep-seated problems to be addressed. Inflation had to be quelled. The Government’s budget position needed to be put on a sound footing. Resources had to shift from inefficient industries to more productive activities. All this takes time and can have a depressing effect on economic activity in the near term.  . .  

He admits the reform process wasn’t “text-book perfect”, as public policy rarely is given the tradeoffs and political considerations which take place in a democracy. But he concludes:

 Another argument might be that the recent economic difficulties show that the reforms failed. On the contrary, I think they show what happens when old habits re-emerge. The quality of economic policy making has fallen. The reform effort slowed to no more than a crawl after about 1993. The focus on growth was replaced by an emphasis on social policies following the 1999 election. A too lax approach was taken to Government spending, particularly from 2005, which pushed up the exchange rate. The competitiveness of the export and import competing sectors was eroded, productivity growth slowed and economic growth suffered as a consequence. Developments such as these rather than the post-1984 reforms account for the current situation.

Contrary to the delusions of the left, the “failed”policies didn’t fail. IF there has been any failure it is of the resolve to keep up the momentum of reform.

The quotes  above are from a column in which Shewan also lists key lessons learned from Budgets over the last three and a half decades.

They are:

Incentives matter
Whether at work or play, the average Kiwi behaves in an entirely logical way. As Sir Robert Muldoon discovered, when Governments introduce poorly designed incentives and subsidies, bad behaviour and high waste are inevitable.

• Focus on the big picture
The key things that matter most for economic performance are a stable and predictable macroeconomic environment, openness to trade and investment, effective labour and capital markets, relatively low taxes and regulatory burdens, and sound public finances. Policies designed to offset weaknesses in the basic framework, like export incentives and investment allowances, or a focus on one or two sectors are no substitute.

• Don’t stop reforming
Policy needs to be adjusted to reflect changing circumstances. Radical reform programmes, such as those of the Douglas era, can be avoided if regular policy housekeeping is undertaken. We are not good at this.

• Don’t take our eyes off the ball
A seemingly sound fiscal position can dissipate quickly as the past decade has shown. Maintaining competitiveness is crucial. Once lost, it’s a long way back.

• The best time to tackle structural reforms is when the economy is strong
History shows that in New Zealand it takes a financial crisis to trigger major structural reforms. That’s unfortunate.

• Politicians need to resist the temptation simply to be seen to do something about a problem rather than doing the right thing
As Economist Walter Williams recently wrote in relation to the US, “The track record of doing nothing is pretty good compared with doing something.”

• Consultation improves policy
Proposals announced in the Budget and passed into law that night often result in bad legislation. Fortunately, there is much less of that now than in the 1970s. Consultative processes such as the generic tax policy process have improved policy making.

• Competitiveness of the export and import sectors is more important than inadequate savings in examining our balance of payments problem.

• There is huge pressure on all governments to placate interest groups, to respond to focus groups and media campaigns

The standard of economic debate is often superficial. It is difficult for governments to withstand the tide. The private sector needs to play its part in engaging in debate and contributing to policy.

• Be sceptical of demands for a paradigm shift from government
These typically amount to requests for large government handouts to fund risky experiments where losses are socialised but profits revert to the promoters.

• The reforms (structural labour market reform, subsidy reduction and the significant opening up of the economy) of the 1980s and early 1990s imposed a lot of pain that Europe and some other parts of the OECD are going through right now. The pressures other countries are experiencing provide the opportunity for New Zealand to improve its relative ranking. In this year’s Budget lock-up Finance Minister Bill English noted that New Zealand’s growth outlook over the next four years exceeds that of most of the developed world.

Rather than failing, those policies of the 80s and 90s have made the country stronger and should get some of the credit for New Zealand’s relatively strong position in the face of global economic woes.

We aren’t doing as well as we need to, but we’re doing a lot better than we would have had it not been for those “failed” policies.

Hat tip:

CTG death, gift duty by stealth


Labour says its proposed capital gains tax won’t be imposed on the family home or farm homesteads.

But there is a proviso – the area used for business will be liable for the tax.

I don’t know of any farmhouse which isn’t used for business, though just where the line between farm and home is crossed could be debatable.

If a farmer has a bright idea in the bath, or lies awake counting sheep would the bathroom and bedroom be considered part of the business or home?

Farms aren’t the only businesses to be run, at least in part, from home and they too will be hit by the proposed CGT.

Of equal concern is that the tax would effectively reintroduce death duties:

Under proposals unveiled by Phil Goff this week, assets passed on to children would not create an immediate capital gains tax liability. However, Ernst & Young tax partner Jo Doolan said when the assets were eventually sold, the new owner’s liability would be based on the value of assets when it was originally bought, not the value when the asset was inherited.

“Essentially it’s a back-door estate-duty-type tax that’s coming back in” if Labour was elected, Ms Doolan said.

“They’re saying it will only impact on a small percentage of New Zealand, but most New Zealanders, at some stage, will inherit a property or some other assets, and the minute they sell, they are taxed at the original cost.”

Death duties caused lots of work for lawyers and accountants and imposed costs which threatened businesses. Reintroducing them, albeit by stealth as a CGT, would be a backward move.

Wairarapa sheep and beef farmer Anders Crofoot described the tax as “death duty by stealth”.

Mr Crofoot said because of the asset-heavy nature of farming, the industry would be hit harder than other types of small business by capital gains tax, where less capital investment was required.

“If you’re going to whack 15 per cent off that every time it changes hands, it makes that very difficult.”

Mr Crofoot said he believed that in theory capital gains tax could be fair, but once exemptions for different types of assets were introduced, it created a new supporting industry for lawyers and accountants to advise clients on ways to avoid the tax.

CTG in theory isn’t all bad, but Labour’s complicated one is a dogs breakfast which disincentivises business success and directs energy to avoidance.

Every minute of business time wasted on trying to minimise tax liability is a minute not devoted to productive, wealth generating activities.

John Shewan, the chairman of PricewaterhouseCoopers, said the proposals were “manna from heaven” for accountants, predicting a vast body of work for financial planners to advise wealthy clients on how to navigate through the exemptions.

“We’re recruiting, we’re going to triple our staff,” he quipped.

“But in all seriousness, as an overall tax, while there are definitely pros and cons for a capital gains tax, this one is extremely complicated. It’s got some amazing features which I think really bring it down under its own weight.”

A clean capital gains tax with no exemptions, balanced by reductions in other taxes, might have a place.

But Labour’s proposal is for a dirty tax, complicated by exemptions and one which reintroduces death and gift duty by stealth.

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