The Reserve Bank and Treasury have both joined the Inland Revenue Department (IRD) in suggesting the government encourage savings through term deposits and bonds by reducing tax paid on interest returns to take account of inflation.
This would involve exempting the inflation component of interest returns from term deposits and bonds when calculating tax returns. This idea was talked about in depth by Motu economist Andrew Coleman on Interest.co.nz back in November 2009.
Coleman is on the Savings Working Group which is looking at ways to improve New Zealand's savings rate. Last week the IRD estimated such an exemption could cost NZ$1 billion a year.
A Treasury study shows term deposits and bonds are taxed at an effective real rate of almost 50%, while property is taxed at half that rate.
Treasury Secretary John Whitehead endorsed the examination of such an inflation exemption in a speech on improving New Zealand's economic growth rate earlier on Wednesday.
Reserve Bank Governor Alan Bollard included the suggestion for the inflation exemption for interest returns in the Reserve Bank's submission to the Savings Working Group, which said an improvement in New Zealand's national savings rate would reduce its vulnerability to global shocks.
"The recent decision by Standard and Poor’s to put New Zealand sovereign debt on negative outlook reinforces this,” Bollard said.
“Most importantly, an improved savings level would reduce interest rates relative to foreign rates, thereby taking pressure off the exchange rate and promoting a more balanced growth mix across the export and domestic sectors,” he said.
Bollard said a number of measures would be expected to improve national savings over the medium term.
“Foremost could be a faster return to government operating surpluses than currently planned. The Government might also give consideration to moving towards a Nordic-type tax system where income on capital is taxed at a lower rate than labour income," he said.
"Savings would also be enhanced by inflation-indexing the tax treatment of interest.”
28 Comments
Absolutely.... there should be a quid pro quo for inflation because Inflation is a form of tax whereby the state through specific policies or actions erodes the purchasing power of money .
From an academic point of view ..." lnflation is a Regressive consumption tax due to expansionary Monetary Policy ( ie low interest rates )"
Google it you'll see
um......Saving takes many forms.....
The problem I have with PI is its neg gearing hoping to excessively make on capital value....ie tax reductions.....oh wait this is exactly the same thing really.
I do agree looking at ways to encourage savings and investment and especially the latter make sense....
"balance" is the key.
regards
Fat chance of this debasement thieving coming to an end...why not bring the property bubbles to an end by raising the ocr!....higher rates for savers and falling prices on property...."oh no we can't have that...think of the profits the banks are making....poor buggers would find farming Kiwi families was not so rewarding."
“Most importantly, an improved savings level would reduce interest rates relative to foreign rates, thereby taking pressure off the exchange rate and promoting a more balanced growth mix across the export and domestic sectors,” he said.
Really - is that "in theory" or in practice? If true in practice - then these traits should be evident in the Australian economy, as they have a much higher rate of savings.
So, is it true in Aussie? Do they enjoy lower interest rates relative to foreign rates; is their exchange rate not under external pressure?
Well yes actually Aussie rates are lower, but you also have to look at individual economies and perceived risk. Higher risk economies pay higher premiums, so that needs to be added to the mix, you can't just say country x has higher savings so they get lower interest rates.
The idea I think is the net return on an investment for a NZer living in (I assume) NZ is better, hence the carry trade menace is reduced....
In terms of OZ you have to consider "all else being equal" You cant simply look at OZ and look here without taking out (or adding in) the effects of the mining boom or any other factors....
I would like to see more of the reasoning why this would result in a more balanced economy...
regards
It does make sense, but I'm sure the usual crowd will be even more vocal in their distrust of official cpi figures!
The lefties will no doubt hate this too as the capitalists will pay lower tax rates than the workers...
".. Nordic-type tax system where income on capital is taxed at a lower rate than labour income.."
However, you can't keep the haters happy whatever you do... eh Wally..? :-)
If its simple investment like deposit accounts then these would probably be the accounts of "workers" Capitalists would seek bigger returns and I would hope and since they carry risk should see them....
The problem I have with taxing capital less is making a clear distinction between an employer / business owner who produces a good and the likes of hedge funds, PIs and banks etc who arguably do more damage than good...so taxing the vampire squid less is plain stupid....
regards
Bernard,
re your Radio comments about using virtually infinite Eastern seaboard Australian coal resources vs Pike River.
I think you'll find they are mainly thermal coals ie used mainly for power generation etc.
Pike River is a very high quality coking coal used in the production of steel as part of the chemical process.
I am not sure they are substitutable due to impurities etc.
JB
Coking coal an interesting topic. Australia exported 131.4 million tonnes of metallurgical (coking) coal in 2008/09, earning A$40.2 billion. This is about the same as the 132 million of thermal coal exported for earnings of A$18.2 billion.
More detail here.
http://www.australiancoal.com.au/the-australian-coal-industry_coal-exports_coal-export-details.aspx
Apparently a lot of it comes from the Bowen basin in Queensland.
http://www.australiancoal.com.au/the-australian-coal-industry_coal-resources_queensland-map.aspx
And more here
http://www.bowenbasin.cqu.edu.au/basin_data/operating.html
cheers
Bernard
Talk about bloody obvious! I love how the RBNZ and Treasury come out with these ideas and pretend that they are THEIR OWN!
Many of us here have stated these solutions and ideas for YEARS! but no.....they did'nt want to know........they didn't want to listen.............they instead wait long enough and then pretend THEY actually have a clue which we all know they don't.
Justice
You are soooo right.
Its a no brainer and one some of us have been talking about for years as you say.
given the dumb ass policy makers and politicians at the top of this country , is it any wonder we are langusihing on the OECD rankings?????
At times we really are a DUMB DUMB DUMB Country
This seems to be limited to deposits and bonds....I would assume wealthy investors with larger amounts to invest would seek (far) higher returns, so in effect this would benefit the likes of me who have a few thou as opposed to "wealthy" who have a few mil....
If left wing loons like Matt blah-whatever his name is want to rant on....carry on.....non-event....
regards
Won't the government have to borrow money to make up for the $1bil/year tax loss? While I agree it is fair and probably a good idea, I wonder if it will make that much of a difference to the savings rate for the cost of $1bil/year - that is an awful lot of money!! After all, you have to have spare income to save it!!
Yes, for me I have only so much spare $ per month, so no I cant be encouraged to save more...and in reality Im paying down debt as fast as I can as that rate is higher....so if I had/have spare that is where it goes.
Also kiwsaver seems to be losing ppl money? kind of chops this off at the knees.
regards
Getting rid of that debt is the best thing to do steven.....when it's gone....do try to carry on saving and do try to stay away from the parasites....the best thing about escaping the noose of the banks is that feeling of freedom and having spare income left over.....trouble is unless you train yourself well, the tv advertising and social pressure will see you back in the clutches of the parasites in no time at all.
Viva la debt free!
Hi,
Yes debt first....I will then save (given peak oil, the obvious rip off from banks and investors in the meantime just where to save safely is the issue).....and I agree as the debt comes off its a great feeling....I have more and more money every month....which feeds back into more debt reduction.....sorry Johhny K....honestly I am.....
hehehe....I am trained...Im pretty immune to the advertising crap....I dont watch TV, I ignore adverts and tell the bank parasites when they call not to bother me. At one stage they were even visting me to see how they could help me.....(nice or them eh?)
The social pressure is however a "real" issue (yet of course its the least real issue of them all). My wife but especially children in particualr feel it more. How can we be considered successful and be in the in group if we dont have a new(-sh) car and dress in good labels and have nice brand name wizmos to flash about (and they have to be the latest generation)....
Me I just walk away, I really dont care......I have an old nokia 2005 cell phone.....my boss picked it up and was amazed on how old it was, like you use something that old? and what a tiny screen....however its as tough as old nails, semi-water prood, battery lasts for days and I put $20 or $30 2Deg pre-pay on it last October and it expired this October....its there if I need it....
regards
Will inflation interest be deducted on share dividends?
How about on Managed Funds?
What would be the implications for business (or shareholders) to invest spare capital in deposit rates instead of re investing in business?
What would be the implications if it is deducted on deposit rates but not on dividends?
Would people sell shares?
Or Sell property?
would that get votes?
Would Super Schemes get CPI deductions, would they then be taxed as they are spent.
If you change the system, you better be entirely sure the follow on consiquences are appropriate.
Funny that the RBNZ are supporting an inflation adjustment to the interest tax. They have allowed our money to collapse as a store of value by over 90% since it's inception in 1967. There's a reason the new 10cent coin is very similar to the old 1cent. Epic failure.
Meme...., sure there are some distortions with this proposal but no more than the present situation, it's just that we've grown used to them. You can't deny the fundamental injustice of taxing folk on what is, in effect, a loss. Why not remove the inflation component from the tax deduction for business loans as well? That's fair.
Or better still, give us sound money and forget about the whole thing.
Just term deposit and Bonds?
This leaves out any benefit for the majority of NZ population.
The majority of the population have very little , if any left over at the end of the week, this they put in the savings a/c. IF or when they manage to get $1200 dollars in, they may transfer $1000 into a term deposit, once or twice a yr...
In effect there is no benefit to them, and any potential of incentive for the working person to save is non existent. ..its a policy to the advantage of the minority high income people, and leaves out a huge source of encouraging savings...
Or put another way, the ave and below working person doesnt matter or have any effect or can have any benefit to the economy thru their savings.
So do give a 'tax break' advantage to all NZers...or just those high income, those with financial suss? And leave out the Mums and Dads, our children at school?
Also elections next yr, Labour and the Greens will have a field day on this, and rightly so to.
Scenario.
A couple have some old Super Fund.
They move it to term deposits to get CPI interest cover.
The kids have a a problem with the boy racer car being crushed
Mum lends the son $ 5k from the term deposit
Err
Dad needs a boat, why not you deserve it, take it out of that deposit rate
Err
Nothing left
Why isnt the Government looking after me?
That's because Labour ( Dumb ) and National ( Dumberer ) take turns at crunting the country's economy .............. There is no alternative , yet
Gummy I went to the 4RD (For Real Democracy) meeting tonight here in Nelson. The Ambassador from Switzerland was there , great turn out . That 'alternative' is coming. Most people i think want it BUT they need to know it exists.
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