Here's my blogroll for the week. Covering reaction to Labour's non-announced capital gains tax policy due on Thurdsay next week. There are also some economics blogs on the economics of blogging, and how our university economics departments rank globally. Auckland's still way out in front.
Some good cartoons too via Bryce Edwards at Liberation.
From the left
1. A hole big enough to drive trucks through. Anthony Robins at The Standard picks up on SMH economic correspondent Peter Martin's comments on NatRad yesterday on New Zealand's capital gains tax status. Raising tax isn't the point, he says. It's about closing a hole in the tax system. He goes on to say a capital gains tax would still be effective even if it raised nothing. Anthony's own comments are in bold:
On how odd we are for not having a CGT:
I thought NZ was something of a worldwide orphan … members of both sides of [Australian] politics use NZ as a sort of case study in strangeness because there’s a yawning gap in New Zealand’s tax system, which isn’t there in the UK’s tax system, isn’t there in the US tax system, isn’t there in the Australian tax system.
And yet the New Zealanders showed the way for us in the mid 80′s with their goods and services tax. And yet there’s always been this strange thing missing that New Zealand’s been unable to do, and I must say I thought it would never happen, it would be one of the continuing quaint things about our cousins across the ditch.
On how a CGT allows all income to be treated as income:
… the idea is that if you earn a buck, you’ve earned a buck, it doesn’t matter how you’ve earned it. So if you earn a buck from working hard, labour, you’re taxed on that at your marginal tax rate. If you earn a buck from selling shares at a profit, or buying anything else really and selling it at a profit, speculation I suppose you could call it, you’re taxed on that at your marginal tax rate.
So if your marginal tax rate is low, 15%, that’s what you’re taxed. If your marginal tax rate is 30%, that’s what you’re taxed. …
There is no [separate] capital gains tax in Australia, and there is no [separate] capital gains tax in a lot of other countries. Capital gains are regarded as income.
Far from the nightmare of complexity that the Nats are trying to scare us with, that sounds pretty simple doesn’t it! There’s plenty of other good stuff in that interview on how the lack of a CGT creates damaging distortions in our tax system, and how (despite all dire predictions) the CGT didn’t destroy the property market in Australia. But I want to finish with one final point, that is particularly important, as hysterical Nats try and talk down the amount that a CGT might raise:
Raising isn’t the point. This is misunderstood.
A capital gains tax could be very effective if it raised nothing. What the capital gains tax does ideally is stop people, for tax reasons, changing income into capital gain. So even if the amount that you forecast you would raise from the capital gains tax is low, that isn’t an argument against the capital gains tax. Because if it is low, it’s because what it is doing is encouraging people to make fewer “capital gains” (with quotation marks around them) and make greater income.
It’s more a case of just not having (sort of) a big gap in the tax system people can drive trucks through.
2. How to sell a CGT to the masses. John Pagani looks at Labour's options for selling its capital gains tax policy to the masses. The key part is making sure it doesn't just come across a another tax grab - it has to be seen to be used to reduce tax burdens elsewhere.
Taxing capital profits is a problem if it is seen as a tax grab, rather than a tax switch. Not hard to see how National will try to attack.
So far, all the attention has been on the cost of the new policy - and no one is talking about the benefits.
The benefits are real: By shifting some tax load to untaxed capital profits, the tax load can be reduced elsewhere. And investment goes to where it earns the greater return, rather than to the tax favoured speculative sector.
Already New Zealand gathers a greater proportion of total tax from personal income than most other countries.
That's why middle income earners feel over taxed.
Effectively, people on middle incomes are subsidising people who make untaxed capital gain.
If Labour wants to sell a capital profits tax, therefore, it has to be clear about sending the revenue to those taxpayers - not using the money to pay for big-spending new fatness. No matter how desirable it may believe higher teachers' salaries and more trains to be, they need to be paid for by re-prioritising existing spending.
There are only two politically viable ways to use revenue from taxing capital profits:
1/ To reduce the deficit, for example by using it to help pay for Christchurch recovery instead of selling assets.
2/ To fund tax cuts elsewhere. Labour has signalled already a tax free zone - basically a way of making the tax system more progressive and fair by ensuring everyone gets the same tax cut.
Let's say (this is me btw, not I/S) rental property owner Bob doesn't like CGT being applied, so decides to leave NZ (regardless of the fact quite a few other countries have CGTs). Bob sells his rental - either selling to home buyers Frank and Cathy, who had been renting the house off Bob, or to another rental property investor Bill, who continues to rent it out to Frank and Cathy.
If Frank and Cathy buy, that's one fewer rental needed (demand falls), if Bill buys, the supply of rental properties stays the same. So everything's hunky dory right?
Now, before you all rip into my little scenario, there are plenty of situations we can dream up for what happens when a CGT is introduced - housing supply needs to be considered, sellers might raise asking prices in an attempt to get the profit they were planning on making - there's plenty out there. Come up with your own if you want. Anyway, here's I/S:
Labour's suggestion of a capital gains tax has got the speculators running scared, with the Auckland Property Investors Association saying that landlords are already talking about selling up and moving to Australia to avoid it (which is odd, given that Australia has a capital gains tax). And, according to a quote in another story, this will
reduc[e] the supply of rental properties and pus[h] rents up further.Um, no. To point out the obvious, houses aren't mobile; you can't take them with you when you go (or at least, not very cheaply). So if a parasite flees New Zealand to avoid paying their fair share, their rental property does not suddenly disappear. Unless they bulldoze it out of spite - an unlikely proposition - it gets sold to someone else, who either lives in it or rents it out to someone else who does. The net effect on the supply of rental properties? Zip.
4. Get over it. Political Dumpgroud tries to debase some of the myths around a capital gains tax, such as it would be the end of the world. I've included two below, but there are eleven in all, so go have a look and see what you think.
Capital gains is bad for home owners
If property prices do fall and you own your own home this isn't something you should be worried about. Yes your house will be worth less than you paid for it but only relatively to other goods not to other houses. Most people will own 1 home, they will always own that one home and its actual value to them does not change just because the price does. When a person decides they want to move and sell their house they will receive less money for it but they will also pay less for their new property. In short if you own one house this policy really doesn't affect you because you don't pay the tax and the price reduction will never cause you any hardship.Capital gains is bad for landlords
If you own a property to gain income from rent a capital gains tax will not bother you because you are not in the industry to make profit from sale. The landlords affected are paint-and-flick landlords who don't intend to actually keep the property as say a retirement income. This is undoubtedly bad for people who invest in property to make money off its sale but only to the extent they lose 15% of the profit and this is income like any other so they should actually just be glad they aren't being taxed the top income rate which is probably what they are earning. The capital gains tax cannot stop someone from making a profit at all because it only taxes the profit not the whole value of the property, it can only reduce the profit they do make marginally.
From the right
5. The government's changes are working. Kiwiblog's David Farrar says he was considering renting out an old apartment so he could hold on to it, offset losses against other income, and make a capital gain. That was until the government made changes to depreciation laws. It wasn't economical enough for him to keep the apartment, so he sold.
National’s change last year to remove depreciation on investment properties has actually made a difference. I know as I had been looking at whether or not to sell my old apartment or rent it out as an investment property. Before the depreciation change I would have kept it and rented it out. But the loss of the cashflow advantage from depreciation meant that I would have a net cash deficit every year, and it was not worth it unless I was confident of really really strong capital growth.
I doubt the tax will raise as much money as Labour thinks, as people will just hold onto their properties rather than sell them.
Trouble is, the professional advisory group which advised gummint on this issue calculated that all those activities would generate the magical $4.5 billion ONLY if the rate were 30% and ONLY on a steadily rising property market. Labour is touting a 15% rate on a NON-RETROSPECTIVE capital gains tax in a flat market.
On Thursday next week we might, if we’re lucky, hear how these Labour genii expect to fund the remaining huge holes in their programme of profligacy. So far they’ve still got $2.25 billion per year to find long term and $4.5 billion to find for at least the first three to ten years on flat markets.
Labour’s eKonomic Killerbeez will strike on Thursday. It will be another fiscal blow job as they suck the last vestiges of life from an economy struggling to recover from their own depredation over nine years. The economy will be killed off as businesses immediately retrench; more and more jobs disappear and investment decisions are deferred.
Why? Because senior managers and directors will hedge their bets against even a remote chance that enough of New Zealand dumbarse population actually will be stupid enough to swallow Labour’s voodoo economics and put them back into power with the loons from the Greens party.
Already Goff has made the extraordinary admission that Labour will borrow to fill the gap.
Yes, that’s B for borrowing. If he’s got nothing else, he’s got the bare faced cheek of a Chinaman. After all Labour’s caterwauling over the last two years about National’s programme for borrowing, Goff and Cunliffe are going to BORROW to fund their election bribes.
Housing prices boomed under your party's watch because the Reserve Bank inflated the money supply by around ten percent per year, which spilled over into the housing market, and because planners used their powers under the RMA to strangle land supply in NZ's cities.
And if he thinks a Capital Gains Tax would have stopped this -- if he thinks his new tax would somehow ha,he defied economic reality -- then I suggest he look at the experience of every Western country that had one, where in every place it did nothing of the sort.
8. Game on. Tax Lawyer Cactus Kate says she is happy Labour is actually making moves to try and win the election. She thinks Labour announcing its cornerstone tax policy so early before the election is a good move - it gives the public time to get used to it. She hopes Labour dares to introduce a death tax (inheritance tax) as well. She's doubly happy because she thinks all this will mean more votes for ACT (as Cathy Odgers, Cactus is trying to get into Parliament this election on the ACT list).
I gave Labour a helping hand in January by proposing a top ten tax options. If they implement all of them next week I suspect they would be polling at over 50% representing all the net beneficiaries in New Zealand who would then flock to smash up those people perceived to be wealthier than they are.
I am having a wild guess here that next week they will formally announce they are going with probably watered down versions of the following:
10. The "Nanny Rahui" Proposal to Lower GST (fruit and veges)
8. The Fonterra Fart Tax Proposal
5. The Stuart Nash Proposal to reintroduce Gift Duty (watch this one)
3. The Michael Cullen Memorial Proposal to Tax Rich Pricks
I will of course take a closer look at their proposals once detail is formally announced.
While the proposals will no doubt be namby because they won't reach far enough, the introduction of Capital Gains Tax (watered down) on top of these measures will draw a very large line in the sand differentiating National and Labour.
I also wouldn't be surprised if they don't slip in some anti-avoidance measures there to keep us tax boffins in good mental state working how to get around them.
It will be the first time in three years that Labour have set the policy agenda.
They are commencing a mainstream class warfare. A war between those who for years have profited from buying and selling property, and those who have always aspired to but now are discouraged to do so. A war between those New Zealanders working hard to better themselves in the higher tax brackets and those who dont wish to contribute positively and seek to vote themselves an income when they don't deserve the vote because they are net beneficiaries.
Economics blogs
Good to see the chaps at TVHE are back up and running again here.
9. Blogging just like dealing drugs. I missed this when it was set up, but the New Zealand Association of Economists have set up a blog site. They've just had their annual conference, and from all reports I've heard, it seemed to go pretty well. Probably quite a lot of assuming went on, and I'm sure theoretically all our problems can be overcome ;) I've nicked one of their posts by Bill Kaye-Blake:
Putting together my first post made me think about the economics of blogging. Blogging is a tournament game: low barriers to entry, with a very few earning fame and fortune. In that respect, it is similar to dealing drugs (see Freakonomics).
For most bloggers, the return is low. If someone is blogging about economics, and doing a credible job of it, s/he presumably has marketable skills. Banks, universities, ministries, think-tanks — there’s a long list of potential employers. Why bother producing a blog?
Three reasons came to mind:
- Weak altruism. Working on the NZAE Council, I see how much other people have contributed over the years. Now, through blogging, I can help improve the visibility and relevance of the Association. If economics looks relevant, then I look relevant, too.
- Consumption good. Although I’m producing something, the real reason for writing a blog is the enjoyment of production. That makes blogging like playing music, knitting, and baking biscuits. Sure, we can argue about the relative quality of home-made versus store-bought, but in the end it’s about the pleasure of producing it yourself. It just so happens that I enjoy producing economic arguments.
- Signalling. Well-known economics blogs tend to be side-lines. Why are otherwise successful people blogging, and why aren’t more economics bloggers famous in their own right? This looks like signalling in two parts. First, I’m not going to trust Billy Bob’s Forum of Economics and Used Hardware (no link). The fact that someone has a day job (in economics) signals trustworthiness. Secondly, getting involved with blogging signals with-it-ness. I can grok the new media, man. That makes me more in demand for my day job.
So blogging is like the rest of the economy: I am sending signals in order to improve my individual outcome, while contributing to my own tribe (but not too much) and taking pleasure from it.
Here’s to a new and strong signal from NZAE. We’ll enjoy the DIY, and we’ll try to keep the noise down.
10. Auckland University first, Canterbury second, the rest somewhere down the list. Canterbury University Economics lecturer Eric Crampton picks up the latest global university economics department ratings (again, appoligies for nicking the whole post).
Selections from the new QS World Rankings of Economics Departments:
- 1. Harvard
- 2. MIT
- ...
- 37. Auckland (implausibly high)
- Tied equal in rankings 51-100, and listed in alphabetical order:
- Boston University
- Cal Tech
- ...
- University of Canterbury (probably about right)
- ...
- University of Minnesota
- ...
- Tied equal in 101-150 (among others): University of Otago; Victoria University at Wellington; University of Waikato; Massey University
Ok, more honestly, there's no way that the NZ universities deserve to rank quite this well. Canterbury probably punches above weight in relative rankings because, in reputational surveys, Canterbury just has a good-sounding name: evocative of long English traditions, maybe it's really part of Oxbridge for all that the American survey respondents know.
But let's ignore the caveats and boldly assert that the University of Canterbury's economics department is tied equal with Boston University, the University of Minnesota, Cal Tech and other illustrious institutions. And, more importantly, we're better than Otago.
Video
Clarke and Dawe on the Aussie carbon tax announcement due Sunday. They're about to launch a huge new show called Carbon Tax, the Musical. You buy a ticket, watch the show, then on your way out you can hand the ticket back for a refund.
Have a good weekend all.
12 Comments
Re. No. 3 - that's just economically illiterate I'm afraid.
I've worked in the housing and development sector intensively for the past several years, where I've been heavily involved in development feasibility assessments.
A CGT would absolutely adversely affect the supply of housing to the market, especially apartments and townhouses. Overwhelmingly apartments are investment properties rather than owner-occupied. In most settings in Auckland, apartment developments don't stack up. In lower income areas, the costs of delivering apartments to the market means a two bedroom 80 sq. m apartment would almost always have to sell for more than a detached 4 bedroom house in surrounding suburbs.
In middle income areas its not much better.
In higher income areas, you typically have to go to higher rise (more than 4-5 levels) to get the economics to work. And communities in higher income areas tend to oppose higher rise development at all costs.
At the costs that new apartments need to sell for on the market, an investor would be doing brilliantly to attain a 5% yield. That's not good enough. However the possibility of untaxed capital gains makes a poor yield possibly tenable.
Tax capital gains and what is already a marginal investment becomes even worse.
Development and delivery of apartments to the market will die, and in the face of a growing population, rents (and prices) will surge upwards.
And then, with intensification well and truly buried, the only option will be to spread outwards, which of course is a totally unanticipated prospect for the people naively backing a CGT.
A CGT could have worked 10 years ago, but not now
Number 8: In the debate about a CGT, Cactus Cate is closest to the mark with her observation "the proposals will draw a very large line in the sand differentiating National and Labour".
Labours announcement has drawn many articles and comments about the possible effects of a CGT yet the real issue is wedge politics. It provides a simple choice between National's sell down of SOEs versus Labour's CGT.
The question is: which proposal will benefit the New Zealand economy the most?
CGT is a doorway through which any govt can extract as much wealth as it wants from whichever target group it seeks to plunder. It is a disincentive for govt to balance the budget by prudent means through spending controls.
If you want a country of unskilled, low income, unemployed and envious people, (most of whom who have jobs 'work' for the state)....a country not unlike a third world economy dependent on world handouts....then vote for CGT...it's just the thing for you!
CGT will mean more capital will be withdrawn from the economy. Bugger investing here when all you are doing is propping up a shite system of benefit dependency where there are few incentives for people to get off their arse from day one and make their own way in life. Labour will look after you!...
Note to self: Labour will slither back into power by 2024...must make sure investments are liquid..must have capital escape routes planned and tested.....doh
Of course the CGT was just leaked to see how the public takes it. Its not going to actually earn anything in a flat market is it? What they really want to do is means test the pension and how can you argue the rich (anyone who bothered saving) should get a welfare payment at retirement when you argue for CGT? Same principle of envy.
Rubbish...(you are better than that LAJ)....putting to one side the rights and wrongs of said 'means testing'...what would stop those who had saved and gone without for 45 plus years so they could have a bit extra in their final years...from avoiding the means testing crap...or are you suggesting the means testing would include the value of a property...and of other stuff like paintings or rare books...
Think for once LAJ...!
Apart from the above and immediate response, you seem to fail to see that people would STOP saving to have the extra...they would splurge...waste...travel...blow it...and that would mean the great gravy train of means testing tax theft would dry up bloody fast.
Think about it LAJ.
Wolly,
Why don't you think first? Only a Puritan like you thinks spending is a bad things. Unfortunately there are far too many Puritans here in New Zealand. Probably a consequence of our Presbyterian heritage,
If not for spending how do you think savings are generated in the first place? If people spend the tax take will be higher on GST and taxes on earnings. So what?
Struth...I doubt the bleeding Puritans would have wanted me near them....
Face reality AnaK...if saving for retirement invites a poke in the eye...would you do it?.
Spending leads to saving ...doh...how can it if everybody blows it as fast as they can....and how about dealing with the inflation point AnaK....! You skipped past that real quick.
And what about the expansion of the 'black market'.....already at multi billion dollar levels...I'll swap you eggs for some of your spuds...you swap the eggs for some lumber...then the lumber for a fishing trip on a boat....I'll exchange the spuds for some labour to paint me house....Get the picture AnaK.
NZ declines into a socialist bog of taxes and fat pollies telling themselveds what a great job they do...while the population carries on without them...happy to have pisspoor incomes and save nothing...
"Face reality AnaK...if saving for retirement invites a poke in the eye...would you do it?."
How about the same reason people have always saved. To face an uncertain future. The same reason the Chinese are such big savers, because without a generous social security system like we do they have to save in case they're struck by some unanticipated financial cost, such as ill health, lost job etc etc. Its a total misconception that New Zealanders don't save, in our case the government saves for us and the burden is spread over the population and the more well off assist those less able to save for themselves. Its imperfect but under the circumstances better than the alternative.
"Spending leads to saving ...doh...how can it if everybody blows it as fast as they can....and how about dealing with the inflation point AnaK....! You skipped past that real quick."
Its an other misconception that there is such a thing as true "savings" other than people hiding cash under the bed. Savings are just another form of transfer from those who aren't using their money right now to those who are willing to pay a cost (interest) in the future for the privilege of using it now. Nothing changes. And its credit (new money) that creates savings in the first place. Savings just means that the money is transfered away from those who need to pay back the loan, who then need to source it from elsewhere.
"And what about the expansion of the 'black market'.....already at multi billion dollar levels...I'll swap you eggs for some of your spuds...you swap the eggs for some lumber...then the lumber for a fishing trip on a boat....I'll exchange the spuds for some labour to paint me house....Get the picture AnaK."
I'm an Anarchist, of course I support the black market. Your point being? I just think that under the current circumstances that the cost of our modern society should be bourne fairly. We all are beneficiaries so we should all pay. Its unfair that those who've gained the most don't share the burden fairly with everyone else. Like Warren Buffet for example.
"It turned out that Mr. Buffett, with immense income from dividends and capital gains, paid far, far less as a fraction of his income than the secretaries or the clerks or anyone else in his office. Further, in conversation it came up that Mr. Buffett doesn’t use any tax planning at all. He just pays as the Internal Revenue Code requires. “How can this be fair?” he asked of how little he pays relative to his employees. “How can this be right?”
http://www.nytimes.com/2006/11/26/business/yourmoney/26every.html
I did think about it Wolly- Why do you think they're introducing a tax that won't raise any revenue for years? I didn't say it was a good idea, to the contrary
I think Labour has already spent the CGT in their heads and how are they going to fund the next bout of social engineering? CGT is testing the appetite of the masses to really getting stuck into the "wealthy" (AKA people who have saved for their retirement) and once they have the majority on that, means testing the for the pension is where they're headed next. (Yes, including anything they can value except maybe the first $300k of the family home as they'd lose too many voters then).
"...managers and directors will hedge their bets against even a remote chance that enough of New Zealand dumbarse population actually will be stupid enough to swallow Labour’s voodoo economics..."....oh yeah that'll be true.
Goofy can feel the Little blade in his back already....wonder which of the socialist 'also rans' will be siding with the mighty union man.....Labour could change post November from having a 'Phil in' to having a 'leader with Little to offer'...........haha
"British and American crews have been brought in to help demolish damaged buildings in Christchurch's battered CBD, but there are still not enough skilled workers or equipment to allow the deconstruction work to continue on weekends" stuff.co
When the job is finished, they should move north to wgtn and demolish the death traps that litter that city......incredible to be told by the WCC that quake risk buildings will remain in place for 10 to 20 years...go figure.
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