By Gareth Morgan*
The top tax rate on income continues to be a political football and is emerging as a key battleground in this election.
Shame it is an outdated and inefficient way to raise extra cash for the Government.
National’s first term saw the infamous tax switch, which dropped the top tax rate to 33%, raising GST to 15% to pay for the change.
Now, predictably Labour and the Greens are pushing for that top tax rate to go back up – to 36% and 40% respectively.
We won’t comment on the quality of their spending plan – that is a subject for other blogs. Nor will we get into the whole ‘higher tax will kill the economy’ argument.
The question here is whether, given the Labour/Green desire to increase public spending, this is the best way of raising the dosh.
And the answer is almost certainly no.
We will briefly look at why the top rate of income tax is such a dud, before briefly looking at some alternatives.
A good tax system is a simple tax system.
To collect the maximum revenue possible with the minimum impact on the economy, the ideal is to tax as many activities as possible, all at a low rate. That way there isn’t an incentive for people to find ways around the tax regime.
The more complex it gets, and the higher the rates, the more sense it makes to pay an accountant to find ways to reduce your tax bill.
And New Zealand has a massive loophole in that we have only a partial tax on the income from capital. In particular capital that doesn’t generate cash returns (owner occupied housing and land are good examples) in effect produces income that slips through the net.
Hiking the top rate of income tax isn’t the best way to raise more revenue, simply because the most well-off New Zealanders don’t pay much income tax.
They are able to arrange their affairs, taking advantage of the widely varying rules about taxing capital, to avoid having a high taxable income.
Don’t believe me? In 2013, 103 of the wealthiest 197 New Zealanders declared an income less than the top threshold.
The top tax rate will simply hit high salary earners, many of whom are far from New Zealand’s wealthiest citizens.
All the more reason for these people to hurry up and invest in property so they can stop working day jobs where they have to pay income tax. That is not the kind of outcome that will get our economy booming – yet it is exactly what our tax regime encourages.
The Labour/Green proposals will only make this worse.
Sure, Labour and the Greens argue that they will tax capital gains, that they are hiking the trust tax rate, and that they will fund Inland Revenue to chase tax evaders.
None of that deals with the problem that one of our biggest asset classes can produce income that hardly gets taxed at all.
A capital gains tax is a terribly clumsy and ineffective way to address that anomaly – even more so because they want to exempt the family home, which is the vast majority of property.
Capital gains taxes are also incredibly complex, and take a long time to raise money. Labour and the Greens know this – that is why they want to bump up the top income tax rate.
What alternatives are there?
The Green’s carbon tax is one example of a corrective tax that would address a problem and generate revenue if that is the objective (not that we’re saying it should be). It’s biggest benefit is that it would encourage people to make low carbon investments at the same time. There are other examples – such as water charges.
But by far the best alternative is to raise money by plugging the holes in our tax system.
In our book the Big Kahuna we canvassed the scope for a comprehensive capital tax.
This is a tax based on the assumption that all assets that don’t earn a cash return are providing value to the owner to the tune of 6% per annum.
The idea is to tax those benefits each and every year.
Account would be taken of the amount of debt people had, so owners would only be taxed on the equity they had in their home for example.
The comprehensive capital tax would be far simpler to administer and generate a lot more revenue than a capital gains tax. In fact, this tax would rake in a lot more cash than Labour and the Greens are looking for, so they could lower all tax rates, have a low comprehensive capital tax rate, or put in an exemption for family homes up to a modest value.
Given the alternatives, why do we face this persistent focus on the top tax rate?
The answer is probably political – it is a tweak of an existing tax so Kiwis understand it, and it satisfies the politics of envy.
While the longstanding belief that the people with means should pay more has a strong list of subscribers including Adam Smith, the father of capitalism – the problem is that increasing the top tax rate really doesn’t achieve that anyway.
A comprehensive capital tax will.
--------------------------------------------
This article was first published on the blog garethsworld.com and is re-puslished here with permission.
59 Comments
Thank you Frontwind, I 100% support that comment. "'Hurry up and invest in property'" is an unfortunate title, shame on interest.co.nz.
Could not agree more with this article. By and large, higher wage earners are NOT the main source of inequity in NZ (there are obviously exceptions), it's the staggering degree of inequity due to the property boom that's got us where we are today. The Greens proposal won't do a thing to address this situation.
Tax is a means of re-distributing wealth. A good example is the USA from late 40ss onwards. It was by far a more equal society than it is now, and the ecomomy boomed....
39.6 percent: Top tax rate in 2000
31 percent: Top tax rate in 1991
50 percent: Top tax rate in 1986
70 percent: Top tax rate in 1980
91 percent: Top tax rate in 1963
84.4 percent: Top tax rate in 1950
94 percent: Top tax rate in 1945
Reagan and Thatcher made a right mess of things.....
Looks like high top tax rates are a very efficient means of raising mony for public spenditure...
@DFTBA The UK has had a similar history of tax patterns .
Taxes were used to fund all sorts of social experiments, pay for wars , sheltered employment during depressions , fund public works , undertake post-war reconstruction , and the like .
Today taxes should have two primary purposes , to pay for a functioning administration and transfer payments to the poor , disabled , unemplyed and downtrodden .
Nothing else .
We dont need or want a nanny state , and Government should not be doing for a man what he is able or capable of doing for himself
I disagree - the role of government is a lot broader than that - unles what I mean falls under your definition of 'a functioning administration'.
A reasonable well off country - which NZ is - should be able to provide the following services subsidised to all its citizens:
- early childhood care
- education (libraries included)
- health care
- emergency services
- clean water/air
- electricity
- infrastructure/puiblic transport.
I'm in two minds about cultural events. I seem to be leaning towards the 'nice to haves' to be user pays....But 'need to haves' can be reasonably expected to get subsidised via tax take.
Okay , some of these I would consider part of the 'functioning administration' such as a Treasury , the Crown , the Reserve Bank and social welfare administration , which you have not listed .
I dont think we should have universal Superannuation, because providing for your retirement should be something individuals can do for themselves .
I strongly beleive we shpu;ld have small government rather than the current big government
I disagree however with the State providing :-
- Early childcare ( if you have kids like we have done , you have a legal , social and moral respnsibility to look after them )
- Clean Air ( the state should however manage the polluters)
- The state provides almost no public transport anyway , in Auckland the busses are almost all in private hands
- Things like Worksafe New Zealand , which should be privatised
The issue with your point about Early childhood care, and that it should not be subsidised, means that only the reasonable well off would be able to afford to have children.
.
There are people who did not have the money to get a tertiary degree, or are just not academically inclined. They end up in low paying jobs, and more than likely their partners will be, too.
Would you argue that these people are not allowed to have children? Or would you prefer their children live in benign poverty?
The circle remains a vicious one, and remains unbroken.
The fact is that we need subsidise early chaildhood care, so parents can get back to work. We need to subsidise education, so people from all walks of life hav a chance at higher education and a chance at bettering themselves.
.
What you propose will result in an even more stratified society, where people who do menial jobs are eithr not allowed to have children (smells of something altogether unsavoury), or are beig dragged back into poverty because they have them.
.
And again, it's all down to luck as to where you start off in life....
libraries don
t need Bluray/DVD/CDs/Videos though. Nor do they need facebook.
education no. But. A decent basic education -is- an investment so is worth pursue in public interest (but not government).
healthcare, only a pandemic control (eg measles, rubella,etc). Most healthcare should be the responsibility of the individual to see to their own person and family, and then at sensible pricing. Otherwise we get a cartel arrangement, where prices are disconnected from the service provided because of the vulture culture. It's illegal to profiteer when war is coming and people are desperate but it's ok when they're desperate through illness?
- -
The acid test is that "a well off country" shouldn't change what services are governmental/subsidised by enforced taxes. Just because 80% of the country is well off...that's 20% who aren't able and the wealthy lifestyle is likely to cause them more problems. Think of it like this - 50% of your friends have great incomes, you're a business startup...does this mean you can spend like them??
It's been well documented that when you privatise fundamental services, they get more expensive (watercare, anyone?).
.
So if these fundamental 'need to have' services are run for profit, they will soon be out of reach of families who earn below the median - the median being somewhere in the 60 thousands at present. that's a lot of families, believe it or not.
Unsubsidised healthcare and private healthcare exising together, creates a two-tier system, with long waiting lists, overworked and underpaid staff for those unable to afford private health care. This will result in premature deaths - ilnesses going undiagnosed, diagnosed too late, medication could be unaffordable, etc.
..
Like Boatman, you seem to be happy to live in a society that's terribly stratified - and it's not a world that appeals to me.
Humans living together should be concerned for the wellbeing of all. We all need eachother.
The phones didn't get more expensive, in fact the dropped quite considerably.
Foreign experiences of data traffic point toward privatisation pushing down cost and lifting quality of service.
But.
It does depend where on the product lifecycle they are.
Developing markets are cheap. Progress and R&D jumps are significant. But companies and share-pricers get used to the returns, and it's diminishing return to chase the returns.
Road building and construction are also much cheaper privatised and frequently better quality....
The difference becomes when a company or group dominates the market. Then they start pushing up service quality (more "value-add whether you want it or not". All addons cost. But they have to justiofy their staff numbers otherwise their CEO will be sitting on a shrinking empire (and then a falling share price...)
Not a lot wrong with GM suggesting a tax on capital . At 6% that would raise at 2% on the capital at the max tax rate. It would provide the incentive to either get a 6% return or quit the investment. Over time the result should lower property values where the return fails to meet the threshold. An incentive to achieve good returns on non-income producing assets would be increased and CGT not needed.
Personally, I have investments treated in this way under the FIF at 5% right now and have sought opportunities to achieve 8%+ that offset the non-income part of the portfolio.
Gareth ,thanks for the sound piece of advice , which will certainly go unheeded by that rabble rousing riotous ragtag mob of yelling and effigy burning extremists , if they find themsleves lucky enough to get into the co-pilot's seat .
This widely held belief that there is a massive pot of gold at the end of some rainbow is what these people think .
The real problem with Tax- and -spend polcies , is that someone has to pay the increased taxes , and that ends up being ordinary middle class Kiwis who grind their way to work each day to put food on the table , put petrol or diesel in the car and pay the rent / mortgage each week / month, and fund government profligacy .
Kiwis are aleady much poorer than our OECD bretheren , and evidence of this is our poor savings rate , our weak capital markets that ensure we cannot own or fund our own assets .
As a result our Banks , farms, commercial properties and fast food joints are increasingly ,or substantially, owned by foreigners.
Labour and the Greens are complicit in this radical nonsense . The have not condemmed it strongly enough ( if at all) , and they will not hesitate to form a government with this mob of extremists if expediency suits.
These are dots that we dont need to try to join up for ordinary thinking Kiwis to understand
They can do that for themsleves ............... and they will
...... yes Boatman, I'm with you here re the tax part. But I am afraid explaining this Morgan tax and the likes of the silly idea to muck around with gst on veges will be drowned out by sound bites. If the Nats had focused their time on sorting out our tax system along Morgans suggestion they would be in a much better place now - as we all would.
Good Point Rastus , the Nat Government has been far from perfect in tax Administration , but a lot better than Helen Clarke and Michael Cullen .
As for GST being taken off Filipino and Banana Republic ( Cuban , Costa Rican and Guetamalan) imported bananas , well go figure what they were thinking ?
With return on equity of 14% plus on some residential investments possible, this will be a tax cut if you only have to pay 6% of the equity held in each property. Or have i missed how this tax is applied, i.e only to non-income producing capital, in which case the 6% would act as a baseline minimum tax payable?
Has some merit, and wouldnt effect most investors who would be well above the 6% return on equity invested in capital, but would hit property speculators getting net 2% returns in the auckland market
A coupla points (I broadly agree with the article's main thrust, which is of course for a small tax on current values of specified assets):
- The issue with the LabGreenManiacs CGT and 40% top tax rate is that they think it will raise $1.1 billion per annum in actual, countable cash.
- The issue with any failure to actually raise that amount is that they have shot their mouths off in all manner of electoral inducements, to the tune of several times that figure.
All that has to happen for #1 to fall over is any combination of:
- income-splitting
- income directed via a company (taxed at 28%)
- income moved offshore (think, IT and on-line...IP licensing - it's a long list)
- tax avoidance via suitable structural and domicile advice
- t/o decreases so as to take NP below the magic line
- outright production wind-downs (the John Galt effect)
- lack of realisations (CGT is on Realised value whereas GM's Big Kahuna sweeps up Unrealised value into the tax net)
- Realisation at - tada! - the original cost price and the balance extracted via lease or other non-CGT-attracting arrangements yet to be devised....
The poor naifs have overlooked the most obvious behavioural response to this widely signalled mare's nest:
the fact that accountants, lawyers and other clevver brains, can move an awful lot faster and smarter than Gubmint laws and their enforcers. So my prediction would be for a tax take realisation of maybe 15-20% of the budget, and yet the spend is locked and loaded.....at 100%+
Look out, Cap'n - them's Rocks ahead!
Gareth's proposal is terrifying; some actual numbers; I live in the regions and although my house is nice it is only valued at $300k. 6% of that is $18k. I do not earn a lot although reasonable for where I am, and although a comparatively good saver, there is absolutely no way I can save that much every year. Gareth's proposal would have me on the street very quickly - which he probably thinks is a good thing, as then I'd have to rent and make some wealthly landlord richer.....!
You wouldn't be paying $18k in tax. You would be paying tax on $18k. So if your marginal tax rate was 33% - and it's probably less than that, since you say you don't earn much - you'd be liable for tax of 33% * $18k = $6k. As DFTBA states, it would be less than that if you still owed money on the house.
So it's not quite as bad as you fear, but it's still pretty problematic, since you'd be having to pay the tax in money when the putative increase in your wealth was not in the form of money.
Unless Gareth has in mind that you could pay the tax in kind - eg, 2% of your house might be the chimney, half the garden or a couple of windows, for example. Good luck to IRD administering that one.
Couple of things Murray86 (and i'll stand corrected).
$18,000 woul be the deemed income. You would be taxed on this at the said rate (so its not $18k of tax).
Secondly, the affect will be to push down property values, as there becomes a 'cost' to holding property. Thus land bankers sitting outside the cities will be forced to either sell or pay a reasonable level of tax. This will lower you home value and thus tax burden.
Thirdly, this is not an additinal tax. it would replace/offset tax from othe sources, notably paye. And paye is the burden of the employee..the self employed have all sorts of loopholes.
All things being equal, tax will not go up, possibly down as it's more efficent. It is where the burden sits that will change - to the better I believe.
Beneficiaries and the elderly who own their own home but who have limited income could be forced to sell their home as their income is usually set. The tax they pay is at the lower end of the scale so if you are a single superannuitant (or pick any benefit) living in a home with a value of 350k with an income of 20,000 you would need that income to be almost tax free in order for the income tax to be reduced to allow for the cCGT they would need to pay w, would they not?
What happens in the case where you live in a retirement village and the purchase plan you bought in to says that the village owners will take 20% of the purchase price upon sale? Would that mean that there would be a 20% reduction on the cCGT value for tax purposes? After all the value of the property to the owner is not that which will be realised to them on sale.
Beneficaries and elderly will be economically destroyed and never be able to recover.
But also what happens to the small businesses who use their house or other valuable property as an anchor security, especially during tight times. A large priority in starting up/establishment is having minimal outcomes, and maximum security for borrowing, this creates a back-biting spear...to have enough security to borrow through hard times, one ends up paying extra taxes sucking away what little trickles of income are coming in...and one can't sell the security without paying off the mortgage first...
I'm thinking that whomever came up with this plan has "struck it lucky" with quick profitability during the first 5 years of business and isn't used to low cashflow operations (which is most of us)
Gareth scoffs "the infamous tax switch, which dropped the top tax rate to 33%, raising GST to 15% to pay for the change"
It was not infamous at all and was a really good idea. Taxing expenduture catches the big spenders more effectively than via their income. And for the big consumers, is still difficult to evade. Lets think about the $100.00 wine bottle
Acknowledging of course, that tax of any sort that increases and becomes onerous, turns our minds towards avoidance and evasion.
So if your drinking the PI cool aid and have you pile of rentals all stacked on interest only and revaluations creating more paper capital to fund your way into the next property, i.e. a large pile of debt and paper thin capital, you would clearly evade this tax.
Result - house prices continue to rise with cool aid crowd, pressure continues to go on employers to pay higher wages for people to compete against PIs just to own a house, Banks continue to do well, NZ debt load goes through the roof, more inflation, and round and round….
Surely this would have to apply to capital value including debt, so you actually have to make a return on the investment equal to or greater than the tax…?
Well the obvious way to tax this, is to look at the issue causing the tax-free expansion. The addition of fresh assets, under leverage, is providing a large income system. In itself this is not a bad thing, and there is no cash income to be "fairly" destroying.
But there is a "re-valuation income".
So what is wrong with re-valuation income? Well in most cases, like when your rate bill goes up because the councils wants an increase more than their legal maximum, there's no problem because it's only a paper figure and not a real profit anyway. Even using the increase to spend on house improvements or business security are actually better for NZ.
Except in one single case...where the compounding effect is used to multiple overleveraged properties.
So it's the compounding effect, _without_realised_value_ that casues the problem.
So target that one area.
compounding = multiple properties... tax increasing numbers of properties with slightly higher tax rates, use look-through-systems and declaration of related-party investments. This creates a diminishing return on the compounding effect that means higher leverage for large numbers of properties is less effective, slowing the compounding.
The one thing I'd change if I could : is to get Kiwi's to wake up to the fact that wealth is not a crime.
Whats equitable though? If my family has been prudent for generations, is it not equitable that we have wealth?
And if my Great grandfather offends someone important in his high risk business (owning and breeding harness racing horses) is it not equitable that the family suffers the direct consequences of his foolishness.
How equitable is it that people who might be experts at mathematics, be imprisoned in the same classrooms as literary and art students who are functionally innumerate?
Or to have less resources in rural areas... or for tax payers to have to pay extra so a few rural students can have an equal education that they don't want.
If we had a free and competitive market for the supply of land and building materials there would be no property capital gain beyond inflation.
The competing use of land is farming which can only suport land values in the realm of $10,000 to $50,000 per hectare. ($1,000 to $5,000 per 1000 m2 section) The real cost of developing residential land from this base does not get anywhere near explaining why 600 m2 sections on the fringe of Auckland (no sea view, nothing special) can cost over $500,000. From personal experience I can confirm that bulding materials in NZ cost in the order of 60-80 % more than Australia and as Tony Sewell the Ngai Tahu Property development manager pointed out 2 - 3 times the cost of the USA. In light of the machinantions being revealed about National recently, people might like to consider why these markets appear to be rigged.
As an Ecconomist Gareth must know that if a market is free and fair, it maintains stable lowest possible prices. Remember when we used to have a lot of interfence in the motor vehicle lsupply market. If you were lucky enough to be able buy a new car, you could keep it a year the sell it at a good profit!
An other aspect that needs to be addressed is the practice of farming or milking inflation by borrowing money against any capital asset and letting inflation abate the true value of the loan.
As reccomended by one of the govt task forces, the inflation proportion of loan interest should not be tax deductable to the borrower and tax free to the lender. Due to the fact that most morgages and loans to individuals are not tax deductable now, this would raise quite a lot of revenue for the goverment. It would also enforce some beneficial rigour on entities making capital decisions because at the moment it is a lot harder to make a poor capital decision.
I cannot see where Gareth has mentioned the Tobin (Robin Hood Tax). Is somebody trying to put words in his mouth? A Tobin (Robin Hood Tax) seems pretty low, unavoidable and broadly based. Seems to tick all of Gareth's boxes to me. It does need widespread international adoption however.
"If we had a free and competitive market for the supply of land and building materials there would be no property capital gain beyond inflation."
ummm... no. No it wouldn't. Why do you think that would be the case?? Without any controls there would just be upwards pressure.
" If you were lucky enough to be able buy a new car, you could keep it a year the sell it at a good profit! "
Don't know where you're getting these.
No. the way it was if you brought a new car, you halved it's price as soon as you drove it off the sale lot. What used to keep prices up is they attracted lots of duties and added labour via protected industries.
Ohhh...so basically unsupported (and incorrect) theory. Such theories relies on a whole host of assumptions, like equal demand, free availability of equal alternatives, no subsidisation in the market place. It _assumes_ that without these things, everything will even out. Sadly it's not true, as not all market participants are equal.
No I was 70 and 80's which were not so "post-war" driven, and where business had got used to profiteering on their contractual limits (no grey importing, and if the official importer decided not to bring in an item or model, then that was that.)
How is taxing on the equity of an owner occupied home fair? I buy a house, I pay interest on the loan, from a salary that's already taxed. Not to mention rates. If I make sacrifices in my life in order to pay off my mortgage earlier, I get taxed more - punished - because I have more equity in my home.
This kind of tax would incentivise consumption. If I'm going to be taxed, I might as well splash the cash on a big telly, the SUV and the fishing boat. I have more toys to play with and at the same time my tax rate is reduced. Good plan
Or do I have it wrong somewhere?
It's not fair - it's about the state confiscating your property. You sum up correctly as far as I can discern. A person buys a modest family home over many years paying several times the nominal purchase price as a result of the "bankers tribute" (interest/usury). Then, when you thought it was yours, along comes some rich and privileged character who wants to impose "government tribute" - regardless of your ability to pay. Of course, our believers in fairness have a solution (page 176 paragraph 3 of the Big Kahuna if I recall correctly):
"In the event that investors can't generate the cash needed to pay the comprehensive capital tax, they have the option of postponing the payment, although any outstanding balance would incur use-of-money interest and IRD would take its place in the head of the queue with claims against the asset. This way, when the asset is sold, the outstanding CGT balance is payable out of the proceeds".
Of course, irrespective of the above, the bankers feed first. If mortgage is still owed on the property then I understand that is offset against the secondary tribute due to government. Nice to see the elite reminding us of what Sir Josiah Stamp (former Director of the Bank of England) once allegedly admitted - "bankers rule the earth".
I bought a copy of the Big Kahuna and was so horrified by its contents that I regretfully decided there was only one place for it in my bookcase - between Adolf Hitler's Mein Kamph and a biography covering Britain’s notorious 1960s protection racketeers Ronnie & Reggie Kray.
Ahh always love a bit of R&R...
The difficulty arises that the tax is based on government assign and demand, not on what the market can supply.
In normal business if ones' expenses are too high then the customer will tend to shop elsewhere (basic supply and demand). If the business owner makes a good product then that brand may draw premium prices...but if the market that they're selling into can't afford the premium, or even the basic product then the business revenue stream will vanish, along with the business. That's what happens in the Third World, small business owners cannot build capital, cannot pay wages, so there is no market for their services/business. Thus no economy.
that is because the government and officals have all the ownership rights.
And that's where the tax issue becomes a problem. the government declares that "for fairness" all landlords (self-servicing or otherwise) must pay tax. This is deemed "fair" based on some government employees and their selected experts. Yet is it sensible? No. It is the Third World totalitarian system where the government decides you don't own your house; the government has ownership rights to your house and so for the wealth that exists there you must give a portion to the government officals...just in the same manner as the Third World operates.
In a sensible system, the budget is based on what the market can afford to pay, and how to best encourage the development of market forces. The worst case is to encourage one or two major players who then dominate the entire market - they effectively become the government of that segment, indeed often influencing or being the proxy for the government to act as above. The disadvantage of such dominance is that costs can be passed on without alternative options becoming available, and it is more effective to stagnate on cash cows, than it is to allowed research and development. The other side effect is that a lack of options creates exactly the effect as government, that the single/cartel player becomes the ultimate price setter, and can take whatever revenue it wants, and pass on any cost it wants.
Interesting - when Ronnie Kray died (in 1995 if I recall correctly) there was the biggest turnout for a funeral in Britain since the death of Winston Churchill. Again, if I recall correctly, one elderly East Ender summed up attitudes perfectly:
"they was benefactors them Krays, they was benefactors"
The British Historian and former editor of the Times Newspaper Lord Rees Mogg once reminded us that the difference between organised crime and politics is far smaller than most respectable people would like to believe. Both disciplines (for want of a better term) rely on the threat, or actual delivery, of violence to extract "tribute". I guess a difference with the Krays would have been that when they required you to take their "services" you actually got something in return. Only a madman would have harassed you whilst under their "protection". Of course, government is more subtle in its inference and execution of violence. Yet try finding yourself in the position of not being able to pay their "tribute" and see what happens. Don't they apply usury and penalties to the original sum owed - in a way that would shame many a gangster? Don't they ultimately send the bailiffs to take your goods and to foreclose on your home - is that not violence? Moreover, if they have the B52s and Typhoons etc don't they just destroy other nations in order to take what they want?
Ever since the stirrup was invented - allowing a man to stabilise himself on horseback and cut down with a sword or spear - groups have formed to take what is not legitimately theirs. However, to contemplate placing a lien on a frightened pensioners home - because they cannot pay an outrageous Marxist Capital Tax - is something that Ronnie and Reggie Kray would never have dreamed of. Perhaps that is why they were a great deal more poppular - and respected - than most politicians.
You are right, the story of "R & R" is one of the most fascinating insights into post-war Britain, the human condition, and clinical psycopathy, that you will ever find.
If I own a rental property, then the tenant staying there pays rent and as landlord I pay tax on the profit. The amount of rent is proportional to the value of the service/asset provided.
If you lived in a rental house, you would pay rent, your landlord would pay tax.
Who pays the tax for your use of the asset/service now (when you're in your own property)? Is it the land&building owner (ie landlord)?
Thus rental tenants must pay enough to cover the tax the landlord pays...hardly far that you don't have to contribute.
My understanding of the meaning of comprehensive capital tax (CCT) of that proposed in The Big Kahuna is that all registered capital (that being both private and corporate capital assets) would be taxed - therefore the SUV and the fishing boat would similarly be captured by the tax, but not the TV. This is what distinguishes it (CCT) from a capital gains tax (CGT) which is targeted at land and improvements capital assets.
Presumably you would no longer be paying GST on all your spending , Thats 15% right there. Also no more paye on your wages so some more compensation there. I think Gareths proposal has merit but more explaination and research into the effects on individuals is needed. In the Big Kahuna he also proposed a minimal living wage for everyone . I think we need to begin looking at alternatives as we move into the low or no growth era that will be forced on us by energy depletion. In the shorter term the loss of jobs due to automation makes the minimal living wage a good idea.
" In 2013, 103 of the wealthiest 197 New Zealanders declared an income less than the top threshold."
Umm...maybe that's because 103 of those people don't have huge incomes??
Gareth....why are you criminalising wealth? What's wrong with being wealthy, and why on earth do you think that being wealthy (with moderate income) should result in being hit with extra taxation???
The theory behind the split level income taxation, is that those with high disposable income can afford to pay more without detriment, than those on much lower incomes. ie a flat tax would be disasterious for the low income, yet trival for the high income. Throwing away the "fair" word as junk, a flat tax big enough to support a well salaried government would cripple the bottom quartile (pretty much by definition).
Personally I think tax on wealth is crazy talk. And personally I think that a 8hr maximum should be implimented for PAYE. why should I give up 4 - 5 hrs a day of my life to the government, when others (with lower and higher income) are only expected to hand over 2 - 3 hrs.
The 6% growth is likely to come from the average doubling of house prices every 10 years which is about 6.7% year on year growth. Inflation should be taken into account which just about halves the real growth.
If it is only calculated on the equity portion one can indeed argue this will lead to a disincentive to build up the equity by paying if off but providng the prices increase in future in a similar manner your equity will go up regardless. I can see another 1000 jobs coming up with the IRD to track this. If this is to be a fair tax then we should also look at the costs required to maintain that growth. If we buy a house today and do not keep it in good condition and modernise/renovate it is not likely that it will have doubled in value over 10 years. How will that be taken into account? Those expenses should be tax deductable. And if that growth is not realised over time what are your tax implications then, a tax credit?
There are council and government actions which can slow down, or speed up for that matter, the growth rate. Free up land around a town/city and the value of sections will drop and with that house prices. Increase the immigration and it will increase the prices if not offset with sufficient land supply for housing development.
A CGT on the owner occupied dwelling would be a nightmare even if it appears easy to implement.
A CGT on rental property, which is a business, is no different then taxing a company on the value they add to goods they produce. But likewise if the house is eventually sold with a loss there should be a tax credit. Yes a landlord pays tax on what is earned in rent, calculated after rate and insurance payments, maintenance, interest and any other conceivable cost relating to the business. Negative gearing usually means that no to very little tax is paid, and losses can be offset against other income, but it is profitable in the long run due to the value increase of the property. After having had years of tax credits there should be a tax payment. I have no problem with that, it is part of running a business and that is what a landlord is doing. (in my opinion qualifying landlords should get tax relief as a form of payment for stress caused by tenants wrecking the place).
A CCT would be a nightmare too, apart from real estate and collectable items everything else you buy decreases in value, the boat, the plane and the Ferrari. Which in theory should allow people to claim those losses.
Then we have the issue of shares, apart from paying tax on dividends, if we keep them long enough, usually more then 2 years or can show our "intent" to have kept them for longer but situations forced the sale we can keep any and all profit made on the increase of the share price. Possibly another issue for CGT however then again do you get a credit if the price has decreased over time.
Simplifying the tax system would be great though.
Present tax system is very unfair to savers and retired people who have saved their hard earned tax paid incomes to supplement paltry govt funded pensions out of their own taxes . For retired and people dependent on only income from their savings , tax rates should be much lower if any or atleast give them credit for inflation erosion of their savings . Looks like no political party is looking at their cause by making it a poll issue for their votes ...after all they are a big group here ...if not all savings income then atleast retired people's saving's incomes should be treated more nicely then as it stands today ...Govt needs to show to people that saving pays and not otherwise !!
Actually no, its a level playing field. Everyone who pays tax pays the same % rate and that is how it should be. Now sure some areas are un-taxed that needs fixing. If you actually look at say the burden of PAYE in terms of Govn revenue its huge....
If retired ppl/savers wanted a higher income they could, buy shares for instance Which is what I have done in the past. And/or invest where it pays out capital gains which is un-taxed.
"nicely" Govn doesnt have to show any such thing actually and the big gains to an econony is actually from the risk takers who often borrow to fund their ideas.
regards
Shares as investment is too risky for retired people ..., Capital gains paying or growth oriented investments seems like a good idea ...Can u suggest some examples of such investments other then property . I always thought Govt. always wanted to teach good habits to young people too by carrot and stick theory practice ...thats why they increase tobacco tax every year ..similarly reduce interest income tax to promote savings ..
Ahh clearly that's a typo...
You mean unfair to the young people and small employers, who are expected to cover their own future retirement (via kiwisaver and other super funds) and contribute their tax dollars to old peoples' pensions and the behemoth health system (IIRC NZ's biggest internal market). All with every likelihood that the cheese will not just be moved but gone by the time they get to 60/65/72/150...
I agree with much of what cowboy and malfunction have said.
What I don't agree with in the Big Kahuna idea is the suddenly-shifting goal posts. I've worked hard paying massive taxes to invest wisely for old age and when I'm pretty much spent you propose that the rules change and my capital is taxed. I get beaten up twice!
If my property was all in the provinces there's a good chance I could lose capital value. l could suffer a loss of capital as well as a tax on capital. That would be like being beaten up 3X over.
An extra tax will of course need a additional highly inefficient govt. IRD administration to manage it. More costs for tax payers.
Once world population plummets (after acute resourse depletion - acute due to the momentum of increasing numbers) all property assets may lose value.
Why shouldn't someone keep what they've lawfully obtained - either by hard work or good fortune? Whether to reap the rewards or to pass on to their heirs. The demoralising effect of having rights to your property taken would definitely remove much of the incentive for anyone to work to try to better their lot in life.
This proposal is far too communist sounding.
This sounds more like an envy tax, from what I understand of it. So if you have worked hard and saved, and accumulated savings, you get taxed on them, and that over time will deplete your savings, if you don't have any other source of income. Yet if you don't have any savings, you don't get taxed, and if you work, you don't have to pay the amount of tax someone who has to pay on their savings. Doesn't sound like any incentive to save. It possibily works best for someone who owns a house and has borrowed a high percentage, and is earning a good wage. I don't think the current system is bad enough to change it.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.