In June I released a report detailing my idea for a Comprehensive Capital Income Tax (CCIT). This reform would close the loopholes in the New Zealand tax system, eliminate speculation in the housing market and importantly improve the capital available for business. It would also raise a lot of money, which could be used to reduce other taxes.
Here’s an example of how a CCIT might work insofar as persons are concerned. This is not example of how it would apply to a business.
Let’s say the tax rate is 30%, the deemed income is 5%, and the lower threshold at which the tax applies is $100,000 per person. A minimum threshold or exemption for CCIT isn’t necessary, but it greatly reduces the number of people who would be subject to CCIT (no exemption means all 3.5million adults would need to be assessed each year, a $100k minimum would reduce that to 2 million, a $200k exemption to 1.5 million).
Now if we take a couple with a $350k house and a $50k mortgage, then the CCIT applicable is as follows;
Equity in house = $350k – $50k = $300k
House is jointly owned so lower threshold = 2 * $100k = $200k
Value of asset to which CCIT applies = $300k – $200k = $100k
Deemed taxable income = 5% *$100k = $5,000
Tax on deemed income = 30% * $5,000 = $1,500 per annum
A lot of people ask if they can write off expenses such as depreciation upkeep or interest costs for a rented or owner-occupied dwelling. Under the CCIT this wouldn’t be allowable; the whole idea is that an investment should generate at least the risk free rate of return (5%) after expenses.
Now remember that CCIT expands the tax base only, it is not an increase in taxation overall. So it’s “matched” by a cut in tax rates – not one dollar of additional tax is being raised. The government of the day would decide how that is done, but for the purposes of illustration let’s assume it’s just a cut in tax rates across the board – so an equal cut in all tax rates.
My estimate is that a CCIT of this magnitude would reap about $6bn in additional tax on an income tax base that currently provides government with $30bn pa. So that’s enables a cut in all tax rates of 6/30 or 20%.
Back to the example above then. Let’s say the family above has one income of $70,000 per annum. The current tax on that is $14,000 or 20%. Now a 20% cut in tax rates would see that tax burden drop by $2,800 to $11,200.
So while the couple pays an additional tax of $1,500 on their owner occupied house, they save $2,800 on the rest of their income tax. They are ahead.
Now let's look at the impact of this on some rich dude like me
I have a home worth say $4m with no mortgage. It’s jointly owned let’s say (it’s not but I’ll deal with Trusts elsewhere) with my wife.
Equity in house = $4,000,000
House is jointly owned so lower threshold = 2 * $100k = $200k
Value of asset to which CCIT applies = $4m – $200k = $3.8m
Deemed taxable income = 5% *$3.8m = $190,000
Tax on deemed income = 30% * $190,000 = $57,000 per annum
Our current taxable income (let’s say) is $230k, all earned by me. Tax on that currently is $67k or 29%. A 20% tax cut would reduce that tax by $13,400.
So we pay an additional tax of $57,000 pa on the house but save $13,400pa from the overall cut in tax rates. We are worse off by $43,600 pa.
The issue then comes down to whether the status quo is fair. That status quo sees me enjoying tax free the benefits of living in a $4m house whereas the tax free benefit the couple get is from their $350k house. Now this is not an argument about whether we should all be the same – it has nothing to do with that. The question is whether by virtue of having more money I should compound that financial advantage via the tax loophole on rental benefit. We get much more gain from the loophole than the other couple do.
Let’s put it another way – if their $300k was in a bank deposit and so was our $4m – we’d both get taxed on the interest from that. We’d still be better off, but the tax regime wouldn’t amplify that advantage. To the extent we all choose to buy houses (one or more, larger rather than smaller) rather than bank deposits because of the tax break is the anomaly that needs addressing. It is especially pertinent given that 90% of New Zealanders are closer to the situation above of the couple, than to the one I enjoy.
Finally, a note on trusts
The above example is for joint ownership with the owners using their personal exemption to minimise their CCIT liability. What if a trust owns the house or there are more than two owners? My approach would be to not allow the personal CCIT exemption (if indeed one was even favoured) to apply in those cases.
The reaction of many people to the idea of having their house taxed is one of incredulity. But they don’t realise that these tax loopholes are exploited by the rich far more than by the middle and working class. Therefore a Comprehensive Capital Income Tax – even levied at a flat rate – would be an incredibly progressive change to our income tax regime.
Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. This content was first published here and is used with permission.
64 Comments
Gareth : I have a couple of issues with your tax proposal . One is that it appears comparatively onerous , or bureaucratic , to enforce . And secondly , that it taxes capital improvement ... ... taxes tend to discourage whatever activity they are levied on ...
... I'd rather NZ had a simpler " resources " tax , or a land-tax as promoted by Bernard Hickey , which is levied annually on the unimproved value of the land .
I would also extend that tax to include air and water ... the point there being to promote more efficient use of these resources , and to discourage pollution ... dairy farmers look out !
Gareth, I think this is an excellent fiscal approach; it deters a system that favours "old money" & it will take the lazy money out of property speculation and encourage job-creating investment. It rewards those that work hard which can't be a bad thing & punishes lazy capital.
Three questions if you have time:
1. Is there a short answer how your suggested CCIT policy apply to an average NZ dairy farm? i.e. Notwithstanding that on a discounted cashflow valuation it could be argued the value of a typical dairy farm is $0, lets say the average farm is valued at $10M via a trust - say its someone that went all in & rely on their farm for their retirement so say $6M equity - Am I right to calculate $90K pa CCIT tax payable ($6M *5% = $300K *30%). However, the farmer lives in a house on the $10M farm that is maybe worth $300K - does an exemption apply? i.e. though the farmer gets to enjoy vast acreage of open space, he is only liable for a tax on estimated cost of living quarters? If the former, can the theoretical $300K be applied against trading losses?
2. Why does NZ finance continue to apply a 5% riskfree rate when the 10-year US T bill is the hallmark riskfree asset and that stands at 1.58%. (I guess you are just applying a 5% hurdle discount rate).
3. Unrelated - Is it your view the evidence that the experimental monetary policy at the major central banks (NIRP, QE, Italian bond yields lower than the US etc) especially close to the zero bound has no positive effect on GDP & the real economy (other than via currency depreciation)? or is there a several-year lag meaning we can soon expect widespread inflation.
Yes, yes, yes. Let's just abolish the existing tax structure and start again. No income tax, no corporate tax, no fringe benefit tax, no stamp duty, no payroll tax, no GST and, most importantly, no exemptions of any sort. Then put a financial transaction tax (FTT) of say 1% on all Bank deposits (the word 'Bank' being widely defined), double the rate if the money is sent overseas – the rebuttable presumption being that it is done to avoid taxation. A sort of turnover tax. The FTT could be implemented gradually so my suggestion is that the full FTT system be implemented over a period of five years by initially making the first $25,000.00 income tax free, a removal of some exemptions and the application of a 0.25% FTT. The next year would be similar etc etc so that would within five years the full system would be in operation. When that happens everybody, individuals and companies, would be contributing to the running of the country they either live in or in which a business is active. If there was too much money in the system then that FTT could be increased and vice versa. The Government of the day could then work out policies of how to better the country as a whole with all (and it would be a lot - far more than is collected through the current system) that FTT money.
The Banks would collect the money on behalf of the Government.
If a country elected a Government that put its people first then it would also have a progressive inequality tax on incomes over X times the average wage with an inflation adjustment for tax bracket creep, a type of wealth tax. If the elected Government wasn't interested in the welfare of its people then the Country would not have an inequality tax. Everything would be so very transparent.
What makes you such an authority on such matters? Why on Earth should anybody listen to you? Why don't you man up and pay a capital gains tax on your sold businesses? You can make voluntary tax payments, funny as don't see you in a hurry to do so. It is the tax them not us approach.
... probably it's a case of " the green eyed monster " ( no , not Miss Piggie's mother-in-law ! ) ...
Gareth is right to highlight our back-to-front taxation system , which takes from the productive sector ( company & income tax ) , and rewards already wealthy who own vast tracts of land and multiple houses ....
... but his solutions do leave a lot to be desired ...
Gosh, GM is getting better by the minute...It appears that he is obsessed with this TAX-the-hell out of everything syndrome and pulling one weird idea from thin air after another every day ... conveniently and naively assuming that the collected TAX will be used to lower income tax !! ... as if we don't have few Black holes for an extra $6B or $10B dollars lol ... and why is this Robin-hood obsession of taxing the rich to give to the poor ... why is he insisting of rewarding and encouraging the lazy and unproductive segment of society to get addicted to handouts and easy money UBI etc ... North Korea is the ideal place for implementing these ideas , I bet he missed them in his last world tour .
As PK said above ... He is No authority on this matter and No one listens to these ideas ....
the tax system is a bit different from the TAB, right?
So a retired couple in Auckland who through no fault of their own have a house worth $1.2m and just the state Super would be taxed on $500k each or $25k at 30% equals $7500 . Total $15000.
Then one of them dies and the tax ups to $16500 with no cash income other than Super.
Great logic, GM
Good point Basel.
Follow Canada's (Vancouver) lead and apply a 15% stamp duty on foreign buyers which includes students and temp visa workers. Also any companies or Trusts with foreign beneficiaries.
Per the latest LINZ report students and temp workers purchased
13,500 homes * $1m average = approx 13 Billion dollars worth of property
That is just over $1 Billion a month
This was 32% of the Resident home purchases
This would drastically reduce the pressure on the housing market caused by rampant demand.
Gareth, you continually go on about taxing people that own houses.
Why not tax people who sell business's for huge money?
Explain to us why property owners should pay more tax just because they legally try and provide for themselves and family, where others that do t own their own home just continually bludge off the taxpayers by way of benefits.
You would be far better putting your efforts into providing jobs for the people who are a drain on NZs society!
What is wrong with people achieving a passive income if you can?
Surely that is a sign of someone who has been productive?
It is the continual mass production of the non working and benefit bludgers that is the worst liability that this country has to continually shell out for!
Everyone that works knows this and is sick and tired of it, but it is culturally and politically incorrect to bring it up.
People should stop going on about the house prices and be more concerned about the bludgers!
Indeed, maybe there is a point in simplifying the TAX system and closing few loop holes ... however, with No offence to beneficiaries at all ... I was once one of them for few months ... BUT There are few smart people like GM who just like to directly or indirectly make sure that the supply of alcohol and smokes is properly replenished to most benefit bludgers ( you know, to cover prices inflation) and to also make sure to kill any future hopes that some of them might even think about "working" ...
The other objective seems to encourage ( or send the message) to the new generation that you can be a tosser and a loser all you want in your life, go on drop off school,..spend your money, play and enjoy yourself as the government will look after you later .. No worries , if they fail to do that , we will tax those idiot buggers who worked hard and saved to have any form of assets ... ( how dare they having passive income without sharing it with everyone? ) there will always be something to TAX, land, Air, Green house gas, ..etc .... so we are all equal and everyone is happy ... and stuff the country !!!
Let's look beyond the direct effect ... Floating these ideas is not only envy green eye syndrome ... it is a dangerously destructive social engineering attempt for pulling the country into useless debates about the very principles of the evolution of modern society. It is also twisting the humanitarian and protection purposes of the safety nets provided by NZ Super or Social Benefit Systems.
Misery likes company ... misery never builds a future ...
@the man 2 ...OK then, as I salaried taxpayer I hereby withdraw my share of taxes that go towards the accommodation supplement and working for families - as if a so called "business" in a so called "free market" , can not afford to pay a decent wage, it does not deserve to be in business !
I think Patricia has the right idea. Do away with the tax system. Get rid of the government, they are the biggest bludgers! Get rid of all corporations, get rid of Fonterra, they control our biggest export and their executives earn unwarranted salaries for sitting in a plush office, plus all expenses paid including overseas travel. Stop immigration. In other words reset the system and start from scratch, building anew!
Establish local governance using councils' infrastructure. Take New Zealand back to it's egalitarian roots. Stop emulating the USA. There is no need to have a rich list and much less a need to publicize it. There is no need for a Prime Minister or ministers of Parlament. Our isolation is our best asset and we produce enough food to feed ourselves. Two thirds of our electricity is produced by hydro electric plants. We could become self sufficient in a few years. Shut the door!
It will be hard at first, but it will be a better system in the long run, and maybe other nations would follow our example. We don't need 'papa' government ruling our life, or at at least some of us don't. We certainly don't need people earning million dollar salaries for sitting in a plush office whilst there are children living in poverty. The future of New Zeland is the children, yet the least payed professionals are teachers. It is difficult to understand why so many commentaries suggest how we should be taxed, when in reality we should be questioning why are we taxed. If we add all the tax payed to our illustrious but useless government, we would realize we pay over 50 cents of every dollar we spend in tax. Heck, in New Zealand we pay tax on tax. More precisely, we pay GST on many of our tax bills. We pay 51% tax on every dollar we spend on fuel, and we pay GST on top! Diesel vehicle users pay more through RUC. In the feudal system only 5% of crops was required by the feudal lord, and people rebel against it. We suggest ways we should be taxed...
:) While having day dreams can be healthy at times , yet some of us are yet to grasp what modern day colonisation is and how it works ....
unfortunately life is not a computer game that we can reset and start again when we lose ..but, Hold on to your suggestions they might become handy after WWIII ....
Yes, people need to grasp the reality of the situation and act accordingly. The old New Zealand is now just a smoking ruin never to return. Ahead lies colonisation and transformation. The new arrivals are not going to integrate into a classic Kiwi way of life although remnants of that way of life will remain. The future will be different and will present danger but also great opportunities.
Young people needn't feel so bound to their birthplaces now and in actual fact many of them don't and head off overseas at the first opportunity to seek their fortunes and adventure. Naturally folk in other countries do this too and head here.
The reality is that if we were a company we would be insolvent!
No Bank would lend to us as our outgoings currently are higher than our income.
Current costs to run the country are too high and the future increasing costs due to an aging population and
Beneficiaries can't continue.
Super age needs to be increased and benefits cut.
No more paying for people having children as many choose that as a career, and we shouldn't be paying. Immigration halted and parents of immigrants not entitled to super unless they have contributed sufficiently financially.
May sound extreme but needs to happen or else future not that flash.
Actually a lot of what you are suggesting is implemented within the current laws and regulations - other than paying people for having kids... you need to think realistically about the other 2 issues, extending super age means that Gov will pay the same person just a bit less in benefits rather than Super if he can't work or ill until he reaches 67 ... so no gains there! If you don't have something to fall on , good luck finding a job when you are around 60 - 62 ( let alone 55) and tell us your success rate ...
Benefits cannot be cut!, the this binge drinking has been going for so long, it made whole generations addicted to it.. and we will have huge gang problems on our hands if we do that.
NZ is not an insolvent company, not yet ! ... look at Greece , Italy, and even the USA which are completely bankrupt on paper ... banks still choose to lend them money when someone is just printing the green stuff for them out of thin air and in other occasions companies can borrow using their CHARM not assets ...
Q+A on TV1 was good this morning .... suggest you tune to that on the net.
I have a technical problem in that the 5% implied benefit seems too high. It is higher than the deposit rate that Gareth compares it with. Perhaps the 10 year NZ government bond yield is the best figure?
In general I like the idea of broadening and lightening the tax base. What about GST on interest and rents, both are services that are not taxed as such? A land tax on unimproved value seems to have merit, as does a straight tax on the bank's lending book, say a 1% pa excise tax on the $400 odd billion lent out. A lot simpler than Gareth's plan, which I think is probably a red herring.
I am very distrustful that politicians and their parasites would actually pass on any savings. Perhaps that is why I distrust Gareth's ideas.
5% is the deemed rate of return for non grey list overseas investments. The regime is iniquitous in the current NZ tax context but is administratively simple. The value of shares however is easy to establish, property much harder. Imagine the valuation headaches. But Gareth’s idea of taxing all capital equally is worth exploring.
In addition to addressing the current incentive to divert capital away from the productive sector to housing, an additional spin-off would be reducing the avenues for tax evasion. Some authorities suggest tax rates could be more than halved if everyone paid their fair share. Extraction through property would reduce the widespread tax evasion mechanism of diverting labour and materials to lift the value of housing investments. Doing an extension to the boss’s renter or bach would not be as tax ‘efficient’ as it currently is.
"Some authorities suggest tax rates could be more than halved if everyone paid their fair share."
This implies that tax evasion is more than 50% of the current take, about $30 billion. Even the wildest estimates of tax evasion in the UK are not even a faction of that kind of number.
As middleman suggests above 5% is the benchmark to apply across all asset types. It does not matter that deposits and housing provide lower yields currently. The positive to this is that cash and property investment becomes less tax efficient whereas any productive investment yielding over 5% effectively gets a tax cut.
As a long-time user of the FIF regime, I can say that it does drive good investment behaviour and is simple to understand and implement.
"As a long-time user of the FIF regime, I can say that it does drive good investment behaviour and is simple to understand and implement."
Really? Would you care to describe how this drives good investment behaviour? It strongly discourages investment in any kind of company that is a start-up, or has no dividend doesn't it?
Not at all. The FIF tax covers income and capital gain. For start-ups, as long as the capital gain exceeds 5% per year then you effectively save tax. Because tax needs to be paid yearly out of pocket and the assets may be held longer term, you tend to focus on investments that will exceed 5%. The good thing about FIF is I know on 1 April what tax needs to be paid on 7 July the following year and can plan for it.
In the same vein, people buy properties that run at a cash loss to harvest the capital gain (as long as the gain is perceived to be worth it).
Where it does focus your decision making is when you think a company won't achieve a total return of 5%. You then look to put your money elsewhere.
NZ has, or used to have, one MP per 30k voters.
Now add to this all the Bureaucrats in
Banking, Treasury, Inland revenue and on and on
Women's Affairs, Maori Affairs, Human Rights, Consumer rights and on and on
Trade and Industry, Overseas Embassies and on and on
DOC, Fisheries, Land Transport and on and on
All the committees
Add to this all those consultants partnerships, contractors sucking on the taxpayer tit
Add to this all the Council Bureaucrats their consultants and contractors sucking on the Rate Payer tit
And on and on
There must be at least 1,000 tit suckers per MP
So if there are 30k people per one MP there must be one MP and Bureaucrat per 300 people
We could easily cut this right back and save millions of dollars then we actually give everyone BIG tax cuts.
How about that Tax Lover
"That status quo sees me enjoying tax free the benefits of living in a $4m house..."
I don't understand this statement at all. Although the value of my home may have appreciated over time, I definitely recall purchasing it with after-tax dollars. And, I am equally certain that I have been paying rates every quarter.
I'm just not feeling the guilt that GM reckons I should feel. Can someone please help?
Taxing unrealised capital gains is a horrid way of raising tax. I have no control over the 'market' - is it my fault that NIMBY's, the RMA and local government restrict supply? Hell no. Yet under a CCIT I would pay for these factors largely outside of my control.
If I cash in and realise the gains I will presumably need a similar amount to purchase a similar property, therefore I am never any better off. Yet I'm paying tax as if i've benefited from my own home rising in value BEFORE i've even sold. Assuming I need a house to live in, my gain is zero (now negative thanks to tax).
I'm already beholden to the local government via annual rates to live on my 'freehold' property - now I also need to pay the government due to speculators driving up the 'market' price. If I happen to be on a lower income, or retired, i'm screwed.
Sorry mate, never going to fly.
I note that GM concentrates on tax changes/increases eg Govt income, the scope for savings in Govt expenditure however is overlooked. If Govt expenditure is say $150 Billion annually a 5% saving would yield $7.5Billion enough to eliminate the fiscal deficit and start debt repayment and still leave some over for incentives or service improvements so come on Gareth lets have some input on this.
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.