By Gareth Morgan*
Tax Working Group head, Michael Cullen, asserts that the capital gains tax (CGT) is best described as a “tax on capital income”. Since when have capital gains been income? Show me any country’s national income accounts that include them in the measure of income.
There appears to be total confusion on Cullen’s part over what income actually is. And that is dangerous because such conflating of concepts threatens to compromise the whole basis of our income/expenditure-based taxation system. That regime’s integrity is dependent on revenue-raising taxes being neutral to economic decision-making. Labour’s desired for capital gains tax is anything but – it will discourage investment, and with the exemption for owner-occupied property, further direct the nation’s scarce investment resources into housing. This is the antithesis of desirable.
Firstly, understanding what income is, is critical to any literacy around the principles of income and expenditure taxation. As any standard economics and economic-statistics text will attest, income is payment (either in cash or kind) for production. Similarly, consumption, investment and saving denote how that income is deployed. The two sides add up. We have income tax that tax elements on one side, while GST taxes the consumption element of the other. Nowhere in this framework of income and spending accounting do capital gains appear as a source of national enrichment. So a tax on selective capital gains on realisation – especially one that does not provide tax deductions for capital losses – is nothing more than a selective transactions tax.
Why are capital gains not in the national income accounts? If I decide to pay you more for your house than you paid for it, nothing has been produced, earned or consumed in that transaction. You have simply swapped your house for cash, and me cash for the house. The price reflects the willing buyer, willing seller equivalence. We have swapped assets and agreed on a price to do that. It could just have easily been for a lesser price than you paid and it’s no different to what we do all the time when selling each other our secondhand goods. It’s not our business; we’re doing it because we no longer want use of that good. Which of us has achieved a windfall? Who knows, who cares?
And by the way there’s no GST and there’s no capital gains tax or tax deduction when selling other second hand goods for a gain or loss. Labour apparently thinks second hand houses should have a different rule. Its rationale? Because houses are “too dear”.
Let’s look at it another way. I decide to buy your company from you. How do I arrive at a value for what I think it’s worth? I look at the potential future tax-paid earnings, apply some allowance for risk and what I could otherwise earn on my money in the bank, and thus assign a discount rate for that future stream of earnings.
The result is a present value or cash price that I’m willing to pay now. If that price is above what you’ve spent building the business to, then that’s your good fortune, if it’s not, then you’ll accept it only if you’re happy to get the monkey off your back. Whatever – once again, a willing buyer, willing seller agreement is reached. Nothing is produced, earned or spent in this swap of factory for cash. We’ve both simply agreed to swap horses. No income is involved.
And it’s these transactions, wherein owners agree to swap assets, that Labour is deciding to tax. Irrespective of whether the gain in value over the holding period of one owner is a windfall, or is a reward for effort (improvements), or is because the vendor is ‘in the business of trading’ – under Labour’s capital gains tax it doesn’t matter; it deems any gain should be taxed.
Its proponents justify CGT as being an instrument to improve housing affordability – in other words, as a corrective tax rather than a revenue-raising one. Indeed in Labour’s case the rationale runs even deeper than that. As opposed to its indifference over how many cars, farms, businesses, or paintings I might own, the Left gets its knickers in a twist over how many houses one might have – even for own use. It has a deep-rooted preconception of what that number should be – one per household.
This is why Cullen deems that one house being exempt of his CGT, no more. Why such prejudice arises only Labour can answer; there is no economic rationale for it. Indeed, if houses were sufficiently cheap, I’m suggesting most people would have multiple homes. Labour has transmuted the blight of expensive housing into a declaration of how many homes it wants people to own. It’s a strain of socialism that should not fit easily with most New Zealander’s understanding of free choice and democratic capitalism.
Surely the government would be more productively engaged understanding and addressing why property is so dear, and addressing those causes, than issuing a decree on how many homes one should have, and bringing in a tax to enforce that.
A recent edition of London’s The Economist (November 22nd 2018) produces some arguments as to what is so nuts about capital gains taxes. Its list is partial in my opinion and omits the greatest fallacies upon which such tax is founded. Nevertheless let’s add The Economist’s arguments to those that underlie the rejection of such policies.
The magazine begins by stating that over recent years many rich world politicians have “woken up to the blight of expensive housing”. This of course applies to New Zealand and underlies Labour’s rationale for its tax review as well as for its self-defeating condition of excluding owner-occupied housing from that review.
Auckland has one of the highest level of house prices to income in the world (along with Paris, Amsterdam, Vienna, Oslo, and London). The others are all subject to a CGT so where is the rationale that it’s a lack of CGT on 30% of our housing that’s uniquely the cause of high house prices? This reality is why the Cullen TWG was never going to be credible and why the tax literate within it’s number objected to the CGT.
The Economist then goes on to blame “dysfunctional government polices” for the outbreak of house prices – especially how taxes on house transactions, like CGT on realisation, have fuelled the flames. The argument is that these slow transactions in the property market (because there’s a gap between what buyers pay and sellers receive – taxes), prevent people moving up and releasing housing stock for new entrants. The Economist advocates, as do I, that such transaction taxes be removed and instead annual levies be applied.
This inclusion of taxation upon all income to capital (not just homes but all non-financial capital) properly integrated into the current income tax regime is what underlies the proposal in our 2011 book The Big Kahuna, and after which was established as the flagship policy of The Opportunities Party in the 2017 election. Getting rid of this loophole would do more than anything else to take away the tax-driven fuel for expensive houses. But it would achieve much, much more than just make houses less expensive. Crucially it would facilitate a 30% cut in income tax on other income forms (currently over-taxed) and it would improve the appeal of investment in productive businesses (as opposed to houses).
There really is no contest. Closing the tax loophole currently enjoyed by both owner-occupied housing and low return businesses and passing on the benefits of that to salary and wage earners and productive businesses, is day and night ahead of Labour’s capital gains tax proposals.
*Gareth Morgan is a businessman, economist, investment manager, motor cycle adventurer, public commentator and philanthropist and was the founder of The Opportunities Party. This article originally ran here and is reproduced with permission.
73 Comments
"Income" is whatever the Government says it is.
So right Gareth
Capital gains are not income
If they were income the IRD would’ve been taxing them as income
This is typical Cullen speak
From the same Cullen who bought back the railways at exorbitant cost to the NZ taxpayers
How’s that cat eradication going Gareth ?
Spot -on
Tell that to the IRD. They already assert that capital gains on cryptocurrencies and gold bullion are taxable income. And with no adjustment for inflation, it's possible you could sell a gold coin 20 years after you purchased it, make no profit or loss in real terms, but be obligated to pay income tax on whatever the cumulative inflation rate was over those 20 years. It's daylight robbery.
IRD's position is those items were acquired with the intention of sale (for a profit) so are taxable (i.e. revenue rather than taxable under current rules).
Gareth's definition of income, "As any standard economics and economic-statistics text will attest, income is payment (either in cash or kind) for production" presumably leaves out gains/income traders make between the producer and the consumer (or maybe he thinks the trader is a producer = facilitator for a fee?).
Anyhow, an exception to the taxation of gold would be for it to be shaped into some "artwork" (say a dragon with ruby eyes) so you do not hold it now to make a gain but rather for its artistic beauty.
Nothing makes humanities graduate working at a cafe more gleeful than the idea of taxing those kulaks earning over $70,000 a year
saving4ahouse(in Dannevirke)
Having done an Open University degree in the Humanities,I wonder just how many such graduates the world needs?
Oh, we need a few.. only a slim percentage of them become good Baristas :)
He's answered his own question - CGT is targeted at minimising the following behaviour -
"If I decide to pay you more for your house than you paid for it, **nothing has been produced**, earned or consumed in that transaction. You have simply swapped your house for cash, and me cash for the house. The price reflects the willing buyer, willing seller equivalence...."
Nothing has been produced & no value has been added but we borrowed loads of overseas cash via the banks to do it, we created property bubbles, we exacerbated rent increases & homelessness and we failed to invest in boosting productivity.
Call it the politics of envy or whatever emotive phrase you like. I call it leveling the playing field on taxable income so wage earners aren't paying all the tax. A CGT is aimed at discouraging this unproductive behaviour, and if it can't be eliminated then it ensures government can share in the party without tapping me for more PAYE income tax.
So boohoo - if the CGT wasn't going to be effective then no one would be complaining. All the whining about this issue tells me that's high-time the Bridges "kiwi lifestyle" of trading houses was reigned in. Bring it on Mr Cullen, it's better than doing nothing like the previous govt - the party of "nothing to see here, we're just rockstar." God, what a wasted decade. I wonder how those wade-able rivers are going....?
Couple of things:
1. It is often not the case at all that "no value has been created". In competitive markets, as many parts of Auckland are at the moment, vendors regularly sink a significant amount of money into improving their properties in order to achieve a higher sale price. If there is going to be a CGT on profits then it is only fair that there be an allowance for profitable expenditure to allow these people to offset their expenses against the tax.
2. If CGT is aimed at discouraging unproductive behaviour (housing speculation) then why apply it to other forms of capital gain like equities? Providing capital to listed business is absolutely a productive way to invest, even if it is just a case of buying low and selling high.
3. Using a "whinge scale" as a yardstick for how desirable or effective a policy would be is pretty shortsighted. Why stop there? Government could be even more effective if it set out to make as many people as miserable as it could all the time!
4. Every dollar taxed has a lower multiplier than it would if it were left in private hands. The purpose of tax is to fund government operations. Government finances are in good shape. Excessive taxation literally shrinks the economy - doesn't sound all that productive now does it?
Can anyone tell me exactly how many actual recorded working hours Cullen has actually put in since his contract was extended ?
Is he beavering away somewhere , or sitting on the deck at home sunning himself laughing at the ruckus he has caused ?
And why does it matter? He's only the ex-Finance Minister - not like he's under qualified or something.
But of course - if your old boys network at Deliotte or whatever was doing the hard yards, that would be OK? Plenty of pork on the Beltway when the public sector headcount is reduced to "save" money.
Go back to calculating the CGT on your yacht - maybe it will help pay for the measles outbreak?
Yea, being angry about tax doesn't make your more knowledgeable than tax professionals about tax.
Could be a lesson for both yourself and Sir Dr Cullen there.
@larry76 ............... anyone who thinks there are Capital Gains on a Yacht is dreaming
If one capitalizes the costs ........... repairs, maintenance, mooring, anti-fouling, interest costs , there is no way in hell the is any gain for anyone to tax
Spot on Larry76
He only gets paid for the hours he actually works, so if he's sitting on a deck in the sun then he isn't being paid.
As unusual as Gareth's all-capital tax and UBI might be it's surely less nuts than
1) Taxing the s!-t ouf ot the productive middle class
2) Giving it to landlords (accom supplement) and "working families" that don't even work
3) Denying middle class families any WFF credits even though they pay the most in
You are right to some extent - obviously any progressive society should be looking out for the vulnerable and the middle before the rich. Fair enough. But:
1) Middle NZ is notoriously unproductive, and Kiwis are amazing at complaining about how hard they work without realising that they actually have very few genuinely useful skills.
2) Yes fair point.
3) An official information act request that was circulated around 10 years ago showed that only earners in the top decile were actual net contributors to the public purse and that everyone else was a net beneficiary. The middle class absolutely does not pay in "the most" and that's ok. That's how it should be.
1) point taken but is it any surprise productive people bugger off to countries with better living standards? NZ also has low capital investment per employee so they may not have the right tools for the job.
3) Do those "earners" include property flippers and landlord lizard people?
Define the "middle". If I have three kids, I need state assistance on $70K. If I have no kids, I'm a rich prick and taxed accordingly. Unfortunately the Treasury figures do not provide enough of a segmented breakdown over $120K to figure out who pays what, but I can assure you that anyone earning over $80K is part of the group propping up the Revenue.
3) An official information act request that was circulated around 10 years ago showed that only earners in the top decile were actual net contributors to the public purse and that everyone else was a net beneficiary.
Link? I doubt that's what it said.
I'll have to dig it out. It was sent around a group of people by email some time ago. There was a breakdown of tax payers by decile netted off against all side payments. Consider the point withdrawn for now until I can find it.
3) Ahh, this old piece of crap again.
That graph considered income taxes paid only. It did not include GST, petrol tax, alcohol or cigarette excise or any of the other taxes that people actually pay.
Once you incorporate those in, most of the country will be net positive contributors to the government tax take.
If you receive WFF or other benefits then tax on that moneys spend is not a net tax receipt.
I’m sure those at the bottom 50%, if they had a choice, would gladly pay more tax if only they were paid more. Oh wait, minimum wage is going up so maybe they will reduce some of the horrific burden that’s placed on the top 10%.
Nail squarely hit, cleanly on the head, Gareth. It's not a CGT at all, it's a Sumptuary tax....
- relating to personal expenditures and especially to prevent extravagance and luxury
- designed to regulate extravagant expenditures or habits especially on moral or religious grounds
From Them as wot Knows Best how the rest of us serfs should Behave....
“the rise of modern capitalism ultimately made sumptuary laws obsolete.” There it is. Are we or are we not living, working and conforming with a capitalist society and accompanying law and economy. Think we might be! Therefore who exactly wants to turn back the clock!
... this CGT debate is making alot of people way mad ...
'Cos it solves nothing ... it doesn't even raise much munny for the Gumnut .. .less than smokers pay in tax on their stupid cancer sticks .... but it does make our lives more complicated ...
... my accountant thinks Sir Micky is a God ... he wants Cullen raised to a peerage ... he kept saying , " good Lord ... a CGT ... oh boy , we're gonna be rich ! " ...
In as much as taxing the income of salaried folk to hand it over to non-working oldies is also, sure.
@RickStrauss That's a bit below the belt, isn't it? Us BB's have all been paying our taxes into the govt pool for 50 years in the expectation of being looked after in our retirement, and you begrudge us even our " own money". Self-serving toad!
Key point: a tax on capital gains or on land is only an envy tax in as much as a tax on income of working folk is an envy tax.
Problem is you only filled it a third of the way, yet you want to drink the other two thirds.
There appears to be total confusion on Cullen’s part over what income actually is. And that is dangerous because such conflating of concepts threatens to compromise the whole basis of our income/expenditure-based taxation system.
But Gareth....
Aren't you the one who says that home owners receive tax free income , in the form of the benefit of living in ones own home..?? ie. You say there is a "pretend" (imputed ) income that is tax free..
And now you say Cullen is remiss for using the term "Capital Income"...
At least Cullen is talking about "real" money that actually ends up in someones pocket..
In this regard , I'd argue that Cullen is closer to economic reality than you are.
I did wonder how Gareth's "deemed income" for equity fit into his definition of income as a "payment (either in cash or kind) for production". Maybe payment can be defined as "either in cash, or kind or imaginary"?...
Exactly .. Gareth's criticism of Cullen is spot-on ; the irony is of course that he is guilty as sin himself.
Deemed income is Unrealised income on something by definition: no cash has changed hands - whereas realisation-based taxes require traceable financial transactions. It's a slippery definition, too: I get a deemed income from being able to orient at sea if there's a lighthouse on a point or a GPS signal in the heavens, but I have not paid a traceable amount to fund either. 'Deemed' is whatever the tax authority decides it is - a nice little racket.....so must be used sparingly and transparently.
Although it is difficult to find definitive details on TOPs tax policy (I think they do this intentionally, lest the voting public discover how freakin nuts it is), my understanding is that the imputed income idea applies to everything, not just houses - bikes, cars, fancy recreational boats.
Yes, I’ve read this. They don’t quite come out and clarify that they’ll be taxing the imaginary “income” (as in utility and enjoyment) that I get from my supposedly “productive” recreational boat and bike, but this is what they say in speeches and interviews. The ambiguity is intentional.
Surprised that Gareth, a supposedly shrewd individual, would continue to so blatantly throw good money after bad when it comes to the TOP party.
I’ve asked Geoff to tell me what TOPs definition of “income” and “productive” is. He responds with confuscation and attempts to change the subject. Most TOP voters would run a mile if they knew how far-reaching and disconnected form common meaning your definition of these terms is with respect to your tax policy.
https://www.google.com/search?rlz=1CDGOYI_enNZ750NZ750&hl=en-GB&q=Dicti…
I doubt TOP's definitions of income and productivity are different from the economic descriptions.
Just because you have a different personal definition is a pretty crappy reason to argue the point.
Is my fancy recreational boat a productive asset that generates income? The average person would say no. TOP's policy document says they will only tax the "income" on "productive" assets, so TOP prospective voters assume that their recreational boat is safe.
The reality is that TOP's definitions of "income" and "productive", which they don't clarify anywhere, are so artificial and broad, that they do consider a fancy recreational boat to be a productive asset that generates income, and would therefore be taxed year after year.
You don’t know what TOP’s definition of income or productive is.
Why are capital gains not in the national income accounts? If I decide to pay you more for your house than you paid for it, nothing has been produced, earned or consumed in that transaction.
You are wrong... there are many ways that Capital gains are included in national income.
Many people make a business out of trading "Capital Goods". ie. Capital gains become income
What defines " income" is an arbitrary thing, as is tax. ( Both, normally based on commonsense and everyday reality)
I don't think Cullen is remiss in using the term "Capital income". I know that the Private Equity world is all about generating tax free " Capital Income" ie. the real profit and gain is in the Capital gain.
Its not hard to see the difference between a horse trader who buys and sells horses for a living and an individual who simply wants to sell his horse to a willing buyer. ( Horse is a metaphor for any Capital Item , that can be traded )
@Roelof ............ you are wrong , if you trade in Capital assets , such as shares, property , franchises , bonds , etc , you are and have always been taxed as a trader in those assets .
If you buy and sell houses or property , you are a deemed property trader and thats your income , and you will be taxed on it .
Ditto for listed shares
If Mc Donalds sells a Franchise its deemed as income as McDonalds is in the business of selling franchises,
Mc Donalds Inc does not flip a single Burger , it sells the right to franchisees to do so and burger sales are incidental or secondary to their main business of selling franchises and charging fees to franchisees , and of course collecting rent
The difference between the two horse sellers is one has an intention to make a profit (the trader) and the other one does not (maybe status). The problem with intention is that it is facts specific and a lot of those facts are in the mind of the person. This was clear in the 87 share market crash where before the crash no one had an intention to sell their shares because it was all about the dividends (yeah right!), so no tax paid on gain on sale. After the crash those same people all of a sudden were traders as they did now intend to sell shares at the date of the crash (so now their loses were claimable).
A CGT will stop people gaming the system e.g. if I make a gain I am not a trader (no tax thanks), if I make a loss I'm a trader (losses please to use against other or future income).
My only beef with CGT is that its going to take a big chunk out of what is the modest capital assets of the few Baby Boomers who have been able to actually save and accumulate some capital assets .
One of our clients has a share portfolio of about $500k ( $350 k bought with after -tax money ) of which only about $150k is actual gain , the rest has been hard slog saving and investing .
So lets say he retires and cashes it in and 33% of the gain which is about $50k ( about the median wage for just one year ) is lost .
He has paid dividend tax on the income, just like savers pay tax on interest
Why bother to invest or accumulate capital at all ?
Its a massive disincentive to capital creation and investment .
That $150k gain won't be touched as it will be included in the cost price on valuation day.
The difference between shareholders and savers is savers can't make a capital gain (e.g. invest $100 in term deposit, $50 interest and at the end of term you just get your $100 principal back) but shares may make a capital gain also as the company becomes more profitable/potential (e.g. buy $100 shares, receive $50 dividends and then sell shares for $200 as company is taking off = $100 capital income).
Why bother to invest you ask, well you get the dividends and with shares you also have a chance to make a gain on the share value. You make it sound like the only things worthwhile investing in are things that are not taxed, remember you only pay tax if you are making money (well under the proposed CGT anyway).
Incorrect, you also pay tax on inflation. It's quite possible to have a gain that is less than the general inflation rate but it will still be taxed in nominal terms.
Given the RBNZ has a mandate to produce an inflationary environment, this is arguably a Govt agency issue and should result in either a 0% PTA or allow for inflation on gains.
If there is deflation does that mean you've had a tax cut?
Gareth : if this Labour government had wanted real solutions to our lop-sided taxation system , they'd have appointed an independent person to chair the TWG ...
... but , they had a vision for what they wanted , a CGT , and they picked the one person in the country who would guarantee that outcome , Sir Micky ...
Did anyone seriously expect a different result from this TWG the moment we heard who was employed as chairman ?
@GBH that's true and they think we cant see it ............ treating us like fools
... and yet CGT supporters keep trotting out that tired old pony " but every other country in the OECD has a CGT " ...
Blithely ignoring that fact that people in those countries are seriously inconvenienced by it ....
... and that it clearly does nothing to keep housing " affordable " .... it solves nothing ... it is not the answer to anything ...
It's an answer to one thing that requires answering. As John Key himself described it
"If you earn NZ$100,000 from going out there and having a job, and you pay tax on it, well fair enough. If you earn NZ$100,000 from buying a property, well you probably should pay tax on that – fair enough."
Salaried folk are tired of bearing the load while property investors get a free (and subsidised!) ride.
Just tax all income, earned and unearned.
... I agree with taxing capital , and pollution ... but a CGT is a shoddy way to go about it ...
An annual land tax would work , would immediately raise heaps for the gumnut , be simple and cheap to implement , be unavoidable ... all land owners pay something ...
... a carbon tax would work for pollution ... a water levy on all water used , by everyone .... all users / owners pay a little ... that's fair , isn't it ?
I agree a land tax would be far superior. But politically much harder to get across the line until the land ownership pendulum has swung much further back in its arc. The last time it was instituted in NZ was to break up land banks held by local and foreign landlords and get land into the hands of more average Kiwis who were willing to work it.
CGT is a less ideal substitute, but still addresses some of the unfairness of inequitable taxation of earned and unearned income.
Many developed countries don't have a CGT (see below) and most others who do, the tax ranges from 0-20% with masses of exemptions and roll over provisions.
* Switzerland.
• Singapore.
• Cayman Islands. ...
• Monaco. ...
• Belgium. ...
• Malaysia. ...
• New Zealand. ...
• Belize.
• Netherlands
• Turkey
• South Korea
Great article !
The next election will be very interesting indeed !
This tax grab is a serious misguided course of action.
Agreed. Firstly the next election is going to present the strangest set of circumstances the electorate has ever seen. A coalition that will be deeply unpopular, complicated by the status of WP who may or may not be leader, or even if so, is obviously not going to last the term, in which case NZF will not be returned. And National with disarray in the ranks, insipid leadership and no way of getting there without a viable coalition partner, presently non existant. Secondly the adjective misguided is spot on. And that is why the coalition will be deeply unpopular.
Cullen thinks by changing the label cgt suddenly equates with earnings. He is totally wrong none but the totally naive will buy into his nonsense
The labour left like AOC and Corburn are on a wealth distribution campaign. And my fear is that cgt light in 2021 will turn into the full tax Cullen proposed
This is a very good article from GM. Educational and topical. I hope the government notices. Also noting comments already above, and iterating them, if i remember correctly GMs position when the leader of TOp was to tax assets on a "deemed income" basis. To me that is just a twist on CGT, although i can see that it could be argued to be quite different.
Having said that, he shreds MCs rationale and proposal utterly as a real economist not a pretend one, and I apologise but i cannot help but feel very pleased about that!
Pretty good article, but overlooks (or doesn't make clear) that capital gains through trading or developing are actually income, and are taxed as such. I thought the bright line test was a good idea from National and the increase to 5 years probably fair enough. Let's give it a chance.
I couldn't read the Economist article; does it really promote a tax on deemed income on your house using an arbitrary required rate of return, as Gareth implies? What are the annual levies that the Economist is advocating?
I see Gareth's big kahuna tax as just a pseudo capital tax. Whether you call it a 5% capital tax, or call it an income tax on your deemed income at the made-up rate of return of 5%, the effect is the same. You are taxing capital rather than income.
It also has the same dictatorial nature that he opposes, in that an ordinary person is forced to see their house/boat/car as a productive asset with an opportunity cost when used for personal use only.
Does the big kahuna include an analysis of the supply side factors affecting the high prices of houses? (RMA, release of land, supply chain of materials etc). And if not, how is this made out to be the biggest thing that would affect house prices?
B-Rock having read the article again I don't think GM says the Economist article promotes the deemed income on a house position. As I understand it that it only shreds the CGT arguement. The Deemed Rate of Income bit is just about Gareth clinging on to his original idea on it. He seems to resent that somehow homeowners are not paying rent to a landlord. Doesn't make sense.
This is a quote from the article above:
"The Economist advocates, as do I, that such transaction taxes be removed and instead annual levies be applied."
He implies here that he and the Economist agree with taking away transaction taxes like CGT, and applying an annual levy, and then goes onto explain what that annual levy should look like.
Without being able to read the Economist article, I would be very interested to see their version of what an annual levy looks like, because the inference from this article is that Gareth Morgan is on the same page as the Economist on this issue.
Not saying that I agree with Gareth but lets think about how people set out as an enterprise to make money from property.
1 Rent - taxable - fine
2 Doing up up a house to increase it's value. The money derived from this enterprise should be no different from any other employment or business producing and selling a product - therefore should be taxable
3 Farming inflation. Buy a property(or any other capital asset that retains it's value), finance this with a lot of borrowed money. Claim the interest as tax deductible and let inflation effectively pay off the mortgage. This is clearly wrong and the best way to address it is to remove the tax deduct-ability of the inflation portion of the interest paid and as a corollary compensate lenders by making the inflation portion of interest received tax deductible. (will encourage saving)
4 Make capital gains when property values rise as result of changing market conditions. In a properly functioning and free market this should not occur to any great extent. Look at any other competitive freely operating market - do we see rampant out of control price rises - cars, electronics, etc. If the markets are working, competition and on going innovation will continually drive down prices relative to income. The distortions and corruptions within the housing supply market are blatantly obvious and have been discussed at length. The governments prime responsibility is to wade in and very firmly create markets for land and building materials that are very competitive, open and free of the blockages, corrupt influences and bureaucracy that have put house prices out of reach for those who need them. I see next to nothing from this government being done to address these issues. They seem happy to go along with the market as it is and support the continuation of these problems by buying 'Kiwi build" houses at prices that are so ridiculously high, that nobody in their right mind will buy them.
These problems are not going to go away until they make some very hard decisions, and at their current rate they will have achieved next to nothing and look a bunch of fools at the next election.
Regarding your (2) what I am objecting to is there is no allowance in MC's "simple" calculation is for deducting the actual improvement cost. I have no real objection to paying a modest tax on the real profit, but not this naive simplification that takes no allowance for the costs in increasing the value, nor I might add, any allowance for the mortgage portion.
Agree. It has to be the real profit, after all the real costs have been deducted. Not just the difference between the purchase and selling price.
Are you sure about that? I haven't read the TWG report itself, but from other conversations i've seen online there are provisions for deducting money spent on capital improvements from the CG calculation.
Most new taxes seem to be the thin ends of their wedges - The concept of regarding non-monetary things as taxable income is surely the beginning of absolute madness:
If I buy an apple for $2.99 and by the time I eat it the price of apples on the NZ Apple index has gone up to $3.99 will I, one day, have to pay tax on the capital gain on that apple? If I chose not to eat the apple and my health suffers can I get a corresponding tax deduction for the value of my loss of health due to this choice?
Alternatively, if I eat the apple immediately, will the good that it has done to my health one day be regarded as a benefit to be taxed? Will I be able to claim a tax deduction for the opportunity cost of eating the apple immediately which would eliminate any opportunity for capital gain?
If you don’t sell your apple for a profit (money), instead you trade it with someone who has an orange, then it’s truly non-monetary and you won’t pay tax on 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.