By Andrew Coleman*
New Zealand politicians are discussing taxes again. Just like normal, these discussions are about the rate of tax: should income tax rates go up, or down, or get adjusted for inflation. Strangely, we hardly ever discuss the two largest differences between the taxes used in New Zealand and the taxes used in other OECD countries, which concern the ways we fund public retirement incomes and the ways we tax private retirement incomes.
For the last 35 years New Zealand has ignored standard tax theory and the practices of almost all OECD countries and gone off on in its own tax path. Instead of using some of the most efficient taxes in the world, we have designed a tax system that artificially distorts investment decisions and inflates property prices. If we could boast that our distinctive tax arrangements had generated a high wage, equitable, and high productivity economy, this would be some achievement. But we haven’t even achieved one of these things, let alone all three.
It doesn’t have to be this way. New Zealand could keep major elements of its distinctive retirement income system even if it changed the taxes that are used to fund them. Alternatively, younger New Zealanders could redesign the retirement income system they want for themselves and the taxes they use to fund it. (They should have this choice.) Either way, it is reasonable to ask whether our tax system is helping us achieve our goals – and if not, whether we should change it to build a brighter future.
This article examines why most countries use social security taxes to fund contributory retirement income systems. The distinctive way New Zealand taxes private retirement savings will wait until next week.
Social Security taxes
Most OECD countries use social security taxes to fund the contributory components of their government pensions. A social security tax is a special tax on labour incomes that is used to fund social security benefits, particularly old age pensions. The amount a person pays each year is recorded, and their lifetime tax payments are used to determine how much pension they get when they are old. It is collected at the same time as ordinary income taxes, but it is not paid on capital incomes such as interest, dividends, or rents.
This means that different types of income are taxed at different rates: more precisely, labour incomes are taxed at higher rates than capital incomes. This tax system is deliberately chosen to reduce the distortionary effects of taxes and develop a well performing economy. Even though New Zealanders do not have a contributory retirement income system – although a younger generation may wish to adopt one for themselves –we still could use social security taxes, just as Ireland does.
For many years, many New Zealanders have argued that fairness requires all types of income to be taxed in the same way. It should not matter whether you earn $50,000 from working in a shop or a farm or from interest from the bank, the tax should be the same. Consequently, many New Zealanders will find it surprising that most countries tax different types of income at different rates. Can his be fair? It turns out that this is not the right question as fairness is only one characteristic of a tax system, along with effectiveness and simplicity. A better question is: how you design a tax system that is simple, effective and fair? Economists call this question the “optimal tax” problem, after two Nobel prize winning economists, Peter Diamond and James Mirrlees.
Diamond and Mirrlees argued it is often a good idea to have low tax rates on activities people can easily change, and high tax rates on other activities, even if this does not seem fair. According to this argument, it can make sense to tax labour incomes at higher rates than capital incomes, since most people go to work no matter the tax rate but they can easily change their investments if tax rates are high. This grates against the fairness principle, particularly as investment income tends to be concentrated amongst rich people. On the other hand, businessmen and businesswomen may be less willing to expand profitable businesses if capital incomes are taxed at high rates, or they may shift part of their businesses to other countries.
Ordinary wage earners might find they are worse off if the government taxes all income at the same rate, because lower wages more than offset the lower taxes they pay. (Evidence from Germany and (the US suggests that when business profits are taxed, half of the tax falls on workers because their wages are lowered). There is no easy way around this conundrum. Taxes that are fair may not be effective, and taxes that are effective may not be fair. Most countries have decided that the best response is to tax labour incomes at higher rates than capital incomes to ensure wages can be as high as possible.
One solution pioneered by Norway, Sweden and Finland - countries that are widely regarded as some of the most progressive and equitable nations in the world - is to tax labour incomes on a steeply progressive scale but tax capital incomes at a lower rate. In the 1990s these countries were so concerned that their businesses would invest too little or move to other countries if they taxed capital and business incomes too heavily that they decided to tax all capital income at the bottom labour income tax rate.
However, labour income taxes are steeply progressive. That means that people earning high labour incomes not only have higher average tax rates than people on low incomes, but they have higher tax rates than people who have high capital incomes. Whether or not you think this “Nordic tax system” is fair, Scandinavian countries have adopted it because they think it is an effective way to have an equitable and high-income economy. The US tax expert Joel Slemrod argues that the introduction of this system in Scandinavian countries since 1990 is probably the largest advance in tax practice in the last 30 years – and notes that Scandinavian countries have some of the least inequality despite this tax system.
While the Nordic countries have made this equity-efficiency trade-off explicit, most countries do something similar by levying social security taxes on labour earnings but not capital earnings. This means that capital income is taxed at lower rates than labour income, which reduces some of the distortionary effects of taxes on saving and investment. It is true that the higher labour income taxes may increase labour market distortions, but most countries (and most economists) think that tax causes worse capital market distortions than labour market distortions. People are better-off if labour taxes are a little bit higher and capital taxes are a little bit lower.
Many countries raise 25% to 30% of their tax revenue from social security taxes that are used to fund retirement incomes and some other forms of social assistance. In contrast, New Zealand only collects 3% to 4% of its taxes as social security taxes, to fund the Accident Compensation Corporation. The absence of a social security tax or compulsory saving scheme is by far the most distinctive aspect of New Zealand’s tax system.
Because New Zealand raises so few funds from social security taxes, average income tax rates in New Zealand are high relative to many other OECD countries. As a result, New Zealand has one of the lowest “combined” labour income taxes in the world (income tax + social security tax), but one of the highest taxes on capital incomes. If taxes on capital income are high, investors and businesspeople may choose to invest less. This means that firms will typically be less productive since they will have fewer resources in terms of machinery and capital. Furthermore, there is a greater incentive to invest in low-yielding assets that are taxed at low rates such as real estate. High capital income taxes may also encourage businesspeople to relocate to countries with lower capital income tax rates. All these problems can be reduced by having higher social security taxes but lower income taxes.
Social security taxes have a second benefit. Even though income taxes applied to labour incomes are less distortionary than income taxes applied to capital incomes, they are still distortionary. A social security tax has a smaller effect on labour market participation decisions than an ordinary income tax.
Because work is an unpleasant or boring activity for many people, they are tempted to do less of it when a large fraction of their earnings are paid to the government. Labour taxes may change behaviour in other ways as well, which may be more important in practice. People may avoid well-paid but unpleasant work in favour of less demanding and less-well paid jobs. They may avoid moving from one city to another to take advantage of better paying jobs, because they only keep a fraction of the pay increase. Why not live near the beach in Tauranga on $80,000 per year rather than move to Auckland for $100,000 per year if the government takes 33% of the extra $20,000 as income tax, and 15% as GST?
Social security taxes reduce this behaviour. Because people know they will be getting at least some of their social security taxes back as higher retirement incomes, people respond to the social security taxes they pay differently than to the income taxes they pay on their wages. Most people know the income taxes they pay are gone for good, but that is not the case with social security taxes.
Similarly, if people are required to make compulsory contributions to their own personal retirement income account, they may behave differently than if they had to pay the same amount of money as taxes. Ask any Australian whether they treat the money that is paid into their personal retirement account the same as the money they pay in taxes. When a portion of the taxes people pay determine their retirement income, they may not induce the same tax-avoiding behaviour as the income taxes that are levied in New Zealand.
It is not possible to be dogmatic about the relative distortionary effects of social security taxes and normal income taxes on labour incomes as there is not much statistical evidence on the topic. Nonetheless, most evidence from cross-country research programmes supports the common-sense position that people behave differently when the taxes they pay increase their retirement incomes than when the taxes they pay are gone forever. (Also see this, and this).
Social security taxes tend to be regressive, but this does not mean that the tax system overall must be regressive. Most countries with social security taxes reduce other income taxes on low-income people, and raise top marginal income tax rates on high income workers. If New Zealanders were to adopt social security taxes or a compulsory saving scheme to fund retirement incomes, the government could do this as well. Low-income individuals would be required to pay social security taxes on their labour incomes, but might not need to pay income taxes until they reached a high income threshold.
A social security tax could also be combined with a family tax credit so low-income household would get an income tax refund while still paying social security taxes or making contributions to a compulsory saving scheme.
Social security taxes are a deliberate choice to reduce the distortionary effects of taxes. Peter Lindert, a historian of government welfare systems, observes that European countries with the largest governments and the most redistribution are most likely to use social security taxes precisely because they are most fearful of the bad effects that can occur if they use poorly designed taxes to raise revenue. Fifty years ago, when the Labour government introduced a compulsory saving scheme, New Zealand also went down this path. It is time we considered doing it again.
*This series and an accompanying paper are based on work I started in 2020 with Jeanne-Marie Bonnet while we were both at the University of Otago. I am very grateful for her assistance and insights. All errors remain my own.
(This article is part 8 in the series. Part 1 is here, part 2 is here, part 3 is here, part 4 is here, part 5 is here, part 6 is here, and part 7 is here).
**Andrew Coleman is a visiting professor at the Asia School of Business. This article is his personal view of retirement policy in New Zealand, based on academic study.
Coleman is on extended leave from the Reserve Bank of New Zealand, while working overseas. The views expressed in this article do not represent the RBNZ and are unrelated to work conducted at the Bank, which has no responsibility for retirement policy in New Zealand.
134 Comments
'Because people know they will be getting at least some of their social security taxes back as higher retirement incomes, people respond to the social security taxes they pay differently than to the income taxes they pay on their wages.... Similarly, if people are required to make compulsory contributions to their own personal retirement income account, they may behave differently than if they had to pay the same amount of money as taxes.'
This supposes that those with high incomes will contribute more to get a higher retirement income than those with low incomes will. The duty of the state is to look after the poorest. The advantage of the present superannuation system is that it is disbursed fairly, to everyone equally.
Any social security tax introduced on worked-for incomes should go into the NZ Superannuation Fund for equal distribution. Or better, the NZSF could be funded from capital gains tax, land tax, inheritance tax and gift tax. Individuals with income to spare contribute that to their private KiwiSaver accounts, as they do now, to save extra funds for their retirement.
No.
In the case of CGT - the 'G' stands for Gains. CGT, isn't a Capital tax - where losses might be deductible.
Normally, any losses can be quarantined for, say, 7 years to be offset against any future profit derived from the same assets. And once the 7 years is up, so is the potential off-set.
Agreed. This would simply be bypassed by not selling and NZ rand out of funding leading t its repeal. Also why a land tax is a much better angle. Simple, Regular, and Unavoidable. Which is also why all the speculative would hate it, they would actually pay some tax.
No, we should be offered rollover relief or a threshold before this kicks in, like almost every other country with inheritance taxes on property.
We are so poorly served by the quality of debate in this country around tax - "other countries have X tax so we should have it too!" but that never extents to the mechanics and carve-outs that make them acceptable to the general populace or target them so that 90% of people aren't actually affected at all.
The whole exercise is about stuffing as much money into the pockets of governments who have proven time and time again they have no ability to spend money wisely and that will piss it away on enrichment exercises for themselves with little progress to show for it. It's sickening.
CGT has to come now. Together with increased competition powers for someone and house/rent price controls
The govt has to find a way to fund infrastructure, public services and pay pensions and can't load the mid class anymore (as they either leave the country or vote labor).
There is a tipping point (where the current system results in everyone smart and young simply leaving nz) and I reckon we just went past it. At present other countries are smart enough to attract our smarter kids and leave us with the wrong ones.. and we are now importing the wrong ones too... with the smarter ones going to places that are more attractive.
Who will pay the boomers retirements I wonder.
So how much tax is collected when there are no gains? None
So how will the govt plan their budget, what tax fills the gap? paye or gst perhaps - i.e. on you, not property
What incentive is their for the govt to create inflation and create cap gains? Heaps.
Care to have a re-think?
Agreed, CGT only stacks up if property prices continue to escalate, or it becomes so wide-ranging it also captures things like Kiwisaver (which is already off-step with the rest of the world and their approach to retirement products being taxed on exit and thus getting the benefit of accumulated returns) and then that becomes even more useless than it already is.
We don't want house prices to keep increasing. And we can't possibly extract enough from the non-governmental economy and still have a viable country if people want to turn a blind eye to how much our government spends and what it spends it on. Some here and some in Wellington have a real aversion to the idea of linking actual benefit or output to spending, as if the exercise is about the spending and actual results are a trifling concern. Any redesign and ongoing maintenance of our tax system needs to come from as far away from that kind of thinking as possible.
How long will your retirement savings last?
Answer: Not long enough.
https://www.stuff.co.nz/money/350384118/how-long-will-your-retirement-s…
The net NZ Superannuation benefit for a couple needs to be raised now to the higher of 80% of the after-tax fulltime average wage or 100% of the after-tax fulltime median wage; with the single-living-alone allowance rising proportionately to continue to be 65% of that.
To help balance the cost, everyone signing up for NZ Superannuation must go on a separate tax scale that would put a surtax on all other income, as proposed by Susan St John:
https://www.auckland.ac.nz/assets/business/about/our-research/research-…
This does not answer the problem of people without other income renting in retirement. That must be addressed by a mass build of homes owned and managed by the state for secure, lifetime tenancy for income-moderated rent by all who need them.
https://berl.co.nz/economic-insights/home-ownership-and-unequal-ageing
That's the now. The future lies in greatly increasing contributions to the NZ Superannuation Fund from land tax, capital gains tax, inheritance tax, and gift tax.
Yip. The problem is that the mid class and youngsters won't pay any more tax or for houses. And as housing gets more expensive and infrastructure and public services decline... they are simply leaving.
The boomers who got rich by leveraging policies that didn't favor the next generation.. will now have to pay for their greed by paying taxes on their remaining investments or via reduced income.. or have a pretty crappy retirement living in a crime ridden country with crap services.
A gold mine waiting to be tapped to boost the NZ Superannuation Fund. Imagine taxing this at the marginal rate as it passes from one generation to the next.
https://businessdesk.co.nz/article/forward-planning-2024/next-generatio…
No. This would only work if the current cohort of citizens that are over 60 pay their way (i.e pay 50% capital gains tax on their property sales). Given that the boomer generation has never been keen on paying taxes, or creating a fair system to fund superannuation, I find it highly unlikely that they will part with any of the wealth that has been created off the back of the following generations.
If you own asset's/wealth totalling over $500k then you shouldn't be able to claim superannuation. This would cause a two-fold benefit to NZ:
1) Family homes would be passed along or sold to the families that need them.
2) The govt cost of paying super would drop by 80% (Currently $20 billion) to $4 billion. Thereby freeing up $16 billion to put towards the future of the country (hint: kiwi kids).
500k wealthy, Pffft. If you have 500k in assets you don't even own your own house (generally speaking). To retire comfortably in NZ, you need about 5 million in assets, i.e. a house, and about 3-4 million in income generating assets. When you retire, you become more conservative so, many will have these assets parked as cash or bonds, earning 3-4%, which will give you 120-160k per year, less tax (obviously if you want to be more active in retirement you would manage much higher returns). which would be 30-40k, but then you get your super entitlement (30-40k), which is effectively getting your own tax back. This is what people should be aiming for. Targeting people with 500k and calling them wealthy would seem to come from a position of poverty.
Why on earth would we prioritise giving millionaires their tax back, given the other demands on the government's purse?
What we are really doing here is subsidising their children's inheritance - there is no reason that the pensioner with millions in the bank shouldn't be running down their funds, or purchasing an annuity if they want certainty.
You are not subsidizing anyone. You are providing as a society a universal pension. Some people have saved and managed their lives a lot better than others. That becomes very clear once you retire. It's not rocket science. If you want to retire in comfort, make it happen. If you don't care, then don't bother. Just don't line up with your hand out complaining that you need more than what everyone else gets because you couldn't be bothered. Everyone gets the same, so deal with it.
Actually, as a taxpayer I am subsidizing every superannuant. Now, I don't mind paying to ensure dignity in retirement, but why am I funding those who can afford plenty of dignity, plus a few overseas holidays? Let them spend their own money, why else did they save it?
I do want to retire in comfort and I am preparing to make that happen. I am not assuming any government subsidy towards that goal beyond the kiwisaver incentive (as long as that lasts).
The fundamental problem is there will be too many superannuants for the rest of us to support - a huge drain on our country's resources. All we are proposing is that the wealthiest among that cohort do their bit to carry the weight. Either some concessions will be made, or the next generations will take matters into their own hands as they take over the reigns of power.
$1b per year alone goes to "retirees" still employed earning over $100k p.a.
Some argue we lose talent if they're forced to retire, we lose that same talent when they die. Let's encourage them to retire at 65 and open up these jobs to the younger generations. If they want to keep working that's fine, the taxpayer does not need to give them the tax back on their first $90k of earnings.
Natural career progression being held up because pensioners can double dip.
In the stream from ACs last article I asked a question of a contributor around integrity. I asked if they could afford to maintain the lifestyle they wanted without applying for super, would they still apply? The answer I got was yes. I find it fascinating that people want the ability to have freedom of choice, but then lack the integrity to use that freedom with integrity (can't quite figure the correct grammar here). They demand it of others, but refuse to have it themselves. Or they really would prefer to have someone else tell them how to live.
It's called greed. Only a surtax imposed on all other income of those who sign up for Super will deter the greedy from signing up.
https://www.auckland.ac.nz/assets/business/about/our-research/research-…
You don't need anywhere near that mate, pretty much nobody ends up with an individual net wealth of $5M in this country. You would be shocked on what I live on and I'm not even retirement age, its so low I get the full Council rates rebate with ease. You need a mortgage free house and a decent car with no outstanding debt when you retire. If you had $1M in the bank you would be living the dream and then with super on top, I would then be pulling in more each year than I ever did working and it would be that cruise every year in the Pacific.
You probably should not assume that everyone that has earned money somehow did so from property. The people in my circle don't own property other than their family homes. They worked hard and built profitable companies. So, no deck stacking, just hard work and semi-frugal living. Not common in NZ unfortunately, hence the problems we have (well other people seem have problems of their own making). I did not purchase my family home when it was 'cheap'.
You're missing the point, which is many of us have frugality imposed on us if we simply want to own a house or have a family. Extravagance is not an option. Being comfortable enough and living at a time when living costs meant you had a choice about it is the difference between being able to invest, or hell, just not have to worry about a sudden dental bill or appliance failure.
Sorry, but you are trying to make excuses for failure, by making out that everyone that succeeded somehow did so because of some perceived advantage that you think that had, to justify other peoples failures. That does not really wash. Many people plan properly, work very hard, exercise and stay healthy. Good on them.
It's not 'failure' if people don't have a heap of disposable income or free time if they're paying down a safe and dry home for their family at today's interest rates, as well as holding down a job and commuting to and from it. All of these things take longer and are more expensive than any other time in our country's history.
That's what success looks like in today's day and age. You seem too out of touch to decide what does or doesn't wash, sorry.
Having a family is a choice, not a right. If you can afford it, and do it comfortably then sure, do it. Personally I waited until I could afford it, and then I did it. That is my choice. If you choose to do things you cannot afford, then you are a burden on everyone else if you are sitting around wanting others to pay for your poor choices. If yo can't live a comfortable life because of 'choices', then you need to think about how you came to put yourself in the situation you find yourself. I too have made some poor choices, but, I corrected them and did not make the same mistakes again.
Humour me: How long ago did you have a family? What were daycare costs? How many working parents did it take to service a mortgage and how many times your annual wage was it when you bought your family home? and what age were you when you chose to have a family?
If your experience is more than fifteen years passed then it may explain why you can't understand how even deep six-figure households that require two working parents to pay a mortgage don't have a huge amount of spare money or time for retirement empire building.
Ok....I started having a family 10 years ago. I was 39. Daycare costs were zero because my wife decided that is was better that the kids had an at home mother. Only one person required to service the mortgage, house to annual wage was about 7x when I purchased. I did have a mortgage of about 550K around 2019.
Averagejoe, I see you are a new poster here. You need to understand that, surprisingly for a financial site (and sadly), many here who don't do so well, hate others doing better. I know you rightly think that working hard and smart and being reasonable with your money so that you can live a comfortable retirement, is a quality, Well those who waste their lives and end up with nothing, disagree with you, they want your money.
Yes, thanks. I am getting that there are very few financially literate people here. Yes, it is sad, but quite common. Hopefully some of them will glean a few morsels on how to plan accordingly to avoid poor outcomes that seem to be coming through a lot here. There is a huge amount of information out there related to the simple things that you can do to plan and succeed. I guess I just do not see the point in posting here complaining about it, when your only solution it to suggest stealing from someone else.
Yep, this is definitely not the place to post if you are expecting applause for being successful. People are too scared to even post advice in the form of predictions on what they will think will happen. Not sure why I'm here to be honest but someone else said its for shits and giggles for them, I think I'm in that group.
My view would be that if you were to implement some rule to the effect that your lifes work is worth nothing, and all your assets will be taken at end of life and handed out willy nilly. Firstly it would be a total non-starter, and secondly in a theorical world where this was implemented the country would quickly end up bankrupt (more than we are now), and there would be louder complaining. There would be no business, no jobs, the currency would be worth nothing, everything would need to be imported. Frankly it would be a total disaster, but that always happens when people think that they have rights to other peoples money.
I'm not necessarily advocating for a 100% inheritance tax here, I think that would be a bit much. But the strongest argument for inheritance taxes is that, over time, the transfer of inherited wealth becomes a significant issue. In countries like the UK or India, people are often divided into classes based on the circumstances of their birth. When wealth accumulates to a certain point, it becomes self-sustaining, regardless of the merit behind it, which in turn reduces social mobility and cohesion.
It's fair enough to want to save for your children, but at what point does this become problematic? Are we heading towards a feudal system where a select few own everything and rent it out to the lower classes, whose parents couldn't pass down wealth and property? This shift doesn't happen overnight, but we're starting to see a trend where one's lot in life is determined more by parental wealth than by individual merit.
When hard work no longer correlates with higher incomes, the disconnect between effort and reward makes society more fragile as a whole.
Mate, the cleaners and orderlies at your local hospital work pretty bloody hard too. They will definitely not retire with $5million, many will not even own a home. And if your answer is for them to 'up-skill', then who will do their jobs? Society depends on them, and many other roles, to function normally. They are hard workers, their hard work is just undervalued by society. Should they be forced to live a life of relative squalor while some deplorable wanker in finance just made millions of dollars by risking other people's money?
Your miles off in the weeds now. What I am telling you is a figure that I have been told is a good figure to aim for, and I certainly will. Because there are some people that choose jobs that are low paid, are you saying others are not allowed ambition. I actually know a nurse, who received a 3m inheritance about 20 years ago. They still work as a nurse. All things being equal, that 3m would be 12m by now. Should we find her and point fingers and take her money away ? Oh wait, we need these people.
You're*, and it's you who's taking a bizarre detour here.
And you're totally missing my point - it doesn't matter that people choose these jobs, the fact is that someone must do these roles. I don't know how successful you are, but a significant amount of anything you've achieved will be due to luck. Luck that you were:
- Born into a family with: wealth, ambition, intelligence, (in this country) white skin.
- Born with good genetics, have a baseline capacity to work hard (this is less in one's control than most people seem to understand), are attractive.
- The year/country that you were born in.
The list goes on. You'd be foolish to not think that there are people out there with greater intelligence and ambition than you, but who've never succeeded due to circumstances outside of their control.
Designing a tax system that works to "pull-up" those at the bottom ultimately benefits everybody.
Oh, so we're just ignoring the mountains of evidence that prove that white privilege is a thing? You can start with a simple Wikipedia search if you have any interest in changing your mind (you don't, I can tell). Denial it is. And for the record that is only one of many factors that I mentioned.
And to remove any doubt, I am white, and I earn an extraordinarily high income relative to most people (well in excess of $500k/year), so this is not coming from a position of 'jealousy' as plenty of morons tend to suggest. I just understand that many of the things that allowed me to succeed had nothing to do with anything I actually did.
Here's some homework for you: https://en.wikipedia.org/wiki/White_privilege, https://en.wikipedia.org/wiki/Survivorship_bias
Sounds to me like you feel guilty. Cheer up old chap, and celebrate your success. There is no white privilege. There is DO, or DO NOT. White privilege is just a woke excuse for failure. The woke like to try tear people down because they are successful, and calling them racists is their way of doing that. It's a bit old, and a bit silly, and very wrong, and I haven't heard it for a while. Do chuckle a little when I hear the old 'white privilege' red herring bandied about.
I know quite a few quite successful New Zealanders and I can assure you there are quite a few 'non whites'.
'White privilege' what a complete joke!
Just another excuse for non achievement.
Chrispy Kahwai feels guilty then spouts his salary on a public forum. What a cock.
Core Crown spending on superannuation and welfare benefits in New Zealand - Figure.NZ
The numbers are eye watering. The NZ govt still does nothing to support middle and upper-class families have kids. Which is exactly what we should be incentivising (like the Scandinavian countries do).
Instead, we incentivise those that don't work, and don't want to work, to have more and more children.
Will losses be tax deductible? They should be.
Leading up the 1987 stock market crash, the IRD thought it would be a good idea to tax speculators....until October 1987, when the stock market imploded and the IRD was faced with refunding billions in losses..
If you want a good retirement fund, go out on a limb and buy a couple of houses. Just on the outskirts of your nearest city. All yours, you're responsible for them, politicians are very unlikely to tinker with housing too much. And there's a few perks involved.
Repeat of above:
No.
In the case of CGT - the 'G' stands for Gains. CGT, isn't a Capital tax - where losses might be deductible.
Normally, any losses can be quarantined for, say, 7 years to be offset against any future profit derived from the same assets. And once the 7 years is up, so is the potential off-set.
Just passing on what one method often is.
Besides. We could normalise a few things at the same time! Make the Bright Line Test the same length of time as any CGT Offset period. 7 years for both. And in the meantime, if anyone sells a secondary property (one that isn't previously declared as their home) tax on any CPI adjusted Gain is automatically levied, and it's then up to the taxpayer to challenge any deduction. Pretty much like Withholding Tax on bank deposits is today.
"But what about any improvement I do that might up the value! You can't tax those" is often the reply. All that does is make sure any improvements cover the expected value at sale time. Spend $50k on reno work only if you reckon there'll be $100km at sale time to cover the tax costs as well etc.
Quite right. So I'm not sure where any fleeing Kiwis think they are headed off to!
And, yes. We all have the same Global problem - gigantic, unpayable Private Debt. And the answer, as we might be recognising today, isn't 'more of it'.
In essence, Income is Income is Income - no matter whether it's wages, savings interest or an increase in the sale of any asset holding. Tax it equally.
And Prices rises are Price rises are Price rises - no matter if they are reflected in the CPI (Bad!), or Capital Gains (Good! Apparently) They are all one and the same. Treat them the same. And that involves a much higher cost of borrowing to suppress demand.
My daughter just bought a 4 brm brick and tile house about 1 hour from Melbourne for $450k, so not bad.
We are already taxed to death in NZ, and posters here tell me house prices are going to come down. I've got news for them, house prices will keep going up, so if you want a very nice retirement package, buy a couple.
I'm on my 5th new build and every time it's been colossally more expensive. More regulation, government and local body, the costs involved are excruciating, believe me. It took me 7 months and about $15k to get my latest build approved by Council. And it's a plain ordinary villa, there's nothing special about it. The building, subdivision and labour costs are skyrocketing.
The cost to developers to prepare a plan for subdivision can run into the millions. Like this......85 pages of gobbledygook.
https://infocouncil.aucklandcouncil.govt.nz/Open/2023/05/20230504_PEPCC…
(Frankston?). Anyway....
Maybe Chris Bishop is setting about changing those costs, today? (Other article on here today)
And that is part of the solution - lower new build costs. And what happens to all the older stuff? It gets left on the shelf - or, lowers it's asking prices so that yesterday's designs and trends can compete with the new ones of the day.
You may think property prices can go up forever. History tells us they won't. All we don't know is "When" the recalibration happens. But one thing we know for sure - we won't know until after the event. So hold your properties, and build more, by all means. But the longer "It goes on forever!" happens, the closer we are to the inevitable.
https://www.oftwominds.com/blogaug24/housing-bubble8-24.html
House prices certainly do decline every now and then, but there's no instance I know of where they didn't recover and exceed their original price. Like the stock market.
So the net result is, if you buy during the trough, you're going to make money. Could take a while, but you'll eventually come out on top.
No Capital gains are not income. They can be classed as income if you are in the business of making a capital gain (hence it is your income source). The difference is very clear.
I purchase a house, and I live in it, or I purchase shares for the purpose of receiving a dividend, and after 10 years or so, I sell either of those assets, there is no capital gain. The reason is I did not purchase with the intention of making a capital gain. I purchased the house to live in, and I purchased the shares to receive dividends on which I may pay tax.
I purchase a house, and spend 100K renovating and quickly sell it on, that is a capital gain as income, I intended to do that, so I must pay tax on that capital gain (less expenses of course). That is the what is supposed to happen today already.
Most of the commentators on here actually have no clue what a capital gain actually is, how it is taxed, how it would or should be taxed or what the current rules even are, which muddies the water quite a bit, so the ensuing conversation is generally nonsense.
Income is whatever society decides it is. It's what we see today in our tax regime already. If homes are seen as a necessity and not a speculative medium of income, then it's dead easy to create a set of rules/taxes/incentives that reflect that. Say - 1 mortgage per IRD number, and that's it. Want an additional property for whatever reason? Pay for it 100% yourself. Easy.
That's what we've forgotten over the last 40 odd years. Houses are for families to live in and then create Productivity for the wider economy with their day-jobs.
"The reason is I did not purchase with the intention of making a capital gain" The most widely used excuse for Tax Avoidance in this country (wrong word! Tax Evasion). And why we need to tax ALL Capital Gains, regardless of the length of time held or the reason for initial purchase - because the Interpretation Rule is so misused. Fix that however you like, and then perhaps some other, less sledgehammer like, solutions can be enacted.
The rule should be that any property that is not a family home, or bach, is an investment, and if sold within x years should be subject to capital gains. Trying to tax peoples family homes or family holiday homes is out of the question. It is very clear when people are investing for capital gains and the rules should be enforced. You also have the other problem in that our governments are generally so dumb that they think that levying capital gains at your marginal tax rate is a good idea, so for most it would be at 40%. When capital gains are implemented they are generally in the 10-15% range. So, as long as we keep talking here about taxing capital gains at the marginal tax rates, then it will never happen.
Merit in most of that with two disagreements - (1) What's length of tenure got to do with tax liability, and (2) The Family Home. Why is that so sacrosanct that it should be exempted? If prices stay flat or fall, there's no CGT payable. If they rise, then an efficient society will have provided the seller of that family home the ability to recoup that CGT amount and any higher cost of purchasing a replacement/better home from the income earned from productive effort - the Day Job. ie: the harder and better we work, the more we earn, the more we can pay the net price to buy/re-buy a home.
i) If you purchase a home, lets take my Grandparents home. They purchased it for 15k about 40 years ago. Now it is worth 4-5 million. But, if they still owned it (and they don't, but lets say they do), and they wanted to move down the street and buy a house for sale for 4 million, under a theorical capital gains tax at 40%, then the would be paying up to 2 million in taxes just to sell, and therefore they would either not be able to sell, or would have to shift out of the area, s they could not afford to purchase in the same price backet. That is why there should be a time limit, and that is probably why there is a time limit already.
ii) Why should the family home be excluded, see i) above.
And you have also answered your own questions.
If that $15k house today had a CPI adjust re-sale price of $500k, or whatever the CPI adjusted price would be, how much CGT would they pay if they sold it for $500K? None. And that's what Time Frame does. It makes the buyer take into account 'what might happen' and today the answer is almost universally "Property always goes up! I can make myself Rich from that" and that's the bit that has to be hit on the head. Remove property speculation from the home housing market, and we are a long way to sorting this taxation and other assorted messes out.
The only mess we have as far as I can see is a lack of personal responsibility and a poor education system. Cleaning up those two messes will go a long way. I will give you an example. When I attended school (thank goodness I went to a good one), they told us very frankly, and they did if often. They made it very clear that if we did not do a), b) and c) in life, and take responsibility, then you will be a loser, and an embarrassment to your family. At the time, I thought it was a bit on the nose, and I didn't really pay much attention as I assumed they were trying to scare us into action, i.e. study. But, what they said, has stuck with me, and others, and what they told us was correct. It is just a shame the same thing does not happen today.
Now it is worth 4-5 million. But, if they still owned it (and they don't, but lets say they do), and they wanted to move down the street and buy a house for sale for 4 million, under a theorical capital gains tax at 40%, then the would be paying up to 2 million in taxes just to sell
Precisely, so they could not afford the place down the street and there would be far less buyers at exuberant prices therefore the average price would need to decrease and adjust to what people can borrow or afford. You then have lower average prices and less youth bailing on the country because they save and save only to see their ability to save outstripped by the increases in house prices on the basis of investors outbidding average buyers. That's a win in my books.
AC I have a question. I agree that the tax system should change, but while you discuss taxes in this article you don't really explore why there needs to be tax in this day and age (it is not as obvious as many think). You cite economists, but in recent times many published economists have demonstrated they are somewhat disconnected from reality. Why not take the question wider? Could super be funded from deficit funding, and taxes applied in different ways to primarily manage the amount of money in circulation and direct human and corporate behaviour?
The result could possible be that Super and an base level of income be tax free for ordinary people?
In the end though the total view here really does need to change.
There are alternative ways for governments to obtain the real resources they wish to use or distribute, but in the end it largely comes down to tax.
In a time of war a government can regulate what people do and obtain resources directly: it often forces young men to join the armed forces at very low pay, for example, but it can also just commandeer resources more generally. This is not often used outside emergencies due to civil liberty concerns, and the concern that the government will target particular people, not all people.
It can mandate that people do certain things as an alternative to taxing them and then doing those things itself. For example, it could mandate people save for their own retirements in a retirement income fund rather than tax people and provide them with a pension.
It can own large amounts of resources or large portions of private firms (eg through a sovereign wealth fund) and fund expenditure from the earnings on these resources. New Zealand tried to fund pensions using this method at the turn of the 20th century (using the returns from land it owned) but the attempt did not last long. The New Zealand Superannuation Fund is a way of doing this. It does beg the question as to how the resources are obtained in the first place. Some countries such as Norway or Saudi Arabia use this method, originally funded from mineral royalties. In the 19th century the US government funded the construction of the transcontinental railroads by selling vast amounts of the land it obtained from native Americans. The New Zealand government did something similar in the 19th century as well.
It can issue legal tender money to obtain resources - but this tends to be inflationary, which means that the resources the government obtains are ultimately given up by lenders, who can purchase less than they originally thought. (It doesn't have to be inflationary, but experience suggests it will be inflationary if done at scale). There has been a revival of interest in a theory called Modern Monetary Theory that argues that governments can issue money to pay for goods and services instead of taxation, but this does not have a good theory of inflation, and is not considered credible by most economists. Basically, if an economy is at full employment and the government obtains extra resources, someone else has to give them up or get them at a later date. Tax is method of stipulating who gives up the resources that a government wants; if the government issues money rather than tax, someone will still have to give up the resources, but in this case the government doesn't specify who that someone is. Typically it falls on an economy's lenders.
AC
A couple of points to be considered.
The Nordic countries have been listed as an example of the type of taxation/superannuation to aspire to...everyone may wish to look at the Swedish tax system and note the features and the proportion of tax to GDP in comparison to NZ.
https://en.wikipedia.org/wiki/Taxation_in_Sweden
Secondly with a substantial increase in employer paid (for ultimately it will be though likely offset against wages) superannuation contribution it will be a significant increase in the cost of doing business....NZs cost structure is already uncompetitive.
We should be looking for structural methods of reducing the cost of business in NZ, not adding to them.
Norway also has hefty taxation for oil extraction so they have more to play with for public services in that regard. This was one of the arguments for Scotlands independence vote years back, as they would then hold the north seas gas field within their Exclusive economic zone and control pricing to England. Would have helped them in the short term at least until the reserves run dry, but I doubt any of the other UK countries would have let that resource go willingly.
I can't disagree that most Scandinavian countries have very large tax/GDP revenues, and i am not advocating that we copy that aspect of their tax system. However, there are some reasons to believe that they can get away with such high tax/GDP ratios without crippling their economies because they have discovered efficient taxation methods. That is solely what i am advocating: that we choose more efficient taxes to raise revenue, rather than less efficient taxes. The Scandinavians happen to use efficient taxes at high tax rates , but we would not need to do so if that is not what people wanted. For the last fifty years, NZ has been content to use taxes that are considered inefficient by most countries and most economists - except, perhaps some of the economists living in NZ who designed our system. It seems odd that none of the last three tax working groups has analysed in any serious manner the single largest difference between the taxes we use and the taxes everyone else uses, despite a strong prima facie case that social security taxes are more efficient and can have just the same or better effects on distribution. I have never really understood that NZ tax "cult" that so strongly favours income taxes when the rest of the world has been trying to find ways of substituting away from them due to their distortionary economic effects. But who ever understands cults?
Ad to the second question: the incidence of taxes is quite difficult to calculate, and it is surprising how little work is done in NZ to try and understand where the incidence of different taxes falls. Unfortunately, neither the IRD or the Treasury have really developed sophisticated models that estimate incidence, certainly not ones that incorporate land as a factor of production or housing. Most international economists think the incidence of social security taxes falls on the worker, not the firm, which is why they are favoured by so many countries. It is widely recognized that the analysis of tax incidence is simultaneously difficult and important, and in NZ we tend to rely on the results of overseas models due to the shortage of local modelling efforts. This is a pity, given the distinctive nature of New Zealand's taxes.
I cannot disagree that actions to reduce costs in NZ would be a good a thing. This is a slightly different argument than an argument that where possible we should use less distortionary rather than more distortionary taxes, and the two arguments are not mutually exclusive. If you read my other writings on the taxation of capital income, you will realise I tend to favour taxes that reduce distortions rather than increase them - a position I share with most non-NZ economists. For the last 35- 50 years, New Zealand has been a real outlier in its approach to taxation, and a new generation should decide whether the positions the country has adopted for so long are fit for purpose.
AC
Taking my money so I can be gifted it back when I'm old is not effective, simple or fair. What if I want that money now, to send my children to a private school, or buy a second car, or start a business, or (shock horror) save for my own retirement? Stop meddling with our lives and let us keep our money.
Any tax proposal being tolerated does hinge on the citizen's acceptance that the public service it will be used to fund is effective and efficient, and a dedicated to increasing our pretty dire productivity to grow the taxable pie, while trying to make our lives better.
It looks like the electorate doesn't accept that, given the last election result and what looks like the citizenry being pretty accepting of the rapid reduction in the public sector's size. I'd except the public service (well, duh), organisations funded by government (well, duh, again) and media whose default setting seems to be attention-seeking outrage.
From the stories being released with little real media attention, about things like ministerial control of hiring and the appointment of a sole commissioner in the health sector, it's not a stretch to think parts of the public service aren't playing ball. Maybe attempting to preserve the managerial class by laying off the lower echelons who actually do the work, directly in opposition to government objectives?
Maybe tax changes need to wait until we're convinced the public service is here to serve the public.
That's ascribing a lot of competence to our political class: "Never attribute to malice that which is adequately explained by stupidity." - Hanlon's Razor
Maybe they are genuinely after demonstrable value - and what lunatic would want to take on privatising a department like, say, MBIE or Oranga Tamariki?
Property's risky, and you can make.....or lose, a fortune.
I'm building a new house, because there's one thing I know 100% for sure. Subdividing land and building a new house is NEVER going to be cheaper.
And that's a fact. And any taxes on property will send the prices up even more. Just like shafting landlords sent rents up.
How much did you pay for the Land?
$10,000 per hectare? Less? $1,000 per hectare? And that's the component that can change - the cost of the Land. How much did the Land value fall when the Government enacted changes to the Rural Sector in the 80's, for instance? A huge amount. Land that was that $10k per hectare went pretty much $zero, and stayed there for a decade. Because it didn't give a financial return to justify a higher price.
And this time, it won't be the rural farmers that get hit. But the suburban property farmers. That's what tax and other assorted changes eg: RMA, can do.
I've already posted this, but will post it again.
How much it costs to subdivide and develop land. 3 of NZ's biggest developers spent millions on this. Natural hazards, affordability, maoris, stormwater, transportation, iwi, urban form...etc etc., 60 pages of it.
And it definitely isn't going to improve.
https://www.aucklandcouncil.govt.nz/UnitaryPlanDocuments/06-pc100-app-4…
The Auckland Council turned it down....meantime, so that's 1,800 houses that won't be being built for a while.
I see posts on this site all the time imploring people to invest in assets other than property.
Like what? Companies that go tits up, stocks that go bust, property companies that suddenly can't pay their bills and go under?
Godfreys, Du Val, Cannasouth, NZ Wagyu, Waimarie Meats....and lots of others.
You guys 'invest' in them, I won't be.
Has anybody seen today's share market's closing prices..........we're all doomed !!!
Back in the 1950s and 1960s NZders to a man all used to say that hopefully NZ would end up following Scandinavia in all respects. Now for the last 50-odd years that aspiration has disappeared.....where did all go wrong? Perhaps Andrew Coleman could supply the answer.
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