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Opinion: Gareth Morgan on why a capital tax is the key to meaningful reform
By Gareth Morgan The selective income tax system that New Zealand operates results in a number of inequitable and economically inefficient outcomes. People shelter income in non taxable forms "“ the common one being in assets which deliver a substantial portion of their return in capital gain or imputed rent. Capital that is accumulated simply for tax sheltering doesn't make much contribution to economic growth. The distribution of capital is skewed towards those assets attractive for their low-taxation, rather than their economic return. This sees capital productivity lower than it would be otherwise, with the accompanying deleterious effects on employment and incomes. There is also little alignment of tax rates so taxpayers can benefit from choosing to direct taxable income through one legal entity rather another. Such "tax planning" is wasteful. Finally we operate a complex set of welfare benefits across a suite of eligibility criteria -- illness, pensions, unemployment, and compensation for families that, via high effective marginal tax rates, present substantial disincentives for people to move off benefits. It is not far-fetched to claim the tax system is "broke" in the sense of being devoid of consistency, neutrality and equity. The challenge facing tax system designers is how can the system be reengineered to address these issues. The key to any meaningful solution is to extend the tax base and facilitate lower rates as well as changes that eliminate these problems. But most importantly tax and benefit reform must not aggravate the issue of equity between rich and poor. Comprehensive Tax Reform
A core issue is how to tax the effective income from capital rather than being selective, and creating boundary problems between cash income from capital which is taxable, and other forms of return"“ imputed rent and capital gain "“ which are not. The concomitant efforts by taxpayers to move taxable cash income into non-taxable forms are a dead loss, and the resultant impacts of inefficiency of capital are a drag on economic performance. Taxing the capital stock (land, plant and equipment, buildings) is equivalent to deeming that all capital furnishes a rate of return. This Comprehensive Capital Tax (CCT) would not be instead of taxing profits but in addition to. Such an expansion of the tax base would enable a major revision of the income tax schedule, namely to facilitate an alignment of tax rates to say 25% flat (the single personal rate, the company rate, the trust rate) and the achievement of meaningful welfare benefit reform in the form of the Guaranteed Minimum Income (GMI) wherein every adult receives $10,000 pa whether or not they earn any income. The GMI implies that every earned dollar is taxed at 25% and that nobody would effectively pay tax until they earned their first dollar over $40,000. This is integration of the tax and benefit system, so you would get rid of most if not all benefits and eliminate high effective marginal tax rates that people currently incur as their benefits abate in line with the income they earn (known as poverty traps). Assuming 3 million taxpayers, the net annual cost of this initiative would be $30bn less the cost of welfare benefits, $16bn, so $14bn. In addition the flattening of the income tax schedule to 25% (and aligning with company and trust tax rates) would cost another $3bn say so all up we need to extend the tax base by $19bn to fund this. In order to put the size of this reform in perspective, the personal income tax collect currently is $27bn. To invoke an effective reform of the taxation and welfare system (which I hear every informed commentator saying "is broke") we need to find a tax source of this magnitude. Our capital stock is about $1,500bn, including all land, buildings, plant and equipment. A 1.25% tax on capital would provide about $19bn, sufficient to effect the reform. This tax would be in addition to income tax on profits (albeit at the lower rate of 25%). I have made no allowance whatsoever for efficiency gains from owners now incentivised to make their capital work, from the reduction of the size of the government benefit machinery, from the reduction of effort to circumvent tax rules, or from the lower tax rates rewarding effort. In the event that the CCT didn't raise sufficient revenue there is always GST to bridge the gap. By facing an annual charge on capital, an owner is more likely to use that capital to generate income, as there is an increased cost in leaving it idle. This would see more capital brought into the production process. An offset would be that the cost of capital versus labour would rise and so producers would prefer labour over capital. A risk of full employment might ensue! Which is the greater effect "“ greater use of capital because of the higher cost of leaving it idle, or the switch from capital-intensive to labour intensive production? The first effect is unambiguously positive in terms of lifting economic performance, the second effect could be positive or negative. There is no magic capital/labour ratio, indeed increasingly the value-add in businesses comes from intellectual property so my "guess" would be that efficiency gains (the income effect) would substantially outweigh relative price (substitution) effects. Family Homes & Chattels As with GST there is no case to provide exemptions to the CCT if boundary problems are to be avoided. However if the world of realpolitik so dictates, then my suggestion on the grounds of both efficiency and being equitable would be that the exemption on the family home must be limited to the value of the average New Zealand home rather than the more populist notion that the family home should be exempt, regardless of its value. To exempt the family home irrespective of value would lead to "˜mansion tax shelters'. With respect to chattels, again it is simplest to include everything but government may decide to publish a list of consumable personal assets that can be ignored in the case of personal tax payers. Personally I'd like my six motorcycles to be exempt. Impact on Capital Returns, Pricing One of the trends under our selective tax on capital income has been the emergence of some asset classes that furnish very low cash income or earnings yield, instead providing investors with the bulk of their return through "permanent" capital value increments. Such a distortion makes it very difficult for investors to accurately allocate funds across asset classes because of the "noise" from "permanent" capital gains on some asset classes. An efficient allocation of capital across asset classes is unlikely "“ so income and employment generation are unlikely to be maximised. Farm enterprises would be a case in point. The CCT would remove the distortion that has led to pricing of tax-favoured assets as there would no longer be the incentive to arbitrage the capital/income boundary and in consequence drive the price of some assets to a level unrelated to their income return. Double taxation The idea is to both ensure a fair and equitable tax distribution, and to enhance allocative and productive efficiency of capital. It is true that the CCT applied in conjunction with an income tax on profits does, in effect, double-tax cash income from capital. As discussed earlier there are benefits that flow from encouraging idle capital to earn an income. But the extent of the additional tax on capital is significant even though it is mitigated by the reduction in income tax rates on profits (from 30% to 25%) that the package would imply. A 30% tax on profits of say 10% of capital value, can be alternatively expressed as a 3% tax on capital. So reducing that tax to 25% would be equivalent to imposing a 2.5% tax on capital. In conjunction with a 1.25% CCT that would amount to a 3.75% tax on capital "“ compared to the current tax of 3%. Mechanics of Application There are two considerations relevant to applying the CCT on an accruals basis. (a) Cash flow "“ the tax is accruals based but some taxpayers may consider it suboptimal to pay the charge each year, and prefer instead to pay less often, or even on realisation. Such an option might be considered although on equity grounds the taxpayer would need to pay use-of-money interest. For the classic case of a widow left in a large home, the option would be to delay the tax and have it paid, along with use-of-money, by her estate. (b) Valuation "“ an oft-heard objection to taxing capital values is the compliance costs of annual valuations. This can be avoided if the taxpayer can assess the capital charge based on purchase price or opening value and then either adjust that when realisation occurs, or index the nominal value of the asset according to the movement in the relevant published market benchmark price index. Such a benchmark would provide the time profile of any appreciation so that use-of-money interest could be appropriately calculated for tax payment delaying. Some forms of capital depreciate of course, so the normal rates of economic depreciation can be used in capital value assessment. Alternatives Instead of a CCT the issue of capital gains could of course be addressed by an accruals-based capital gains tax (CGT). But this addresses only one of the many issues CCT addresses. Itdoes not facilitate meaningful tax and benefit reform. In the main, the CCT is about a major expansion of the tax base facilitating a fall and alignment of tax rates as well as integration of the personal tax and benefit system. It is a quantum step in enhancing the neutrality and simplicity of the tax system. A CGT alone addresses only one part of that challenge, namely the diversion of taxable cash income to non-taxable capital return. An RFRM (Risk Free Return Method). This is a curious concept insofar as it was proposed as a way of taxing only the risk free component of the return to capital. Its rationale isn't strong. The FDR (Fair Dividend Rate). This tax which applies currently to non-Australasian shares is about taxing a deemed dividend. In large part it was introduced in recognition that the bulk of return in these shares comes from capital growth and as New Zealand doesn't have a capital gains tax that was a loophole. So in terms of being comparable with a CCT it is very piecemeal in its approach, and selective in terms of deeming all shares have the same income from capital gain to tax. It's rough. A land tax. This proposal is closest to a CCT and in essence isolates land as the only form of capital that has untaxed return. That's fine as far as it goes, but by leaving out buildings or assets whose depreciation is way lower than its replacement value, leaves holes in the tax base. Gareth Morgan TWG - Tweaked
66 Comments
Brilliant!!!!
Brilliant!!!!
I can see what you're
I can see what you're getting at Gareth, but I think the CCT on capital intensive businesses (manufacturers, rural contractors, cropping, farmers, etc) through a recession is going to be lethal, deferred payment or not, and will increase costs on staple items worse than even our current system, as bad as that is.
I still like Brash's plan better. Much better. As low as possble income tax rates as flat as possible, and take out, for a start, one bureaucrat in every two, and completely reform the welfare system (for example, no DBP for any child born on DPB, get rid of the obscene WFF, etc, etc).
And with the overrider that I am philosophically driven: I want Nanny State out of my life, and Brash's plan moves in that direction more ably than this plan.
(And no, I'm not selling my holiday house, which keeps me sane, to put my money in managed funds: I've just completed a balance sheet for a client and note their professionally managed investments - NOT your firm - down by up to 50% and 60% (Babcock and Brown didn't help. Although your CCT will hurt, and, needless to say, were it instituted, I would never forgive those who imposed it on me to the end of my days :) I'm so sick and tired of Nanny State, is there no way off this insane bus?)
I said above '... but
I said above '... but I think the CCT on capital intensive businesses (manufacturers, rural contractors, cropping, farmers, etc) through a recession is going to be lethal ...'
Especially when combined with a senseless ETS adding yet further costs on top of the CCT (and when Australia, our nearest competitor, now probably won't have an ETS).
I hear what you are
I hear what you are saying Mark H...
BUT I believe what G Morgan is proposing is far more realistic than Brashs' proposal.
AND I do feel that Brashs' proposals come from a certain world view and philosopy..( probably aligned more or less with your views)... Thats ok.
BUT in the practical world it has already been binned.
G Morgans proposal could get traction... The main reason for that is that it is practical and equitavble ( PAYE isn't) ... What are your views on PAYE..???
The ist $40,000 tax free.... BRilliant..!!!
AND Morgans proposal is not an end...but a start...
Reducing GOVT next would be wonderful...
in terms of Capital intensive industries.. u raise a good point... It would need to be worked thru..???
Well, Gareth, you've got the
Well, Gareth, you've got the country talking (again).
I like the simplicity of this, I like the universaility of it. Your comment about it encouraging investment away from non-productive to productive capital makes sense. I have but two reservations: it imposes a huge barrier to entry to capital-intensive businesses, especially those that employ capital that gradually depreciates and which are likely to be very profitable in the medium to long term but not the short term. Those businesses would then face their biggest tax bill in their first year of operation, when many are very likely to be only breaking even, or worse. There would have to be some sort of deferral mechanism for such businesses, and then you start getting into the exceptions and loopholes issue.
My second reservation also relates to businesses that may be cyclical in nature - during the low points of the cycle, their tax bill will not decrease in proportion to their profits. Probably a cash-flow planning issue, but a slight problem nevertheless.
I've done the sums. The difference between my tax on the last financial year's income and what my total tax would be under this scheme is in the $4500-$4600 range.
One more niggle has occurred
One more niggle has occurred to me - pure science research. Not the applied stuff, which universities can charge large companies millions to perform, so creating an income stream, but the pure stuff, that creates the knowledge on which applied science is built. By its nature, it's hugely capital intensive and yet it produces no income. It is also absolutely vital to progress of any kind (including economic). There would have to be some sort of fix to ensure we didn't devote even less time and effort to research than we do now.
So we pay rates to
So we pay rates to central government as well as local? That will be popular. Financial assets not mentioned. What's your line of business Gareth?
These measures could be introduced
These measures could be introduced over a five year period.
$2000 added income each year and the tax rate reduced in 5 steps.
CCT at 0.25% added each year until 1.25% reached.
Comparatively easy to "suck it and see"
if nothings done NZ is
if nothings done NZ is going to the poor house.Ah well I'm off to OZ.
I agree with Mark H,
I agree with Mark H, we seriously need to look at cutting costs. We are looking at how we can pay for all of the costs when we just need to see how we can cut the costs and get charities to do what they are there for. Enough of the collectivist idea of making beneficiaries out of everyone. I see where Gareth is going with cutting bureaucracy and non-productive tax advisors but I think we could go even further.
Bernard, this ground breaking stuff
Bernard, this ground breaking stuff by Gareth proves he can read The 2025 Alternative Budget that Sir Roger Douglas released about three weeks ago, which is what he has been saying for quite a long time. The gummint will eventually come around to his ideas via someone else. Well read Gareth.
Slap a big fat retrospective
Slap a big fat retrospective CGT on the tens of millions gain he made on his trademe shares - LOL!
Fantastic! The only concern is
Fantastic! The only concern is that this is never actually put into practice. John Key is too much of an arse-kissing, smiling wimp to achieve anything significant. Let alone significantly beneficial for New Zealanders. It will take significant pressure to achieve, however it certainly could be done.
This idea has my backing 100%!
Negative income tax. Something I
Negative income tax. Something I have long been a fan of, though this form is far too pure.
The rate is too high for one. Yes, the total amount to beneficiaries needs to stay similar, but the citizens dividend does not need to account for this in its entirity.
I would prefer an approach where the dividend was granted based on hours worked per fortnight as granting it straight would result in many simply not working (I survive on far less than 10000 per year very happily).
Something like: Each individual is granted $5 per hour worked up to a limit of 40 hours per fortnight. That is $200 per fortnight, $5200 per year, assuming they work at least 40 hours per fortnight. With a flat rate of 20% this means the tax-free border is $26000. Plenty high enough. Any unemployed may work in government provided work in industry otherwise non-profitable at minimum wage level. The unemployed are paid, say, $5 an hour and are able to work in excess of the 40 hours per fortnight but are guaranteed only 40. The hours requirement and payment amounts are, of course, able to be changed but I feel this approach would be far more effective than the proposed hand-out.
I think we also need
I think we also need to think about why we have capital gains in an asset class. If we continue to create money we should expect inflation.
I believe trying to penalize someone for trying to protect their buying power is a bit harsh. Bubbles in asset prices give rise to these types of arguments but a bubble in an asset class is only a symptom of a greater problem.
Hi ,all this talk about
Hi ,all this talk about taxing people who have decided to stick there necks out try an improve there lifes.We need postive people who want to build wealth through property.
Nobody would buy a house if it was'nt seen as a assett that could be fixed up an resold to buy a better house.This is how many working people get ahead in life in NZ.What people need to realise is that hard working people are sick to death of carrying the losers that cant be bothered trying improve there lifes.The problem is far worse than than you realise,stop paying people to stay at home.Get people educated an make them do something for the dole.The problem is people need every cent to live as costs are high an wages low.The country is top heavy in goverment at every level,all the country wealth is going into non productive areas.
Working people need to be treated like kings as we are paying for everything.
We need to make this country the best place in the world to come an live.
Some hard decisions will have to be made soon,
Thanks len
-We need positive people who
-We need positive people who want to build wealth through property.-
Len, as a nation you cannot build wealth through property. Our Real Estate industry is too big - manufacturing valuable widgets and export is one important key of wealth creation.
Walter
Dear Mr Morgan you have
Dear Mr Morgan you have rasied some very valid points but I sense a hint of wealth redistubution in your message you seem to have a view that if one owns a nice home or a house of greater than the average NZ value that person or family should pay tax on it, have you consdered that maybe that they chose to work hard and save etc to achevie their goals and maybe as in our case our home is modern healthy double glazed eco friendly etc that we should be punished for the countrys economic woes that have in most cases been casused by the pollys and bankers. You have a view that ones income or savings should be used to further produtivity and I agree with you but taxing ones home is not the answer in most cases. remove the tax scams on rentals is a classic example but the goverment has allowed this for years WHY
BAZ
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Hi Gareth, Nice to hear
Hi Gareth, Nice to hear some new ideas. Afraid I don't much like this one though -
In summary:
Winner's:
- Non-homeowning PAYE earners (which I guess is good as I'm one of them).
- High labour cost, low capital cost businesses (easier to attract high quality staff for lower net cost. E.g Computing, designers and/or any sort of financial shenanigans. In general "Thinkers not Producers").
- Low wage and/or part time workers (anyone earning close or less than 40,000 with minimal net assets).
Loser's
- Low income, high asset individuals and small businesses (most pensioners, some sole tradesmen, some farmers, many fishermen etc. This is a big and vocal demographic - I don't think its a vote winner... )
- High productivity, high capital cost businesses (any sort of hi tech manufacturing, heavy engineering manufacturing etc. in general "Producers not Thinkers").
- Residential and Commercial Landlords (they might try and pass the cost on in rent, probably won't be able to pass on all of it.).
Quite apart from the fairly radical philosophy of taxing perceived wealth rather than actual income, it just appears to have a whole lot of hairy holes that can only cause the tax advisors industry to grow rather shrink as you state you intend. It also penalises high productivity producers vs. low productivity businesses.
Regarding the nitty-gritty, I have some Questions:
What about Highly leveraged asset's (including property mortgages)? Will interest payments be tax-deductible at 25%? If so that will completely wipe out any CCT owed anyway.
Chattels: Are you seriously suggesting every person in the land must keep a tax record of every major chattel bought in the tax year? The compliance costs for this will be HUGE.
Finance instruments and Banks: I'm assuming this is intended to be on Net assets via some complex mark-to-market valuation averaged out over the entire year (see comment on compliance costs and multiply by 1000). Also, how do you cope with leakage due to short-term asset holding via offshore borrowing?
Valuations: Purchase prices can be manipulated and many assets may not have changed hands for many years. There's a hell of a lot of valuation work to be done here. How does that square with reducing bureaucracy and the size of the tax profession?
Deferred tax: Can I just keep deferring it forever? If not how do you set a fair time limit that still doesn't penalise the widower or the family farm?
Obvious loopholes:
1) Asset sheltering in offshore/non-taxable entities
2) Asset valuation manipulation via multi-stage purchase transactions involving low initial purchase price
3) Use of leverage/cross-holdings to reduce net asset holding.
Given some more details I reckon I could come up with a whole raft more.
I like the aims of low flat income tax and massively reduced welfare bureacracy and I think the vast majority on this site will agree with your statement that "the tax system is "broke" ". I just don't think this is the solution.
Better, but the annual interest(rent)
Better, but the annual interest(rent) bill on our majority foreign borrowed created credit will soon approach $50 billion, this package addresses that how?
Alot of small businesses like
Alot of small businesses like my own are started off with a loan from the bank guaranteed by personal property. This plan will hit small businesses getting of the ground and punish people who have worked hard and own property. Sounds like a plan for a new soviet state.
Greetings Gareth, as a dairy
Greetings Gareth, as a dairy farmer with land secured by mortgage, I am encouraged by your proposal to revitalized New Zealand's lopsided distribution of capital. There are a significant number of dairy farmers under financial pressure because of paying exorbitant amounts of land on presumption of future productivity and capital gain. The current prices are way in excess of productive value, and a significant barrier to entry for younger, more productive farmers, hamstringing meaningful progression of the sector. A scenario I fear as a shareholder of a major dairy co-op, is this level of indebtedness is undermining co-op principles which have delivered so much, in favour of questionable benefits of a corporate.
Given the above, the winners are foreign banks, and instead of NZ reforming it's capital base, interest payments are going offshore in form of profits. A significant amount of NZs milk cheque must be doing this.
@Len: "We need postive people
@Len: "We need postive people who want to build wealth through property."
No we dont....personal investment in property produces personal wealth, it does not make NZ as a whole richer.
@GM's plan bears thinking about...'.its
@GM's plan bears thinking about...'.its far more non-political than Brash's. Though I'd love to see Labour's "social engineering" excercises, exorcised...
Also someone mentioned moving it in incremental steps to give ppl time to adjust...but not to long.....seems a good idea.
regards
Well put International Farmer, the
Well put International Farmer, the billions borrowed for land purchases for all types of farming, has most likely seen ALL supposed profit gone offshore in interest payments. We have sold ourselves into slavery. We bid up land against each other, retiring farmers squandered the money on fancy baches at the beach. We have to get land back to productive value. The question is, is it now too late? Such massive debts to pay off, and many of these debts are interest only based. Talk about the never never.
Steven are you aganist personal
Steven are you aganist personal wealth check what you are saying , having assets is part of wealth creation . What you are saying is just communism dressed up to sound like sound bussiness. The tax scams are the problem here not personal saving and investment in property .
Baz
I would love to see
I would love to see answers to all of Chris B's points. That is such a well thought out post.
As I have said, and looking around the valuation issues (most farmers have five and six page plant asset schedules), there's no reduction in complexity and bureaucracy here, and most probably plenty of loopholes.
And yes, ultimately it's a tax on wealth, and a tax on the truly productive enterprises - the tax advisors with their$1,500 computers will miss the imposition of it - so a further step into socialism. I'll take Brash's plan please (not that the government is going to follow either) because that is the plan that points out the start of the problem: the size of the State (then unsound money, etc, etc). Also, to repeat myself again, despite the deferred payment, such a CCT during the recession we're currently in would be lethal for many 'good' firms.
..."But most importantly tax and
..."But most importantly tax and benefit reform must not aggravate the issue of equity between rich and poor." (see Mr. Morgan's article, above). Oh dear! Seeing as the OECD last year released a report putting New Zealand at, or near the bottom (as in, "nothing to brag about") in terms of the growing economic gap between the rich and the poor in the OECD countries, with all due respect to Mr. Morgan...perhaps too little too late is being done about that gap!
The report drew from the past 15 years of data. So, one could carelessly draw the conclusion that those with the financial resources in New Zealand have become entrenched in their ability to take advantage of it's tax and benefit system.
Don't you go doing anything
Don't you go doing anything Brash John...remember now..priority one is stay in power..all else comes a distant second. Stay faithful to the party rump, especially the property speculators and for their sake try and speed up the number of wealthy foreigners heading down here. No one else to sell the price bloated heavily indebted land to John. Don't you worry about the current media scrum over Don's ramblings..give the public a week and they will be off down some other pathway of stupidity..toss Don a bone for his efforts and put his name on the list for knighthoods in the new year..then put him in a closet somewhere..say High Commissioner in London.
"There won't be any "big
"There won't be any "big bang" tax changes in the next budget, Finance Minister Bill English says.... he hoped it would come up with "practical suggestions" because any changes would need to have public support" NBR ....and by public support he means voter support and as we all know the reason Helen brought in so many benefits was to ensure Labour would receive lots of support and any party that suggested benefit reduction would get none. QED National under Key has become a copy of what we had under Helen. Tinkering to reduce state spending for sure but voters know Cullen would have done the same. See!!! NO change to current policies because the system is corrupt. People have been conditioned to vote for the party offering the most right now...not some distant dream of a rebalanced more prosperous Noddyland....that's just blah blah blah.
Love it Gareth. And don't
Love it Gareth. And don't forget the 5,000 public servants who would no longer be required to administer the nightmare we have at the moment... plus the likely reduction in cheating. That would probably generate another Billion a year... mind you, a short term blip in unemployment!
Whilst Gareth's idea is "nice",
Whilst Gareth's idea is "nice", my elderly parents who have paid over $3 million dollars in income tax alone (and a lot more GST) in their full working lives would then get absolutely thrashed in their retirement as they are in their early 70s and have 2 properties, a home they bought for $14,000 in the 1970s worth $3 million dollars, and a beach house on Waiheke Island they inherited (originally purchased over 100 years ago in 1907 that gets passed down the family, with a bit of subdivision along the way for immediate family members to benefit). This is worth around $7 million dollars such is the popularity and growth of Auckland's beautiful Waiheke Island. They have no way to afford to pay $125,000 per year in their 70s, 80s and probably 90s (their parents all lived to between 89 and 102 years of age). That is a LOT of tax to pay in retirement.
Should everyone with assets go to other countries in the world - isn't this shades of jealously of those with assets with minor Khmer Rouge type parallels? The system we are in is meant to be capitalism not cashflowism. Tax income, not capital.
What a red herring. Real
What a red herring. Real tax reform would include:
1. Taxing income sources rather than the receipt of income. These would be a) salaries (wages and commissions), b) profits and c) property. Interest not to be tax deductible nor taxable. a) at progressive rates top rate same as tax rates b) and c). c) to be taxed on appraised value, regardless of ownership or use.
2. Tax land is better than taxes on savings, capital, income or sales, so the tax burden should be shifted to land (immobile and inelastic base) from the mobile and elastic bases.
3. The tax and spending should be shifted to local government, so that there can be competition, choice, innovation and experimentation, and effective and efficient and attractive fiscal policies can be rewarded.
Reduced company and personal tax
Reduced company and personal tax rates offsetting CCT is great - as long as you are making a profit. In the current environment, many businesses are viable, but not profitable. Ie; They are able to sustain themselves for the moment but are not making any profit. Therefore, the imposition of CCT would simply represent a new cost to cover. They would not be able to benefit from reduced tax until they are manage to make a profit. This certainly disadvantages new companies and those already stressed by the depressed economy.
Other losers include those paying rent on residential property. Typically these are lower income wage earners who would find that some of their tax cut would be offset by an increase in rent as the landlords seek to recover the cost of CCT. Average house value = $325,000, equating to nearly $100 per week in CCT. Not all will be passed on of course, but landlords are not going to absorb it all either.
Simon Says"The system we are
Simon Says"The system we are in is meant to be capitalism not cash flowism".Who said?What about a country where all ages got a fair go.Capitalism seems to be where money is the goal,not personal growth,nurture of all ages and capabilities .Seems frightening when everything boils down to nebulous "figures" that become a measure of success.
Simon, Your parents look they
Simon,
Your parents look they have done extremely well out of taxpayer largesse encouraging the inflation of their assets. It is the avoiding of this hogging of precious resources by taxing and encouraging a use it or lose it mentality that the tax reforms should be focussed on. It will encourage them to subdivide and put the land to more profitable use. Better they pay tax on that land that grows their wealth and takes little effort than I pay tax on my savings and work / effort. In the end tax is arbitrary, but we need to spread it around ... currently its fallign disproportioantely on savers and earners, this is just not fair.
I think Gareth Morgan's plan
I think Gareth Morgan's plan is brilliant. As a former bureaucrat (recently redundant, as I could not demonstrate managerial bum-kissing to the same degree as my workmates) I am fully onside with the idea of slashing the size of government. As a generation X-er who has worked hard to accumulate a decent deposit for a HOME for my family (now delayed), I fully support moves to bring the RE market down to realistic levels, and as a bloke virtually never targeted for any kind of financial relief by any previous gummit budget, I am 100% behind the idea of evening-up the benefits and tax system.
Oh, hey, just please don't get rid of interest-free student loans until I have embarked on my new career path....
Guaranteed Minimum Income = GMI
Guaranteed Minimum Income = GMI = Gareth Morgan Investments! I like it. This idea is far too innovative for any NZ government to pick up. Imagine the armies of unemployed public servants, tax accountants and lawyers leaving the country. It would collapse the property market! How will the Labour party bribe their voting segment when they recycle into government?
Simon - a most excellent
Simon - a most excellent post that illustrates the reprehensible nature of these 'land tax/capital gains tax' proposals that are doing the rounds.
The most difficult thing for the middle class to grasp is that the ideas of liberal democracy, freedom, and economic laissez faire long ago parted company from the economists who are now held up as the 'representatives of the gods on earth'. Relentlessly, they advance the crazy gospels of Keynes and Friedman - ruining good men and women in the process on the altar of irredeemable debt money.
Now we approach the 'denouncement' phase that I mentioned earlier. Like some latter day Emperor Diocletion the 'Keynesians' and 'Friedmanites' plan to 'declare' that your parents and others have 'wealth' that must be plundered. Yet that so-called 'wealth' is largely a reflection of the fact that monies purchasing power has been progressively destroyed by chronic over-issuance.
As a Pom I am familiar with the sickening spectacle of many old people, who have worked hard for their homes, being forced to sell because they just can't afford the rates - a form of 'quasi' capital gains tax. To those posters who think what is being proposed is a good idea I suggest they exercise great caution. These proposals are a powerful indicator that 'those in the know' anticipate a hyperinflationary default by New Zealand on its exploding debt obligations. Do not be deceived! Hyperinflation has nothing to do with demand 'push-pull' - it is the political and elite reaction to the natural attempts of 'Mr Market' to force an honest default on excessive debt accumulation.
Every day, the sombre spectre of Weimar Germany comes into sharper focus - and the wipe out of the middle class becomes more likely.
As the old saying goes - "those whom the gods wish to destroy they first make mad". The gods of the Keynesians and the Friedmanites have, indeed, made us economically mad, literally mad, to be even contemplating a system of taxation that will be the precursor for the ultimate future confiscation of all (non-ruling elite) private property in New Zealand.
Let the 'Keynesians' and the 'Friedmanites' measure these alleged 'capital gains' and 'windfalls' against gold ounces. Remember:
"Gold Is Pale Because It Has So Many Thieves Plotting Against It"
Diogenes Laertius (fl. 2nd century A.D.)
That is the purpose of gold, to communicate monetary exchange honestly! No wonder the 'establishment' hates it. It is time we had some honesty in a debate so critical to the future of our country and the business of natural justice.
I agree Alex - society
I agree Alex - society has generally lost the ability to rationalise matters from a collective view. Instead we deliberate regarding suggested changes from the status quo in an individual manner - and of course most people look at taxation and structure their affairs from a tax minimisation perspective. The other side of the coin are those people who structure their affairs based on a benefit maximisation perspective.
Any proposal (such as this one) which removes the opportunities for tax minimisation to the greatest extent possible will be heartily resisted by tax minimisers and their agents.
What I find interesting is that this proposal would get rid of WFF, accomodation supplements and all those other benefit maximisation opportunities; it would dramatically lower the cost of compliance and administration within both the tax and welfare administrative regimes, and hence dramatically lower the labour intensive nature of these two government departments; and it would remove the incentive to take on debt associated with loss making assets.
It would in my opinion restore individual responsibility - we would all start directing our efforts toward profit making pursuits, as opposed to the present pursuit of asset accumulation and capital growth.
Interest in professions such as accountancy and law would likely diminish over time (the number of businesses associated with MOM - Managing Other-people's Money - is huge presently). Our capable might instead direct their higher education toward goods or production-related, as opposed to service related, career paths. Meaning in short more scientists and engineers - less accountants and lawyers.
Economically desirable but how practical?
Economically desirable but how practical?
Having had to collect taxes I know the practical difficulties. The proposal needs to be simplified, which will create inequities, but that may be an acceptable price to remove greater ones, such as the current beneficiary abatement poverty trap.
The proposal would require every homeowner at least to file returns, but many of those would already be doing so. The necessity for valuations needs to be avoided. QV already does rating valuations: use these for the family home. It is simple to tax on the QV value less allowable exemption. Equity requires that interest paid or payable for the year on an amount up to the allowable exemption to be deductable. Adjustments would be required for less than full year ownership or imputed, possibly notional, part shares.
Other domestic assets probably have to excluded. If someone buys a painting, say, for $100 000, GST or other transfer tax should be payable. Taxes on assets like cars can be collected at the registration, ACC or transfer points. Again, the first car, up to a limited value, could be exempted. Valuation requirements could be become unmanageable if the base was too broad and required current values. The arguments about valuation need to be avoided too. The aim is to broaden revenue, minimise collection costs and taxpayer/IRD interaction.
Financial 'assets' should not be exempted. This can only be done feasibly by taxing at the point of conversion. E.g. Sales of listed shares, say, 2% of sale price. payable by broker to IRD. Even Govt or bank bonds could be taxed that way at appropriate rates.
All shares outside ones own company or group of companies should be considered as trading stock. Allow, say, $200K, indexable, as an exemption and tax the profit. Capital dividends would disappear.
Businesses could be taxed on the amount of their equity with perhaps a five year exemption. This, though, equates to a further tax on earned and unearned income along with valuation concerns for principal assets. If taxable income included all gains from both regular trading and realised capital items allowance would need to be made
for any losses of capital and prospectively the revenue then would be partaking in the risks of business ventures. Ultimately it is only that which is distributed or distributable which is free to be taxed. Anything else is an imposition on the capital base, which may be justified, as stamp duties were, as being simple to collect but impossible to be equitable.
I've a simpler idea. Why
I've a simpler idea. Why doesn't the state simply confiscate all of our income, and all of our assets and then issue us with a ration of living space, a ration of spending money, a ration of fuel, a ration of food etc?
Of course, there would be exemptions for the ruling elite, the glamorous, and compliant economists and other 'experts'. If guidance were needed, George Orwell's "Animal Farm" could provide an excellent blueprint for the new society.
Modern man has been completely seduced with financial alchemy - believing that if only the state takes more then Shangri-La will be reached. He is destined to be very dissapointed - not to mention impoverished.
Excellent piece form Fran O'sullivan
Excellent piece form Fran O'sullivan on National's wimpish approach to these urgent issues
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1061...
Absolute pack of wimps, I am very disappointed in them
<i>I’ve a simpler idea. Why
I've a simpler idea. Why doesn't the state simply confiscate all of our income, and all of our assets and then issue us with a ration of living space, a ration of spending money, a ration of fuel, a ration of food etc?
We're not far from it Malcolm.
I thought the only thing KevOB has missed taxing is air. Taxing equity to punish business into earning a decent return on equity: yeah right. I'm sick of the carrot and stick brigade: and watch debt get even worse if any government was that stupid.
Oh look, I saw a movement over there: quick, catch it, tax the damned thing ...
Great ideas, but I think
Great ideas, but I think the only way for this to possibly happen is to abolish MMP. As long as we have MMP nothing will get done. Can you imagine Labour or the Greens agreeing to any of this whatsoever? Plus the Maori/seperatist Party would be chiming in with their demands. In the last two days I've heard the two figures of $500 per year ACC increases and $1400 per year ETS personal costs. That's up to $40 a week worse off for each of us who work - so surely something is goiing to have to give soon. For me, a move to Australia is now back on the agenda, even for a short time to make some money.
@Mark Hubbard Taxing the air
@Mark Hubbard
Taxing the air ......oh yes, nothing new, we had this in Austria. It was a tax to be paid if you had a little roof (canopy) or company name or advertising board sticking out from your business over the public footpath. So it was taxed, because it was using the airspace above public property (footpath), was called the "airtax".....
<i>Taxing the air ……oh yes,
Taxing the air "¦"¦oh yes, nothing new, we had this in Austria. It was a tax to be paid if you had a little roof (canopy) or company name or advertising board sticking out from your business over the public footpath. So it was taxed, because it was using the airspace above public property (footpath), was called the "airtax""¦..
Hah! :)
But you shouldn't be giving 'them' ideas like this Gertraud.
Hi Mark - thanks for
Hi Mark - thanks for the earlier Big-ups. i'm in Europe at the moment - hence the odd posting times and opportunity to think before hitting submit. Can lead to unreasonably long posts though - apologies Bernard. Have to say I really hated the Brash stuff yesterday though - precisely what do Zespri and fonterra owenrship structures and Publically funded private schools have to do with national economic development?
@KevOB - with the greatest respect it is fairly obvious from that densely worded piece that you are a tax professional. For the rest of us we'd quite like to get away from hugely complicated tax codes with a bazillion exceptions that are only known to the professionals - thus guaranteeing jobs for the boys. In fact it would be good to see just how many of the currently available deductions could be stripped from the tax code in exchange for dropping and flattening the existing rates. For starters we could look at removing LAQC's, depreciation on buildings and any capital depreciation on assets valued under $500,000. Get rid of all the flaming tax credits that seem to have proliferated (low earner/single earner/wff). And if the IRD and courts would grow some balls and actually impose some penalties on those found to have engaged in tax evasion (like the NZ$2 billion+ our freindly australian banks have stolen from us) then that would help with disincentives to play silly b**gers and lead to some one-off income too.
KevOB, thanks for your post.
KevOB, thanks for your post. Would financial assets include savings? One of Gareth's objectives is to foster efficiency in capital expenditure. Savings may be a rational alternative if none of the capital choices measure up to an IRR benchmark, also saving is meant to be something encouraged here as we don't do enough of it. Perhaps exempt long term saving via a vehicle like Kiwisaver ?
On the real property side, reform would be needed in some of the District Plan restrictions imposed by local government. As an example, the Hutt City Council imposes a 700 sq metre minimum subdivide section size in designated "Special Residential Areas", (Woburn and Lowry Bay) effectively rendering an infill section subdivision impossible without an uncertain and expensive RMA process. This kind of policy runs directly counter to an efficient use of capital objective.
It's good to see some
It's good to see some debate about these issues but isn't it time we talked about the elephant in the room in this world? i.e. money creation by bank credit.
No tax system, no matter how well thought out, fair, just, efficient, whatever is going to solve the fundamental issue that there simply can never be enough money in existence to repay the debt created out of thin air by bankers, at a price of their choosing.
Adam Smith, David Ricardo, John
Adam Smith, David Ricardo, John S Mill, Henry George and I are stunned to see an economist refer to land as a "form of capital". No wonder he can't see all the virtues of a land tax. Here is one contemporary economist who still gets it: http://www.wealthandwant.com/docs/Gaffney_LaaDFoP.html
So let me get this
So let me get this right - I work hard, accumulate the capital assets I want to, after all it's my capital and I should invest it how I wish, then my capital gets taxed again !!!
All because someone thinks they think they know how to better allocate it - hmm
In effect a wealth tax. Crikey - Gareth is channeling Marx and Cullen at once.
Rich Pricks watch out.
Lets say I am lucky enough to buy some land (George Grey's comments notwithstanding) - what happens if I can't pay my taxes - is my land (or other assets) are now confiscated by the Crown ?
Wake up guys - the real issue is that we already pay way too much tax and it is NOT repeat NOT sustainable
This sort of proposal will see an increased flight of capital out of the NZ Tax juristiction
Nuts, just nuts
I don’t think Stephenie Meyer
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What, why and how we
What, why and how we tax is ultimately political. Wealth taxes are only a pseudo proxy for affordability. Excise taxes like on petrol affectively clip the ticket on transactions and while usually simple to collect may cause other distortions.
If the state has to have revenue, it has to tax. NZ has evolved an income tax and combined negative social security tax from the old family benefit and rebates for supported relatives, now to WFF. Gareth's proposal of a state benefit for all is similar to one I foresaw 50 years ago. It couldn't be done then, but now computerised data interchange with employer or payer and the Government brings it closer. However it has the seeds of enslavement: those who are unwilling to do their required share may have to be compelled. Those in the middle financing the social payouts to others can rightfully grumble. They sense the direction to further reduce their freedom to do as they will with what they have acquired. Once families supported each other in need but now with family members scattered that needs to be contracted out. The tax system is used to implement a social insurance scheme.
The debate needs to be where are we to go; the how to do it will follow. If taxation must be increased because the state wishes to spend more it should be as painless as possible. If money is not available to pay tax it will be avoided so excise and transfer taxes provide simple collectable solutions.
Gareth is getting the idea,
Gareth is getting the idea, but is only going halfway. The guaranteed national income is a very old concept, as this article by 21 year US Treasury veteran Richard Cook explains, a must read for the serious student of international banking and commerce:
" 1 - We should spend sufficient credit into existence to supply the basic operating expenses of government at all levels without recourse to either taxes or borrowing. At least ninety percent of all taxes could be eliminated. The only taxes that should be retained would be those in the form of user fees for infrastructure operations and maintenance and those levied only for dire emergencies. Capital expenses for infrastructure construction at the federal, state, and local levels should be financed through a self-capitalized national infrastructure bank lending at zero-interest. Operating on a national scale, such a bank could begin to rebuild our job base starting at the state and local levels. A public program of direct government expenditures as described herein would be as effective, as timely, far less inflationary, and much cheaper than creating new public debt by borrowing credit created "out of thin air" by the banking system.
2 - The endemic gap between prices and purchasing power in an advanced economic system in reality is the "leisure dividend" that we never received from our amazing producing economy. That gap should now be filled by a non-taxable National Dividend of two types. One would be a cash stipend paid to all citizens which would also serve the purpose of eliminating poverty by providing everyone with a basic income guarantee. The remainder of the National Dividend would consist of an overall pricing subsidy, whereby a designated proportion of all purchases, including home building expenses, would be rebated to consumers. The average National Dividend per person would probably exceed $12,000 per year under today's economic conditions. It would be a calculated value charged against a government ledger but would be off-budget, with no need to finance it with taxation or borrowing. The calculation of this dividend was outlined by the author in his recent report, "An Emergency Program of Monetary Reform for the United States."
"The theory of this program of monetary reform derives from two principal sources. One is the worldwide National Dividend movement founded almost a century ago by Scottish engineer Major C.H. Douglas. The other is the program of monetary reform based on direct government spending set forth by groups like the American Monetary Institute in its model legislation, the American Monetary Act, to which the author of this report has contributed.
In Great Britain, similar work is being done by the Bromsborg Group and other reformers. The monetary reform movement is worldwide. Through his previous reports the author has received positive support and feedback from many countries, including Poland, Italy, India, Australia, Canada, Germany, New Zealand, and others.
The top priority of the reform program would be to use public credit to rebuild the producing economy which has been wrecked by the phony ideology of "market" economics and the inept and self-serving manipulation of the money supply by the Federal Reserve and the banks.
Direct funding of government expenditures would remove the banking system from the business of financing a massive government debt. Implementation of a National Dividend would establish the balance between production and consumption which the banks failed to do through creation of huge quantities of consumer debt to compensate for shipping our manufacturing capabilities to China and other foreign countries. Both measures would go a long away toward shifting the basis of our economy from one that uses debt for making war and transferring wealth to the upper income brackets to one that uses public control of credit to facilitate peace, domestic harmony, and economic democracy. "
http://www.globalresearch.ca/index.php?context=va&aid=5772
My email to Phil Goff:
My email to Phil Goff:
------------------------------
Subject: Gareth Morgan's CCT Proposal
Dear Mr Goff
I am in favour of the above reform of NZ's tax and welfare systems.
The proposal provides a vision of a New Zealand without WINZ, and without the discriminatory tax and welfare structures which have so perniciously divided our society since the time of the neoliberal reforms.
New Zealand desperately needs a new social and political paradigm shift - in other words, transformation not incrementalism.
Labour's recent announcement regarding the move away from consensus on monetary policy should be followed up by this promise to bring about a uniquely New Zealand brand of egalitarianism, coupled with a strong focus on individual freedom and responsibility.
According to Gareth Morgan, the proposal is tax revenue neutral, and that neutrality does not take into account the significant savings associated with the dissolution of WINZ.
Please, give New Zealanders of all ages and all socioeconomic status or circumstance this chance to become true equals in their interface with the State.
End welfare dependency - End tax sheltering - adopt the Gareth Morgan approach.
Kind Regards
--------------------------------
I find it interesting that
I find it interesting that people with vested interests in managing others financial affairs are always calling for so called non productive assets to be taxed. The truth is people are likely to stretch that bit more and become more productive in their primary income field if they have a goal to achieve. Your so called non productive malarky ignores this completely.
If you are going to tax peoples homes then a recognition of the effort they put into the upkeep of those needs to be implemented also. A trucking firm is allowed to claim back their expenses, so it is only equitable that a house owner is offered the same recourse with regards to their ongoing expenses.
Has the introduction of a land tax and stamp duties been shown to minimise property bubble occurrences? If not in those constituencies then what NZ so special that it will.
What happened when Australia decreased their CGT rate to overall investment levels?
The truth is any form of taxation results in decreased investment.
NZ should adopt a zero rate of tax for any investment and level the playing field that way. Kiwisaver should be incrementally increased to 20% of personal income with 5% being hived off into a personal medicare trust fund.
Home ownership represents wealth and so should be encouraged as it gives people more to lose.
Yes the rich will get richer if their profits aren't taxed, but the society in general will be richer, because people invariably decide that they want and need all manner of things, all of which need to be serviced. So employment will actually go up in the service related sectors. Indeed there will be more investrment capital around is total as the bureaucrats won't get their inefficient mits on it to waste in the first place. We could probably liberate 20000 timewasters/ obfucators into more productive areas with this move alone. How many policy analysts does one country really need, when there is a deficit of plumbers (there must be a deficit of plumbers because their hourly rate is higher than a hospital doctors)?
Iain, (and justsomeguy) - re.
Iain, (and justsomeguy) - re. your points about solving, "...the annual interest(rent) bill on our majority foreign borrowed created credit...". As GM described the idea and explained utilising GNI I did think he was advocating interest-free money issuance via 'social credit'. But I was wrong. In the following question time I suggested that as this idea was based on the 'social credit' concept, that we could start to attack our national debt by also using 'public credit' on infrastructure projects. Anyway Gareth came back with a correction and clarification that the GNI component of this idea is actually 'negative taxation'. I left it there, given my question may well have sounded clumsy and pursuing it further at that point may have been even clumsier! So we didn't get to discuss how much less tax we'd end up paying if we started to clear the national debt with gradual use of 'public credit'. Plus it was quite intimidating being an engineer surrounded by 200 economists (worse - majority probably Orthordoxites) and fearing for my safety I didn't want to identify myself too clearly, especially as we still had a few hours to go and a trip to the airport (across Wellington in daylight) before I would be back in the relative safety of Fortress Mancan.
Gareth - a couple of things. I listened to the radio interview:
http://www.radiolive.co.nz/BARRY"“Gareth-Morgan-CEO-of-Gareth-Morgan-Investments-on-his-radical-Comprehensive-Capital-Tax-idea/tabid/506/articleID/11261/cat/2/Default .aspx
Given your analysis (on the back of the envelope - good on you, ha, ha) did not account for the savings made by closing WINZ etc, how much less could the flat tax be? Or how much more could the GNI be?
Use of interest-free money issuance via the GNI and to fund public works, private business development funding, via Kiwibank, say - as per Guernsey, Bank of North Dakota, the old DFC's 'soft loans', NZ's state housing and Auz funding it WW1 effort - how about it? If not can you say why please:
http://www.interest.co.nz/ratesblog/index.php/2009/11/20/special-report-...
If you have time BH's article and the whole thread might be worth a read.
Cheers, Les.
<b>KATE</b> : Brilliant Email to
KATE : Brilliant Email to send Goffy . Wish to heck I knew how to do all that clever cut / copy / paste stuff . Anyone got a real good learning page for computer retards 'like me ?
Ta Roger, see; http://www.homeandlearn.co.uk/mw/s3p3.html
Ta Roger, see;
http://www.homeandlearn.co.uk/mw/s3p3.html
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Haha - this from the
Haha - this from the guy who made a 700M tax free capital gain
Can someone confirm - does
Can someone confirm - does his proposed GMI, mean that each adult get $10,000 p.a. and then all benefits are abolished? Sounds a great idea. However, I would suggest absolutely no chance of that getting through politically.
Confirmed ! It is an
Confirmed ! It is an old idea , dusted off , and updated by Gareth . Seen the theory of it in some investment book , years ago . A guaranteed minimum payment to the whole populance . Cuts out the social welfare network . And that in itself is a massive saving . Stream-lines and simplifies taxation . Imagine WINZ and the IRD shrinking to 10 or 20 % of their current size . Efficiencies flow through the whole economy . Suddenly costs of production plummet . And we can compete with the low wage economies .
It is absolutely brilliant . Therefore , we will have none of it !
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