NZIER 2012 economist of the year Norman Gemmell on why he changed his mind to supporting taxing capital gains in NZ, if they're taxed as income

NZIER 2012 economist of the year Norman Gemmell on why he changed his mind to supporting taxing capital gains in NZ, if they're taxed as income

By Alex Tarrant

An economist instrumental in setting up the Tax Working Group says the process led him to change his view on the taxation of capital gains in New Zealand.

Victoria University Public Finance Chair Norman Gemmell, who won the NZIER 2012 Economist of the Year award this week partly for his work on New Zealand's tax system, told interest.co.nz it had been made clear many people who should have been paying tax on income earned from capital gains had not been doing so.

As Treasury's Principal Advisor on Tax Strategy between 2007 and 2010, Gemmell was part of a team working on providing the government advice on medium-term tax reforms. That team created the 2009 Tax Working Group to provide outside scrutiny and discussion on Treasury and the IRD's thinking behind any potential changes.

While the Tax Working Group was split on whether a more comprehensive capital gains tax was needed in New Zealand, and did not provide a recommendation in its final report to the government, Gemmell said that during the process, he changed his view on taxation of capital gains in New Zealand.

Gemmell came to the Treasury after working as Assistant Director of the UK Inland Revenue's research department from 2003-2006, where he grew disenchanted with the UK's capital gains tax system.

“When I first arrived in New Zealand, I never thought I would recommend a capital gains tax, because the British system was at the time one of the worst examples – lots of carve-outs, all sorts of complications that just made the system very difficult to apply," Gemmell told interest.co.nz.

“[However], in New Zealand, my on-balance view at the time of the Tax Working Group, was that the ability of others to avoid tax, who you would otherwise like to be paying tax, was sufficient to say we ought to look at trying to introduce a capital gains tax, but introducing it around the same rate we would tax any other income," he said.

That was different from setting up a separate tax specifically for capital gains, which the British system had showed could cause all sorts of difficulties, Gemmell said. That meant broadening the definition of income to include capital gains under the umbrella of income tax.

Unfair tax settings

Shortly after the Tax Working Group was formed, the government's Savings Working Group noted the discrepancy between the taxation of gains made on property, and taxation of other capital income in New Zealand.

"Owner-occupied housing – you can do well out of that, tax is zero. Investment housing – the marginal tax rate is pretty low. Foreign and domestic shares – it gets higher. And the highest of the lot – if my grandmother puts NZ$1,000 in a basic savings product to get interest, that incurs the highest tax rate of the lot, which we think is anomalous," Savings Working Group chair Kerry McDonald said in 2010.

The Savings Working Group recommended the government change the way capital income - such as interest earned on term deposits - was taxed, to index the tax paid on that income for inflation.

If that process was too complicated, McDonald suggested the government just set a lower tax rate for savings products as a way of cutting into the discrepancy between the relative rate of taxation of property and savings products.

The Savings Working Group did not offer a view on whether a capital gains tax or land tax would help cut that discrepancy as that would have been outside its terms of reference, McDonald said at the time. However, it did recommend the government broaden the tax base when it released its final report in early 2011.

Will be looked at

Gemmell noted that Victoria University and the Government Economics Network - which he also helped set up as Treasury's chief economist in 2010 - would address the issue of capital taxation in a debate to be held later this year.

When announcing the Public Finance Debates series, Gemmell said one of the debates would discuss New Zealand’s policy of taxing certain capital income at 28%, and whether the rate should be lower.

“In Scandinavia, for example, interest income on deposits in the bank is taxed at about half the rate of earnings to encourage people to save. The Minister of Finance is seeking advice on whether New Zealand should change its tax rate for investments so it’s timely to discuss the issue," Gemmell said on August 16.

Speaking to interest.co.nz on Tuesday, Gemmell said while the rate of taxation on some forms of capital had been cut slightly, others were still taxed at earners' marginal rates. It would be good to have a discussion about what tax rates different types of capital income should attract, he said.

“The Scandinavians have made it work, but they’ve made it work by having all sorts of rules around defining what counts as capital income, and what counts as labour income," Gemmell said.

“We know that when you and I earn income, say, from interest in the bank, that’s fairly obviously capital income – we haven’t been working to earn that money," he said.

"But there’s a whole set of types of income – entrepreneurs earn for example, capital gain-type income; is it all income from capital? How much is it, in a sense, a reward for you for using your brainpower as an individual?"

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72 Comments

Has Norman Gemmell ever had a real job ....... I mean , not in the pay of the British government , nor being funded by the New Zealand tax-payer ? ....
 
..... has he been nose-to-grindstone in the real world of manufacturing , trade & commerce ? ....
 
..... 'cos if this article ( above )  is evidence of civil servants' thinking , then NZIER would've been better served by giving their award to some other wally .......
 
Wolly !

GBH: makes you wonder doesn't it. where do they get them from. another blow-in. how do these guys blow in and get these top-notch jobs. it is worthwhile remembering that new zealand is supposedly a democracy and does that election thingamy every now and then. and it just so happens there was a democratic election less than 12 months ago, and everyone voted for the teapot. there was no discussion about capital gains taxes during the election campaign at all. nobody had their feet held to the fire and had a great debate about it. cant recall norman gemmell coming out and shouting about it at the time. where was he then. he's about 10 months late. as for alex tarrant, why didnt you ask norman gemmell why he kept his gob shut then and opens it now?

Maybe they blow-in because they are better.
Funny thing how fast the left or right wingers turn on anyone who dares to change their mind when the facts change or become apparent and it no longer matches their voodoo outlook.
Of course lets not forget GBH's vested interest(s)....shares.
regards
 

Not as simple as that steven .. explain this
 
Is it simply wheels within wheels, or nepotism, or what, or is it two protagansists simply changing the contest arena and they have brought their disagreements with them to greener pastures .. you may be right .. those in the recruitment department are just plain dumb .. please explain ..
 
NZ Treasury Secretary Gabriel Makhlouf
Gabriel Makhlouf is one of two deputy chief executives at Treasury, a role he has filled since March 2010. His career has previously been in the UK civil service - at the Inland Revenue, HM Treasury and HM Revenue & Customs – during which he had responsibilities for policy development on domestic and international tax, and welfare. He has also chaired the world’s main tax rule-making body at the OECD, and served as Principal Private Secretary to the then Chancellor of the Exchequer, Gordon Brown
 
Mr Makhlouf was a principal architect/pariticpant/designer/implementer of the UK tax system, which Gemmel now disagrees with ... Gemmel and Makhlouf worked together. And the UK system is hopeless .. and now theyre both in NZ ...
 
Norman Gemmell
Gemmell came to the NZ Treasury after working as Assistant Director of the UK Inland Revenue's research department from 2003-2006, where he grew disenchanted with the UK's capital gains tax system. “When I first arrived in New Zealand, I never thought I would recommend a capital gains tax, because the British system was at the time one of the worst examples – lots of carve-outs, all sorts of complications that just made the system very difficult to apply," Gemmell told interest.co.nz.

so if you're 60 years of age (look at the guy) and disillusioned with where you're at, and nearing retirement, and not going to climb the ladder anymore, you look for a soft green pasture where you will get national super .. no worries .. you blow in for a soft ride ..
 
and I repeat the question .. why did he remain silent during the lead up to the election

Would being a teacher in a private school qualify?

Wow we have inequality in the tax system, I think that is self evident by the behaviour of individuals.
This is what happens when you grow government, they have to generate outputs, the employment costs are incurred and the individuals want to impress and so they generate more outputs than their colleagues, none of the outputs are actual production but theoretical actions and future improvements, which manifest themselves as increased red tape, bureaucracy, meetings, discussions, navel gazing and job creation schemes to write reports and counter reports. Each department needs policy analysts to respond and so it starts over.
It would be good if instead of government growing exponentialy it had a half life.

Why not just strengthen the existing tax laws. 

....... why not just slash government spending ?

What do we slash GBH?
Do away with,
a) public education?  great instead of $6k a year it costs me $12k per year....slashes my spending ability to zero and then some. Great Depression enhancing tactic that. Net result of course is 75% of NZ children would get no education, really bright idea that.
b) Public health? Great let me double the costs with a private in-efficient system....wack GDP by 18% not 7%....
c) Public pensions? watch the OAPs starve to death?  why dont we just drag them out into the street and shoot them? kinder really.
d) WINZ?
Thats where the huge bulk of money goes...
About the only one that can and should be cut is WFF but thats the equiv of Govn austerity which has a drastc multiplier effect something like 2.6.
regards

mist42nz, go for it, I hate waste....Lets get that debate out in the open so ppl are aware f teh choices they should be making but are palming them off to stupid pollies.
a) Public education, well look at my educational experience v my kids I'd say definately no...
b) Probably agree.
c) Short term, well tahts endemic in a capitalist society.
d) ?
WFF, well its going way to far up the tree....I remember when Cullen extended it and a mother was saying that it was great as she and her 4 kids could now enjoy a holiday.  Im thinking oh great we have 1/2 that because thats all sensibly we could afford. So now our choice is usurped by the Govn taxing me to send others on holiday because they wanted a bigger family? like WTF.
regards
 
 

GBH - That would be far too obvious and then they would be admitting they are the problem.  But they keep telling everyone they are solving the problem - the great contradiction dilemna.

Exactly Steven the advocates of slashing public spending are always the first to complain that hospitals, education, roads, and public transport, aren't good enough, it's so strange how those things just don't pay for themselves.
If this muppet government hadn't cut about 2 billion out of it's own tax intake per year in wouldn't be in half as much trouble as they are now financially, they were never going to be able to cut government spending by that much no matter how much dreaming they were doing.
Take the roads of national’s stupidity for example, they have already spent 250 million just on fancy consultants, rather than actually building roads.

Philthy - Do you have any idea how big the Public sector is?? 50% of the working population rely on the public purse for their income which has to be derived by Private enterprise first.
It is completely normal to request that any inefficiency within the public system be removed as it is strangling the economy.
Do we need a Ministry of Womens Affairs? I think not - we have legislation that ensures inequality can be addressed. The Ministry of Social Development is another waste of public funds and exactly what has it achieved? The Commisioner for Children is another office - it should be a crime under the Crimes Act to treat children inhumanely and not provision them with the basic requirements for their growth and development. Hospitals and Schools - well these are contentious issues to the say the least.  I buy health insurance relatively cheaply and there are many like me who choose to do so (about 38% of the population and this is a decline from the past) So I pay twice for health care, once in my taxes and I can't guarantee that any service I may need will be delivered, secondly by private insurance which also covers me in the event of an accident as ACC are renown for squirming out of paying.
 
Everytime I have walked into a public hospital I have been astounded at the poor systems in place.  There is layer upon layer of managment who have nothing to do with the direct provisioning of health care.  If you're in the unfortunate position of being in A & E or ICU you will get fantastic care from the frontline staff. All staff should be frontline whether in the wards or elsewhere. During the Chch earthquake all hospital staff pulled together in the crisis and achieved incredible results - well everday could be like that. and then maybe we wouldn't have so many people on waiting lists or worse dying while on a waiting list.
 
Education - Well I hope it has not passed your attention the number of private organisations that have popped up around the country who teach English and Maths. Why? The answer is pretty obvious. Adult learning centres teaching reading, writing and maths is also another industry - so what the heck is going on in some schools?
 
On the road side of things - just how much tax do you think is being collected from private enterprise in Road User Charges and fuel taxes?
 
Throwing more money at something that has a system failure is only going to make that problem worse and lead to more extravagance.  You have to plug the leaking holes and people don't tend to do that unless they are looking and thinking about how to be efficient and effective.

"50% of the working population rely on the public purse"
Where's this statistic?

WFF stats I think.
regards

You are so keen on cutting public spending notaneconomist but you fail to mention cutting spending to the largest elephant in the room - the retirement age, the one old Smile and wave won't touch.
We are out of sync with most other western countries on that, why not change that then? 
You also just proved my point, the people that complain about government spending too much money are normally the first to complain about the poor performance of schools hospitals etc. If you only want to pay peanuts that's what you get.

Philthy - Can't see how my post proves your point - rather interesting that you gleaned that.
 
As I said throwing money at problems doesn't always work. If attitude and urgency aren't naturally in the people working in the system then the system fails. 
 
What I don't like is wastage. And when that wastage is in the Public system then it tells me that those operating the system have no appreciation of how they are funded. This is an absolute abuse of all private enterprise individuals who work to fund this spending. 
In regards to retirement - it is an international obligation placed on Govts. NZ Govts also told these people that they would receive superannuation payments, given these people are at the end of their working lives little can be done but to honour that agreement.  Interestingly State employees fair much better than employees who worked in private enterprise in the pension stakes.
 
In regards to the peanuts comment - a job is only worth the market price of the work and Public enterprise just can't cut the mustard in competitive efficient delivery. 

I think they are probably strong enough, just they need to be more encompassing.
regards

Capital gains taxes are envy taxes, so we'll never see you stop the pogram, Bernard, but converse to this argument given, I posit the opposite (and have read a report supporting it lately, but don't have the link at hand) - if you really want to revive a depressed economy, you don't go for envy taxing, you give tax cuts for all, but especially deep tax cuts for the wealthy.
 
And Homepaddock has a lovely post up today, reporting on Federated Farmers Robertson, on how the policies that you are advocating, including here, are meaning our only vibrant sector, farming, is facing the perfect storm in 2014.
 
So, the unintended consequence of your policy mix to 'fix' the economy, as in Europe, will most likely be to stuff it, finally.

Given that folk expect to 'spend' the capital gain, and that most of that 'spending' will be the purchase of 'bits of the planet' (flat-screens, etc) then we have a primary disconnect between expectation and reality.
 
Which begs the question; if/when the planet can't supply, just what was the 'capital gain' (apart from being a few electronic 1's and 0's) and just what is it you'd be taxing?
 
May you live in negative-interesting times - oh, that's right, we already are.

Tribeless - like your links. Here is cut and paste off the National Party website - false advertising comes to mind.
 

Welcome to the National Party's official website
The New Zealand National Party was formed in 1936 to represent New Zealanders from all walks of life.

Today National is the largest political party in the New Zealand Parliament and leads the government.

National stands for freedom, choice, independence and ambition. We believe in less government not more red tape. We stand for personal freedom and responsibility.
 
I thought there little mantra would mean for the people of the country - apparently I'm mistaken - I think they may have meant: Freedom, Choice, Independence and ambition for Govt and its Agencies.  Perhaps less Govt - not more red tape - refers also to them given the TPP and also the LGFA stuff that is before them. They don't want the red tape around themselves - silly me I thought they were meaning for the people.
"We stand for personal freedom and responsibility" haha - well that would appear to personal freedom for them with the responsibility upon the sheeple funding them. 
 
 
 
 

Yes, that last paragraph  from their site is a joke. In every Bill English budget, and despite the rhetoric, the government dollar spend has gotten bigger - 2010 by 12% from the year before, adn that was pre-earthquakes - which means they're spending more money than the last Labour government. That's a strange definition of 'freedom' and 'small government'.
 
But's there's an even bigger problem with our social democracies, as I say here:
 
For some decades now, business has been slowly sinking under the swill of politics; forced to try and navigate the perfect storm that has been voted in against it, in vain. In this, New Zealand is typical of the West. National, in theory the pro-business party, having to fund the careless spending of all the Keynesian lunatics before them, including themselves, can make such immoral, and criminally bad law as this is - no, criminal in actuality - knowing business has no choice to vote for them because the ‘other lot’ are worse. And then when the ‘other lot’ get in, as they will in 2014, they know they don’t have the business vote anyway, and can just continue to screw private enterprise and entrepreneurship to fund a smaller and smaller portion, only, anymore, of this monolithic Gulag of Forced Altruism they’ve created, knowingly, and thus irresponsibly, putting off the cruel reckoning for the economic and (im)moral illusion of our welfare states onto our children. Even now, as we continue to borrow $300 million per week, our politicians remain oblivious to the fact that for Europe and the US the reckoning has befallen them already.

Tribeless - well I can sort of understand where a lot of that spending came from - Mis-management of ACC has cost us a fortune and bailouts of the Finance Companies etc. The trouble is these issues actually grew under Labours watch and the way Helen campaigned she certainly didn't want to get back into power - she knew what she done and knew that a new Govt would have to deal with the legacy of problems she left behind.
She was called the Teflon Prime Minister for a reason.
 
The Nats inherited a pretty large sinking ship - however they have shown little expertise in refloating. If they had jumped in and sorted out uneccessary Govt Expenditure and Depts they would not be needing to borrow so much and could have balanced the books.
 
The trouble with Govt is that they have the right to pass any legislation as long as they have the majority. Very few people pay attention to what legisaltion is being passed let along the consequences of what that legislation may bring.
 
I have frequently questioned whether NZ should have a separate legislative body which would provide independence from the Political rulers of the day.  Govts role is not clearly defined and they currently have all the powers stacked in their favour with no recourse for the citizens who have no choice but to comply.
We have a system of Political entrepreneurs rather than market entrepreneurs and this has obvious consequences and influences.  I have been astounded at the public reaction over the sale of State assets. I cannot for the life of me understand why people are so emotionally attached to something that they actually do not own.  Govt is obviously seen as being allowed to control every facet of human life rather than protecting an individuals right to freedom, liberty etc.
 
Everytime the market entrepreneur is not able to follow the free-market because of Govt intervention we all decline as a people.  (Chch city is a classic example of Govt intervention on a grand-scale and the costs to the country will haunt the NZ economy for years and years).  When bureaucray is over-resourced  - true private enterprise becomes under-resourced. And one of the issues that has arisen from the bureaucracy is that many businesses have now entered into a joint arrangement with Govt and its agencies and many Govt organisations have invested tax payers money into traditional private business and all this does is distort the free-market even further. 

Can't disagree with any of that, other than the only fix is a libertarian minarchy.
 
I'll be blogging (same blog) early next week how the Revenue Minister has actually legislated into our tax law Orwells slogan for the Police State: 2 + 2 = 5.
 
And he got away with it, and other than my blog - and I have blogged twice on the law concerned; it's major new law - MSM haven't even picked up on it. Stunning.

Not an etc -
 
You argument is self-defeating.
 
If there were unlimited opportunities for unlimted private folk to do unlimited things, then I'd let your nonsense go. That is not the case, with an exponential growth of population and consumption, on a finite planet, clearly there are limits. We are at them now, how about letting the blame (or identification of the problem) fall where it should? Clark was well aware of the limits to growth; and equally aware that t address reality was political suicide.
 
If opportunities were unlimited, you wouldn't have to worry about how much the Govt 'took', nor about partial vetos. The Chicago school was always a bit dumber than MIT. Folk deciding who had the better argument should have though on that some.
 
 

There are two views on that: the new Great Stagnation Thesis, which I'll be blogging on in a couple of weeks and represents a major threat to the farm sector (though not in anyway you are thinking, and the Great Stagnation Thesis fits in with Libertarian advocacy).
 
On the other gumboot, and I think I'm still more in that camp: over the long term opportunities are unlimited, because of the human mind ... and before you get to this little ball of dirt in the milky way, in the long term we're already in space looking at that asteroid belt.

And by the way powereddown, I've not once seen you offering anything in the way of 'solutions'. All I can glean from your doomsaying is that our only option is to go back to caves with our candles and clubs? So what is it?

Oh great, so here's a problem, dont know the exact answer so in your case lets say the Q is invalid because there is no answer you like the sound of. 
The broad solutions have been written about, use less energy and live within the annual energy fall from the sun. The maths, physics and geology behind it have been pointed out time and time again....but you dont want to absorb them...instead you attempt to caricature.
"caves with our candles and clubs" Except  this is one option and one it seems we seem want to take if we just carry on...as it seems you wish.  Trouble is tribeless you are I think in your 40s....if in your 70s you might just get away with it....ie 5 to 10 years....not in your 40s though....no, 1/2 your life is before you....choose your downhill path wisely, I dont think you/we will be able to move between them once set on one.
regards
 
 

Tribeless - you must have selective-reading issues.
 
I've been very clear, here, on my blog, and in my column, for years.
 
First, globally, we must reduce population. Best estimates are that the planet can support 2 billion at subsistence level, maybe only 1 billion at our current level of consumption.
 
Secondly, the growth-based fiscal system we built on the growth-side of tha gaussian, has to be morphed (or just replaced) by a steady-state one.
 
Professor Ellen Moseley-Thompson put it well a few years back at the Otago Uni staffroom - answering an "how many people can the planet support?" question, she replied "That's not the question. The question is: at what level of comfort do you want to live? Amswer that, and I'll tell you how many people can be supported"   Wise lady.
 
You make - and I suggest it's a form of denial, just like Hughey's "Malthusian" - the false association that I advocate what I warn of. Andrews warned that "in an hour, maybe two, all of this will be at the bottom of the Atlantic". He didn't want it to happen, but he wasn't in denial, nor did he think that because they hadn't sunk thus far, that they wouldn't.
 
If we continue as we are, it will indeed be clubs and caves. Not sure is there will be the resources for candles.
 
I advocate lower population, steady-state economics, sustainability (as in: can be maintained long-term) and getting there before it's too late. Actually, it's already probably too late, but it's still legitimate to be proactive, and illegitimate to pursue a course which is clearly unsustainable, and carries a guarantee of misery for our offspring. And us, if you exxpect to live another decade or two.
 
My proactive contribution is in the arena of energy efficiency - housing and household particularly.

Right, and my naysayers call me an idealist.
 
Given the world now has 7 billion people, and enough resources, the fall to 1 or 2 billion seems a bit rash? And assuming no 'final solutions' how do you possibly think you're going to delete 5 or 6 billion people? I only have to change people's philosophy to get to my free world, you've actually got to get rid of them.
 
I'll take innovation via capitalism, thanks. And I'd make a bet if I was going to be around that long: in 200 years, so long as the statists don't win the battle for the free individual, humans will be even better off than they are now, just as we are better off then 200 years ago, and so forth. I can still almost remember the armageddon that was prophesised at peak whale oil, the streets were going to go dark, we were all going to be back in caves with clubs, all the palaver. Never happened.
 
I only make it to this forum, now, once every two or three weeks for a sampler (I can only handle that much of Bernard's socialism), so I am neither aware of all of your posts, other than when you interact with me, nor your blog, nor your column. Perhaps you could put up your blog link?
 

"seem a bit rash?"
 
Stupid comment, nothing personal.
 
You can put 100 sheep into a 1/2 acre paddock, and for a while they'll be OK. To use that as an argument that they'll be OK in a months time, is stupid (you'd rightly end up in court if you tried it). The ONLY difference is scale. The long-term carrying-capacity might be half a sheep, or perhaps one. What relation does that number have, to the 100?
 
None whatever.
 
If you googled powerdownkiwi  - just a thought. ......

I assume you have good skills in reading graphs so take a look at one of the world population, because that inflection point in 1961 says we don't have enough resources. Think of that year as peak energy or peak EROI (as opposed to peak oil, since net is what counts). Minerals would be included in that, all the cheap stuff gone.

No tribeless - you've never seen him offer YOUR solutions. you are offended by what Pdk has to say. He is just pointing out what is very obvious to him, unfortunately it isn't to you.

God, there's a parrot in here.

God, there's a parrot in here. God, there's a parrot in here. God, there's a parrot in here.

PDK - Have to take issue on you with this one.
 
"Clark was well aware of the limits to growth" Yep she was, she grew such a large public sector that she knew it was completely unsustainable for Private enterprise to keep paying.  She knew she had reached saturation point and pushed private enterprise beyond its ability to pay for her excesses.That is the real limit to growth. The transfer from one group of people to another was no longer sustainable. Think you might be completely confused about limitations on growth and how they actually occur. 
 
It will be the innovative private sector who pulls us out of the quagmire again. History is so damn repititive because of the parasites who can't make a living off their own ability and efforts so they suck they living daylights off everyone else who can by working in the non-productive sector.

Government is 33% of GDP. What is the correct size then?

The parrot says something meaningful, but wrong. Even if government spending was this one third of GDP that would be dreadful. What is more dreadful, is that last time I looked it was 44% ...
 
As to size, government (though even that would be a misnomer, and we don't need politicians) only need be enough to provide the rule of law (police, army, civil and criminal legal system). About a 2% voluntary tax should cover it.

my mistake - I was reading this
"Where do core Crown expenses go?"
2012/13: $73.7b (33.8% of GDP)
 
2%! no wonder everyone is complaining then!  

No, that's 'core'. Look at the whole government spend: all functions, all payroll. 44% I wouldn't be surprised if higher now we have CERA, et al in the mix.

Wrong Notan'e'.
 
She ran 'SUSTAINABILITY' up the flagpole, loud and clear. Presumably they did the polls on that, and did brown runny stuff. Never again was it mentioned.
 
I debated this with Hodgson
 
http://www.oamarumail.co.nz/news/debate-attracts-big-audience/1044979/
 
who was clearly aware.
 
Nobody will 'pull us ourt of the quagmire', that's you presuming growth, I'm guessing. We will, however, adapt to ongoing realities (no choice there) and in that, none of the current leadership are within a bulls roar of being on the pace. The Green leadership may know, and are choosing to make vote-catching noises, but that's an invalid approach. Having an educated population, and leading with truth,  is the only way.

... Having an educated population ...
 
Have you heard of Antonio Gramsci?

Until capital gains is recognised and accepted as the unearned income it is then then discussing taxing it is a waste of time. The problems it causes can only be shifted but never eliminated, to do that you have to eliminate the source of income altogether, but that seems to be a place that on one wants to go as they search for answers.

Scarfie - a similar comment about the Ryan/Living Wage interview just gone on Nat Radio. As with tha Cap Gains, a 'living Wage' is a disconnected-from-the-real-world expectation that the holder of the electronic digits can acquire bits of that real world. And that if the Govt taxes them, then the Govt can buy bits of the same.
 
Mass delusion drives mass inflation?

Scarfie - I have to ask have you ever been in business? I'm not sure that you understand how the current tax system works for business.
 
Anyone advocating a Capital Gains tax seems to have an information gap in understanding the current taxation system and how it applies to private enterprise business.
 
I know plenty of Public servants and other wage earners who were investing in housing doing it up a bit and then hocking it off for a profit. I have absolutely no problems with anyone making a profit but many of these people were not paying the tax on the profit on these transactions, yet they were clearly trading in the housing market. Some of these people were tax deducting their expenses but not paying tax on the profit component from the sale of the house.
 
This group of people were lumped in with other property investors who had a real business within the market place.  There is far too much taxation law and variables to provide you with any in-depth understanding within this post.
 
 

Yes I understand perfectly the tax system (even having a rental property at one point) and I do agree with you, however back the truck up a little and consider exactly what a capital gain is. PDK gets it. What this entire article/thread is about is really an expert on one part of fiscal policy crossing over and commenting on what is really monetary policy and physics.
 
Capital gains (interest dressed up) is simply a tool to redistribute this years wealth, so fiscal in that area. But interest is a claim against future wealth, which puts it firmly in monetary policy. 
I will elaborate with a longer post further down.

These guys are very bright, but can they think?
Why not just do away with tax relief on interest as an expense item? The current system allows some capital gains to be untaxed, but encourages borrowing by allowing interest (a financing, ie capital, cost) as a deductible operating expense. This distortion is one reason property is a better investment in NZ than productive enterprise. This country is desperately short of capital for investment so we borrow it.
 
I could go on, but the present system works like this:
1  A NZ produced commodity starts to go up in price (dairy, apples, thermal coal, whatever)
2  People borrow from overseas to increase productive capacity of this commodity.
3  The spending of this money on the construction of new capacity causes an increase in employment and wages.
4  The increase in employment and wages causes an increase in borrowing for houses.
5  The construction of new capacity worldwide causes the price of the commodity to collapse (coal is a topical example)
6  We are left with over capacity and a large debt to overseas lenders.
 
Yet these guys can't seem to see how the tax system encourages us to become more and more indebted. Sack the lot of them I say.
 
 

I'm all for more people producing, but what would you get them to produce, and more importantly who would you get them to sell it to? I think almost everybody here agrees that we'd like to see more people off welfare and in jobs, but finding ways to employ them all is far from a trivial problem. 

Benwave - the cost of Govt and its agencies are welfare also and the biggest takers of the pie.
 
NZ needs market-entrepreneurs. People aren't prepared to take the risk of doing business as there is so many Political entrepreneurs continually meddling in the market place and the rules are changing constantly for anyone in business. Compliance in business is horrendous which actually puts people off innovation or doing a start-up.  You can get so bogged down in completing all the compliancy that it is like a full time job and your time is not free to be doing the necessary things to develop your market or product etc. If you employ someone to do all the compliance work it costs you valuable money that should have been spent in the business. It is a viscous expanding circle.
 
When the Govt gets behind projects it wants to pursue the market gets distorted and costs for supply increase as they Govt is placing a subsidy into the market. An example of this is the Working for Families Subsidy. This wage supplement helped to distort the market price of housing, distorted income/wage levels etc.
 
People do not readily innovate existing products that are in the market when there is Govt interference so productivity declines. One of the best examples that I have seen in NZ was when the farming subsidies were removed back in the 1980's. Agriculture was completely transformed as farmers had to find new ways to remain viable.  This was innovation at its best -  the cost was extremely high on those in the industry at the time and this group of people actually led this country back from the brink at the time. 
 
Innovation happens when people are left to their own devices - the free-market inspires people and Govt interference discourages innovation the most. 

Ha these 'norms' (and the govt is full of them) are the same ones that got us to this place in the first place. All over the world the same people who led us into this shambolic economic stalemate are the ones being asked to design a way out. Monty Python couldnt have done a better job of a black comedy.
Its way past time shifting the deck chairs Norm. Prize or no prize, its not far away from time to get your hands dirty. Go and have a good hard look at where the tax is being spent before you talk of taking more. I would suggest a good start would be for people to have to pay half of the full cost of a Doctors visit. Return that portion of tax saved to the taxpayers. Theres an idea.
History has seen al and every new taxes being swallowed by the monster. Feeding it more only encourages it more
 

Groan ... here we go again. Why is it whenever cgt or land tax are proposed that no one at first proposes reduction in other taxes, in particular corp tax and PAYE? Not withstanding the re-incentivisation, rebalancing aspect, I think cgt and land tax should only be supported if a substantial reduction in corp tax and PAYE is a prime objective. Ideally equalise corp/trust/cgt and PAYE to sub-20% and pick up the revenue via a land tax, with land based assets exempt cgt, as the latter is taxed via land tax. I'd a thunk this would suit both the right and left - low, flat tax - progressivity via land taxation. (Land tax levied based on classification of potential income value.)
 
Anyway, where's that wall, my head doesn't hurt enough.

I think Ive been saying that, however CGT assumes gains....if you odnt get gains then there is no Govn income.
So a Land tax for ALL, ie a constant.
regards

i don't quite understand the debate on should or shouldn't capital gains be taxed.  Rephrase the (or if u like, consider another) question:  do we want a fair society?  if u say no, ok, i've no more to say to u.  but if u say yes then surely you'd agree some people shouldn't be able to earn money & not be taxed on it while others are taxed on what they earn.  surely  it doesn't matter that some is labelled wages, other capital gains etcetera.  my understanding is those who buy & sell houses often avoid paying tax on the capital gains, likewise with shares & also when setting up then selling a business  Yes there will be other area were things are unfair & in adderssing capital gains u won't address the other areas - so what, we do nothing.  & yes, how to do it may be tricky - so what, we make no effort.  yes, u can give the current platitudes of government will spend it by overpaying civil servants ....  and making wastful welfare payments ...  But They are different issues & surely should be addressed separately.  though in doing so it would be refreshing if those who knee jerk complain about government welfare payments considered government funded R & D, company law, paton law .... etcetera as a welfare - ie financial support to certain groups in society  - or are we to be caught in the web of words

Capital gains is unearned income and since the amount of income avaiable is fixed, then by partaking a person is always taking from someone else. Taxing this unearned income is like a taxing a thief, they steal $100 so you tax them $30 of that money.
 
Let me illustrate. The history of civilisation is the history of agriculture, for it was a surplus of food that allowed activities beyond subsistence living. If you wanted a church for instance, then you needed food to feed the builders that are all of a sudden pulled from the productive workforce. The idea of interest, ie borrowing some food from next year to finish building the church this year, is a physical impossibility. An illusion as it can't be done.
What you may in fact do is borrow from the surplus food of the next town if they don't have any building projects on this season. Or you could borrow their spare builders. However you run the risk of deficit next unless you can grow a surplus on top of your previous surplus in order to pay the interest the next town demands as a cost for borrowing their surplus. Assume for now the amount of food it is possible to grow is fixed ( which it will be unless greater efficiency or more labour input is available). If the borrowing of food or labour from the next town had interest attached, then the following year there will be insufficient food to meet your demand, as you have pass back all your surplus and then some. Your town goes hungry.
So all interest does is facilitate a transfer of wealth. The village doing the lending can build a bigger church than your town, while you go hungry. That bigger church is their capital gain and comes at the expense of your health and well being. They didn't get a bigger church because they worked harder or were more productive. Lets say you levied a capital gains tax and got 30% of your food back, well that still leaves you 70% hungry. Their capital gain remains unearnt, or earnt at the expense of your town.

While your analysis is usually very good I don't think you have really addressed my post. I have tried to take it right back to basics, so throw out any preconceived ideas and have another go:-).   
A granary doesn't allow you to increase production, it only increases storage. I say in there to essentially assume a zero sum, which is a point all civilisations have faced(well eventually contracting). The only way to pay interest is to increase production, if you can't then a deficit is created somewhere and someone starves while someone else gets fat. Interest is purely a method of wealth transfer, capital gains an expression of that mechanism. By all means tax it, but you are not getting all of it by doing so.
I know it has some ramifications on the way capital and capitalism are perceived :-P
 

Remember amongst all this that I am trying to demonstrate how interest is unearned income. It would probably be easier to assume a subsistence level, the suplus of food confuses it a little, but I thought it necessary to link to civilisation. The surplus allows potential work to be shown, but there is still work done at a subsistence level. If interest was charged at a subsistence level then there would be trouble, probably a scenario we are going to meet in the near future.
 
It might have take 5000a to get materials, skills, labour to build it initially, and another labourer added more value. This can still only happen in a surplus situation, the surplus always has to come first. So there is no transfer of wealth, but there is an increase in wealth. Doesn't change the fact that interest is a transfer of wealth and to make that possible there has to be an increase in wealth. However even is a scenareo where wealth is increasing interest still results in an inequitable distribution. Capital doesn't have to come from interest, but interest will always lead to an unearnt capital gain. Difficult to distinguish between to two for tax purposes I know. But heck in the case with fractional reserve banking there is leverage on the unearned income proportion. Quite simple in the case of real estate, in the case of no improvements then any rise in price is attributable to interest.
Tax is of course an unearned income as well, just to throw a spanner in the works. It allows the director, collector and receiver of such to not be engaged in primary production. Another tangent I will keep clear of for now.
 
Yet where is the wealth transfer? That already happened when the neighbours got raided. Doesn't matter if it is interest payment or theft, outcome is the same. 

Get the terminology right. Would it help if you distinguished between "earned income" being the return to labour, and interest being the ROI or "return on investment" and not "earned income". Adam Smith established 3 resource categories, Labour, Rent, and Capital.

So you are getting to the heart of the matter That holding and not consuming adds the value, you want to purchases that value, the money you pay is called "interest".  Just as the purchase for any other resource.
 
I terms of the town building a church I use above (I already have a granary) if I defer that building until next year then that suplus of food still has the same calorific value and same ability to do work next year. It is my choice not to use it this year and by doing so in effect it has zero value. If I choose to lend it to the next town then it is their desire to borrow it that adds the value you state, so why should I get the interest? As I pointed out at the start the interest means someone goes hungry next year but you keep adding inputs to distort this, although in reality they don't. The hunger is of course from labour being stolen by the interest payment due.
 
As to why people peoplel pay interest. Buggered if I know, greed on both parties is all I can put it down to.

I agree on the unearned income part but I would still tax it.
 
I think the solution lies in taxing all property, not just investments. To make this more palatable, allow a fair rate of increase such as 5% a year to be tax free. (You could also use inflation but that just makes the calcuation harder and simplicity always wins out).
 
Then if your house doubled in value over 14 years, no tax to pay. If it doubled in one year, you pay tax on 95% of the gain at your marinal rate.

Or tax on gain but reduce PAYE to compensate....of course in a property slump you then find the Govn's take dies...  The problem with "fair rates" is the contortions a good tax lawyer/accountent will go through for the better off...the end result is the better off pay less than they should.
I for one think that the simple % on everything no matter what has great simplicity and fairness...
regards

Kiwimm - if you want to tax unearned income by introducing a CGT you have to look at the other side of the equation which is a Capital Loss which would provide a tax refund.
 
Countries that have CGT where property prices have fallen are finding this extremely expensive. 

Not necessarily true. In the UK if you have a capital loss you can carry it forward for 7 years to offset future capital gains. You cannot get a refund - at best you can negate a future taxable gain.

Questions for Gemmel ....I find it astonishing that we have a housing shortage and he wants to slap a new tax on those willing to supply lettable  housing stock, thus removing incentives to invest in income generating property.
Who is going to house the homeless .... Housing New Zealand is broke and so is the Government ?
Has he not heard of the principle of if you want less of someting then you tax it ? Less housing?
Would it not be better to remove the offset of other income against property investment losses ?
Simply , less investment in rental  housing would compound an already dire supply side  problem 
The introduction of CGT is a major shift in tax policy , it will take years to implement , and taxpayers would need to be given ample warning of what is a  a substantial shift in the whole basis of taxation.
There are some things to bear in mind :
All  share speculators, property speculators, and currency speculators  are taxed on their gains already anyway , so I dont see this as a major new  revenue source for the Fiscus  
Proceeds of the Sales of businesses are in many cases supporting retirees , tax the sale of this and watch how sales of retirement homes collpase.
Any new tax slows growth, you remove the incentive (gains )from those willing to take investment risk , and they will exit the investment market
We know that CGTon property  does not prevent bubbles .... just look at Australia which has CGT
Lastly this is not England , with 60 ,000, 000 people and a massive tax base , we have just 4 million people , a low wage economy , a tiny tax base and most New Zealanders are not nett taxpayers after getting WFF and other freebies.

Do we have a shortage?
The suggestion is 6% rentals un-occupied and a decent % of speculative buys not rented out because of the hassle and tax writeoffs from "losses" The estimate in OZ its 10%....if thats similar in NZ its 10~15% empty houses....so a false 'shortage'.
So actually taxing these should bring them out onto the market as its no longer profitable to hold....
regards

@ Steven there is no doubt there is a housing shortage , just look at the level of pricing of Auckland houses for sale , now in excess of the 2007 peak .
As Gemmel will know from the Adam Smith and Keynes textbooks he used as a student, there is a supply side constraint in Auckland which is pushing up prices , and with investors  unsure of what Government will do next they are already staying gout of the market
This, added to low levels of new building, makes supply likely to get even worse ...... add CGT to the mix  and the goose dies

You are I think guessing.  Yes there is huge doubt of a real shortage if a decent % of Auckland housing is held off the market as speculation, or foreign chinese nationals not living here have bolt holes and multiple ones at that.
So your contention of adding CGT to the mix and it dies is yes possible but dubious. For instance if a CGT is coming then the speculators faced with paying CGT in future will unload before the CGT becomes law.   At that point assuming no other falsehoods we'd see if there is a housing shortage or not.
Frankly we really dont know and you a guessing on the effects of CGT.
regards

@Steven you are the one making assumptions about my take on this. I suggest you read my remarks , along with any other joker who is in favour of this resentment tax . 
John Key was right when he pointed out that the wealthy in Parnell will never have to pay the tax. They are often able to engineer losses on sales of assets through all sorts of schemes , for example  by taking out management fees and thereby creating an assessed loss in the entity that owns the asset . On sale of the asset  it leaves them tax neutral
Its the poor bugger in West Auckland who is unable to employ accountants to properly structure his affairs that carries the brunt of the tax.  
 I am not guessing about the likely effects of CGT as you suggest . I have lived and worked  in two countries with a CGT tax-regime for 15 years .
Capital Gains tax has the  potential to be a terrible destroyer of personal wealth , it starts out at low rates with wide exemptions but the target rate grows often without making compensation for inflation.
In my practice , I stand to make a fortune advising people on how to avoid the Tax through the use of discretionary trusts and other vehicles, and the use of investors loans to the vehicle to minimise any gains, and can in some cases engineer a CAPITAL LOSS  on sale of an asset , thus enabling the taxpayer to reduce his overall tax liability through offsets  
Here are my observations :
The state never uses tax receipt money as effciently as the indivdual from whom it is taken. 
CGT effectively financially damages the providers of Capital and Investment who make decisions to stay out of the market or avoid the risks.
Decisions to sell assets( to take the profit)  are circumvented by not selling the asset and borrowing against it for consumption or further speculation.
It often constrains the property market because people hold the assets instead of selling them , thus creating more demand , and prices increase to the point where the gains offset the cost of paying the tax . At that point you sell because even if you pay the tax ,you get to keep the excess over the tax rate  
It does nothing to slow house or commerical property price increases if thats the intention.
The only thing Gemmel is right about is the terrible distortions it caused in the UK which will have the same effect here albeit  on a much smaller scale

Boatman: a cgt regime already exists. as an ex-employee of the IRD, I have a few questions for you. How would you define an income generating provider of rental housing? It's the intention right? To escape the capital gains tax net you need to have a genuine intention of going into the business of providing rental accomodation. How many do that? How many are in the business of :-

  • investing in inflation
  • capital gain
  • capital protection
  • capital preservation

Would you consider an investment property owner who is negatively geared to 95% a genuine (in the business of being a) rental accomodation provider. I wouldn't.
 
When you consider NZ turns over 140,000 properties a year, every year, out of a housing stock of 1.6 million, something other than rental business is going on. What is missing is data from the IRD on CGT receipts under the existing regime.

Precisely , CGT exists already for traders or people who buy and sell assets  ( If they dont declare or pay up its an offence)  , so those people who are strictly in it for the Capital Gain will now be in the open (as are traders) .
They simply set up a business leasing out the dwelling with all the deductable expenses of a normal business , and if there is any profit , take it out as managment fees or a salary or divvy it up between the benficiaroes if its a trust ( often with a lower marginal tax rate ).
They can charge fees to the entity which may never be paid ,converting the unpaid fees to a long term liability , which is then taken out tax free on sale.
You make a very valid point about the 95% gearing , but hey does the IRD dictate how much a borrower in business  can borrow and deduct as interest ?
Its got nothing to do with them and they could not do anything about it anyway.
Anyone who gears a property to 95% in a single entity is heading for bankruptcy anyway unless he has other properties or assets to subsidize the 95% er 
My view is the CGT will generate very little for the coffers , be expnseive to administer and be widely legally avoided  
CGT comes with a sting for the fiscuss too ,  called Captial Loss . Its possible  engineer a Captail Loss on a sale which would have to be allowable to offset against other income.
 
 

CGT is too complicated and just makes work for IRD, accountants and lawyers. The only fair way is to universally tax wealth (assets) not income with flat taxes that are unavoidable, easy to administer and cheap to collect. Land tax and Financial Transaction tax would be good starters and bring down gst, income, corporate and withholding tax. 5% rate on everything? Progressive - the more you buy and spend, the more you pay. Get rid of depreciation, fringe benefits. Get rid of all benefits including WFF and replace with universal minimum income. Property sales to long term residents only. Moratorium on immigration for 12-24 months.
 
We want long term investment not short term speculation or "dirty" hot money. A small country like NZ will not survive much longer completely open to uncontrolled speculative money flows. The continual pumping and dumping is distorting the whole economy to the detriment of the vast majority.
 
Nick Clegg is talking about asset taxes in UK as only fair way for wealthy to pay their share that they are avoiding at moment.
John Key has been quite open about rejecting Land Tax as not acceptable because it will cause house prices to reduce markedly.

If you read my posts on unearned income, then taxes also fall into that category :-P