Jenée Tibshraeny argues National's proposal to give 'savers' tax relief is an ill-conceived bid for baby boomer votes that'll distort the tax system, stymie growth and prevent interest rates from rising

Yes, good points and fair questions. But there are some social issues in the mix, as well. For instance, does reduced investment income and increasing fixed costs, insurance, rates etc, mean enforced tightening of the belt to the extent that some retirees go short on good diet, home heating and health insurance, amongst other things. Hunkered down and depressed even. So at an age and stage of life when health problems escalate for obvious reasons, might this not impact significantly, on an already stretched public health system?

You are correct about the uneven playing field. 5% of the population pays one third of all income tax, while 50% of the population pays only 8%. https://ibb.co/YTGJNJP

“Distortions prevent money from finding its way to where it’s most productive.” - Yup, just look at what inflation targeting has done for starters.

Sorry Jenee.. Is it a bad idea or an unclear idea? The article is titled to suggest its ill-conceived then you cite a lack of clarity around how the policy would be implemented and applied and what is meant by savings.

You seem to fill in the blanks then conclude its all a bad idea. Please tell me how you have come to this conclusion given the unknowns you cite.

You ask the question about Kiwisaver? Equities? Bonds?... all good questions then completely undo your article with "It doesn't encourage people to put their money where we really need to them to put it - in businesses to grow the economy, in our capital markets, in our debt markets to support infrastructure investment".

Surely it would benefit capital markets if Kiwisaver, Equities and Bonds were included..... but as you say, its not clear what National mean by savings or retirement savings. So say that.... not fill in the blanks for us.

All I can take from this is Jenee doesn't have any real savings and will have to retire at 67...so, "nothing in it for me so ill make up some economic rationale as to why its a bad idea".

Jenee - why not try compounding the benefit of not paying tax on the inflation component of your kiwisaver returns until you are 67 and then let me know if you still think its a bad idea.

Anyone who understands inflation will realize that the real inflation has not been in consumption of goods and services, it's been in assets (property, equities, etc). Bridges is just practising populism, not offering any kind of real solution to appease savers.

So boomers happy with falling interest rates the last 30 years meaning paying off the mortgage got easier by the decade while asset prices sky rocketed - what a dream run! But what about young people who have been struggling to put together a deposit for a house - where has the care been for them the last 10 years of National power?

Great analysis and a great quote:

“Putting the fundamental issues of distorting and misusing the tax system to win votes aside, allowing savers to deduct inflation from interest earned simply doesn't make economic sense.”

I might have the math wrong on this but wouldn’t high inflation/high interest rates been worse for this problem than low interest rates/low inflation.

If interest rates are 2% and inflation is 2% and tax is for ease of calculation 33% then you’ve lost what? .65% or something.

But if interest rates are 20% and inflation is 18% then you’ve lost like 4.5% or something. So actually much worse in late 80s by my reckoning.

Anyway, best they can do is knock a couple of points of the PIE. But unfortunately we can’t cut rates because boomer retirement and health costs. Fast forward five to ten years and we’ll probably be raising taxes.

"It doesn't encourage people to put their money where we really need to them to put it - in businesses to grow the economy, in our capital markets, in our debt markets to support infrastructure investment."

This is exponential growth you're advocating? There seem to be minds which don't get the problems with exponential growth, nor where it is vis-a-vis our little planet. Trump annexing Greenland, doesn't give the US a doubling-time, nor does South Basin oil - if its there - give NZ a doubling-time. The planet is up against the limits-to-growth now, and ínvestments' are really bets that it will get bigger in the future. So were the interest-rates that deposits used to earn. These signals are there for the thinking.

Th problem now is that 'savings' cannot 'earn' what was a temporary rate of return (but which short-term thinkers think of as 'normal'). So the Nats are trying to dig a hole under the car as it sinks into the quicksand - to keep a margin (at least in people's minds).

Bit like bailing the Titanic with a bucket - bigger problems are afoot. We are entering a low, then no, growth paradigm. Sorry to all those whose training or belief or psychological need is for this to not be so. Only those who address this overarching issue, will remain relevant.

Wow, how innovative of the tories, what next....announce the health budget will be sponsered by Phillip Morris? And the tories argue the pgf is a pork barrell affair? I can't think of a more self serving shortsighted policy for loaded boomers who can't be bothered educating themselves in how to invest across mixed asset classes. In many ways that succinctly sums up why the NZ economy is so stagnant, we lack financial sophistication. Savings account...what is that anyway?

Hi Jenée
You are not often incorrect, but you have the wrong end of the stick on this issue. Ever since 1923, when Jacob Viner pointed out that the inflation component of interest income is not income but merely compensation for inflation, economists have been nearly unanimous that (i) there is no good economic reason to tax the inflation component of interest income and (ii) there is no good economic reason to allow people who borrow to invest to deduct the inflation component of interest income from their taxable income. Nobel-prizing winning economist Franco Modigliani is merely one of the highest profile economists to make this case. The United Nations manual on the System of National Accounts (1993) recommends that GDP measurements should be adjusted so that the inflation component of interest income is not recorded as part of GDP (although most countries do not do this.) The tax falls mainly on elderly and unsophisticated lenders (those who do not hedge against inflation by buying shares or property) and for this reason it is sometimes called the Widow’s tax as many elderly lenders are in fact elderly women. The great beneficiaries of this rule in New Zealand have been property investors and farmers; and there are good reasons to believe that the excessive taxation of interest income is part of the reason why house prices have gone up so much in New Zealand since 2000. There is a well established literature on most of these points.

The situation is worse in New Zealand than inmost other countries because in most countries savers can hold interest earning assets in special retirement income saving accounts that are taxed on an “Exempt-Exempt-Taxed” (EET) basis that means that the inflation component of interest income is effectively exempt from tax. New Zealand changed its tax system in 1989 and got rid of its EET system – a measure that other OECD countries decided so was so daft that none followed. As National observes, this means New Zealanders who save by lending money are amongst the most highly taxed people in New Zealand. If NZ does not reform the taxation of retirement income savings in line with standard economic theory and normal international practice, changing the tax on the inflation component of interest income is a sensible step.

One of the more disappointing aspects of the Tax Working Group is that they got this issue completely wrong. I suspect it is because the group included very few properly trained tax economists - or because they lacked people with guts to stand up to Cullen, who has been wrong on this issue (but not all issues) for decades. (In fairness to Cullen, he has been advised by IRD officials for decades, and they have been adamantly opposed to the exemption of the inflation component of interest income from income tax for decades, despite finding no support from economic theory for their position. Their justification is that it is administratively complex, as if they had never heard of the computerised tax records.) Actually, that statement is not really true – most of the Tax Working Group report was disappointing, partly because large parts of it ignored standard economic theory as well as normal international tax practice. It is hard to believe the Tax Working Group started from the argument that income from different sources should be taxed at the same rate when that position was rejected as a theoretical proposition nearly fifty years ago by the Nobel prize winning economists James Mirrlees and Peter Diamond – and it has been rejected in practice by almost all OECD countries (except New Zealand) . This is one of the reasons why taxes on businesses and capital income are so high in New Zealand relative to other countries, as National has noted.

National should be given some kudos for their position. It might even help young people, as it will reduce the incentive for landlords to bid high prices to purchase investment properties as an alternative to investing in over-taxed interest earning taxes.

Andrew

Saving = less spending you say.
This is a problem for "growth".
There are so many issues with growth it is difficult to know what to say.
Income growth should be key to spending - NOT doing our damnedest to get people to get into MORE debt.
Income growth rests on productivity which NZ has abysmal record on in last 15 years.
Proportion of savings contribution to spending by over 65s is very hard to estimate.
Seems a good joke to make pensioners work another 2 years and then give them a few more crumbs re savings tax relief. Pensioners already have most of the wealth in NZ

Let's just toss the family home into the mix as well - the other great distortion. No tax on that return and in another oddity, also exempt as income or an asset for our benefit testing rules. The saver with no home misses out in all areas.

A government funded retirement for everyone, with no need to contribute at all and no means testing is crazy. It is even more crazy (and plainly criminal) as not to properly fund the plan every year out of general tax income. Such a plan is simply a bribe to the generations who get it and is financially unsustainable. The same as all other "subsidised" things. The subsidising party will need to either ration them (as they cannot afford the actual needed quantity) or the consumers will waste it (the example is NZ houses build in 60s and 70s, cheap energy meant no need for insulation, You save your own money building the house and spent other money to warm it up).
The only thing that makes a subsidised system work is constant population growth, and a constant increase in the number of people working and a constant increase in taxes from these workers. Change any of that, and the system will collapse.

Given the current lot made wild promises, yet delivered next to nothing except higher taxes, hugs and world class virtue signalling, yet still evidently have support, who can blame National for throwing chelsea buns to the hoi polloi?

you don't fix one distortion by creating a new one.
you take away the first distortion, I have always thought is silly an investor can deduct interest from their mortgage but a property owner can not, and there are plenty of structures created to take advantage of that

Did National get their caucus to put 3 policy ideas each into a bucket, they did a draw and then vomited the results out in their recent policy announcements?

We shouldn't be paying tax on our savings end of story. Lets remember 20 odd years ago we paid no tax on our savings and then tax was introduced and the overall situation got worse so how was taxing your savings making things better ? what do you suggest, increase the tax on your savings ? You have already paid tax on your earnings, stupid idea to then pay more tax on your savings. The people who have conscientiously saved their money and not just blown it all deserve better. One minute your being told to save for your retirement, the next your being taxed to death and told to blow the rest to "Stimulate the economy" I think not.

UPDATE: I briefly spoke to National's finance spokesperson Paul Goldsmith on his way to Caucus on Tuesday morning (after writing this piece). You can listen to him explaining his rationale behind the potential policy by clicking on the audio inserted at the bottom of the story.  

I'm more concerned with Jenee's sensationalist headline suggesting that only boomers have enough money to have any savings.

Firstly there are many boomers who are struggling to make ends meet and won't have any savings. and is she saying that no other generation can afford to save? Perhaps a headline that focused on the real issue of that National are looking at the tax treatment of savings.

ABSOLUTE NONSENSE !

If I was allowed to have an inflation and tax adjusted return on my savings , I would save more in the Bank ................. and lets not forget the savings in the bank are the pool of available capital for growth and investment in the economy .

My Savings are someone else's Capital , quite simply savings are part of the capital formation continuum , and without capital we would not have economic growth

I shall vote for the package if Simon can find his way to include some helicoptering of cash to Kiwis, say $2k per each, and stipulate no tax on the first $15k of interest earned from Banks, etc. All to stimulate the economy and to direct more revenue/income to his Business friends, but hey I don't mind that.

Boomers shouldn't be afraid to do the sums and monetise some of their capital to provide money for living expenses.

Do we forget that the retirement age was lifted from 60 to 65 by steps in the early 90's' no 20 year preparation, happened rather quickly for those near retirement, impacted those born before the war marginally and was in full effect for current boomers and the rest of us after the boomers. I have to work an extra 5 years, before I get the pension. however its not all about me. I had more than enough time to plan and was under the opinion that I wouldn't receive the pension if I had a super scheme. If I live longer than 65 and get a pension its a bonus.

This effort to get us Boomers to SPEND SPEND SPEND , is just a load of cods .

Apart from the fact that the schools taught us about thrift and that's what we knew and did ( I still have my post office savings book form the 1970's ) , we also understand the need to live within out means and to avoid being a burden on the State .

Post WW2 thrift was a part of our daily narrative

Economists have routinely pointed out ( it was economic orthodoxy when I studied economics) that Savings were a every important part of the country'e health and wellbeing , and success .

Nothing has changed , the savings of one are the capital resource of the business , farming and other productive sectors , and pooling out savings in savings banks , co-ops and building societies enabled home ownership

We need to save , live within our means , provide for our old age , take care of our health and not expect Nanny State to wipe our backsides , if possible .

And saving should be rewarded with a decent return