Andrea Black probes ways of making tax settings fairer and more sustainable, so that wage and salary earners can feel confident they aren’t the only ones paying ‘their fair share’

Andrea Black probes ways of making tax settings fairer and more sustainable, so that wage and salary earners can feel confident they aren’t the only ones paying ‘their fair share’

By Andrea Black*
(This article is part of Interest.co.nz's Election Series).

Do we have our tax settings right? Traditionally such a question is answered with respect to the GST rate or whether our company tax rate IS too high/low with a bit of wealth tax thrown in for good measure.

I am taking a slightly different approach, looking under the hood and considering what would make the tax system fair, stable and sustainable for the next fifty years – for everyone. Not just those who are easy to tax like wage and salary earners.

Background

The New Zealand going into COVID-19 was one of low wages, high rents, and rising wealth inequality. Information supplied to the Tax Working Group showed that in 2015 the top quintile (20%) – excluding the house people lived in – owned 75% of New Zealand’s wealth. $602 billion of a total $789 billion.

By 2018 this became 77% - $785 billion of a total $1.014 billion.1

Using the most recent Household Economic Survey – 2018 – and looking at how these numbers change by age group, it is not a stretch to say the people in the top quintile (above) are over 35.

And since that time the New Zealand share market has increased by a further 30%2

with house prices increasing by 20%.3

With the final piece of the puzzle, rents and food have increased by more than the CPI over the last 10 years …

and wages fallen behind productivity.4

Putting an income tax lens on this – the following is quite well known:

• Wages are fully taxed.
• Most realised capital gains are not.
• Companies have a lower tax rate than the top personal rate.

What is less well known is:

• Self-employed people are estimated to return 20% less taxable income than comparable wage and salary earners. 5
• In 2014, 25% of the High Wealth Individuals reviewed by Inland Revenue paid 83% of the total tax paid by that group and 10% of them paid 33% of the total tax paid by that group.6
• Wage and salary income has a largely smooth distribution while there is a peak at $70,000 for personal income generally.
• Inland Revenue’s ability to collect debts is easier for individuals than for trusts and companies.
• The $7 for $1 invested that is widely touted as the return for investigations may not include actual cash that can be spent by the government.
• Inland Revenue spending on investigations and debt collection has fallen but its spending on processing has risen.
• Closely held companies’ retention of income taxed at the lower company rate has increased at the same time loans to shareholders have also increased.

So how can we make this better? How can we make the tax settings fairer and more sustainable? So that wage and salary earners can feel confident they aren’t the only ones paying ‘their fair share.’

Taxation of Capital

With rising untaxed capital gains going to the older members of society, the population ageing and a declining share of the economy going to labour; continuing to tax labour at the expense of capital is hardly fair or sustainable.

There are many ways this could change:

• Taxing more realised capital gains
• Wealth tax
• Tax on imputed return from residential rental properties
• Land Tax.

All these options were canvassed by the Tax Working Group who recommended taxing more realised capital gains. This was also my first preference as technically it meshed better with the existing tax system.

Over the last few months, I have changed my view and now prefer a form of wealth tax – ie any of the other options - with a decent threshold to take out all but the top quintile. This is because taxing gains on a realised basis will not put a dent in the untaxed gains that are continuing to accrue.7 I accept there are more technical issues with these options than with taxing more realised capital gains but to ensure there continues to be voluntary compliance from those who are fully taxed – those on PAYE and/or the young - something will need to be done in this area before very long.

Progressive taxation for everyone

One of the few graphs on the IRD website – that doesn’t relate to their performance - is that of the income distribution of wage and salary earners.8 It has a broadly smooth distribution.

This can be contrasted with the same graph but for all personal income. Here we see spikes at $70,000 and a smaller one at $48,000.9 Given these spikes aren’t there for wage and salary earners this indicates the payment of shareholders' salaries at these income levels which also happen to be the respective thresholds for the 33% and the 30% tax rate for individuals.

This means that either shareholders of closely held companies serendipitously earn incomes below key thresholds in the personal tax scale, or a smaller salary is taken by the shareholder with the balance of income retained in the company and the lower company tax rate paid.

This wouldn’t be an issue if the retained income in the company either stayed in the company as part of its capital base or it were subsequently distributed as a taxable dividend at which time the difference between the company tax rate – 28% - and the top personal tax rate – 33% - would be paid by the shareholder.

However what the facts show is that the imputation credit account balances of closely held companies - which record the tax paid by a company - are increasing at the same time loans from the company to their shareholders are also increasing.10 That is shareholders are receiving value from their company by way of loan instead of untaxed dividend.11

This could be countered by increasing the company tax rate to 33%. And it isn’t as scary as it sounds.

Small companies can already have their income taxed directly in the hands of their shareholders via the personal tax scale and the Look Through Company rules.12 Widely held companies already fully distribute all their credits and foreign companies could have their deductible debt threshold increased. Therefore, a rise in the company tax rate to 33% would only affect the New Zealand based companies currently distributing their income in the form of loans rather than taxable dividends.

Meaning that the personal progressive tax scale would no longer be optional for shareholders of closely held companies.

Increased enforcement

Experience has taught me that a rule that is not enforced, either by a regulator or social conditioning, is a rule that doesn’t exist. This is why the role of Inland Revenue investigations and debt collection is so critical in ensuring that only wage and salary earners pay the full amount of tax due. Which is what could be inferred from the Victoria University study, which estimated the self employed were underreporting, on average, by 20%.13

Now to be fair some decline in the Inland Revenue’s operating budget is to be expected following all the money spent on Business Transformation. However, it is very surprising that the share going to ‘processing’ has increased, when all those new systems should have made it more efficient, with step declines in Investigations and Debt Management.

The other thing to note is that with investigations spending there is an expected return of $7 in discrepancies for every $1 spent, so inherently with a lower amount allocated to investigations; there is lower expected return.

But the thing is a discrepancy isn’t necessarily cash the government can spend. It is simply a change in a tax position which could come from a major tax avoidance case; a reduction in losses or an adjustment to a memorandum account. All which have merit from the perspective of ‘cleaning up the tax system’ but only the first one gives the government more money to spend.

And these discrepancies are all counted before actually collecting the money.

So to ensure a fair and sustainable tax system - not only do, at least, the old Budget relativities need to return with greater spending on investigations and debt management; the focus also needs to be on what everyone actually thinks the investigations money is buying – extra cash that the government can spend on public services. If that means for transparency sake - that the ‘return’ of $7 needs to reduce – so be it.

Collection for everyone

This was a key slide in collections specialist and Tax Working Group member Nick Malarao’s presentation to the Tax Working Group.14 His point was that while the tax system puts a lot of emphasis on alignment of tax rates for the coherence of the tax system - individual, trust, company - there is far from alignment or coherence when it comes to tax collections from the various forms.

That is, the ability of Inland Revenue to collect is very dependent on how the debt is incurred. Individuals are much easier to collect from than companies and trusts because there is no corporate veil or (potentially) opaque structuring separating the vehicle from its economic owners.

And why this matters is there is currently $3.5 billion of uncollected tax and penalties sitting as income/asset in the government accounts.

It is also all the more important if the discrepancy that forms part of the return to government for investigations stands a chance of being collected.

Source: Annual Report – Inland Revenue 201915

The Tax Working Group proposed rules which would make directors, who had an economic ownership in the company, personally liable for PAYE and GST.16 While this still isn’t comparable to individuals who are personally liable for all the tax they incur – it is a start in making the tax system fair and sustainable.

Greater disclosure

And finally - greater disclosure is needed.

We know what the tax profile was for High Wealth Individuals in 2015 – what does it look like now?

We know the imputation credit balances and loans to shareholders of closely held companies in 2018 – what about now?

Exactly what is the breakdown of discrepancies found by Inland Revenue? How many were collected? How much was spendable cash?

The Government had no difficulty releasing details of those who claimed the wage subsidy and that proved very useful in ensuring compliance. We shouldn’t have to wait until the next Tax Working Group to find out details of the tax system.

Because maybe – just maybe – if we actually knew who paid what tax – the case for a fair and sustainable tax system would make itself.

*Andrea Black is policy director/economist at the NZ Council of Trade Unions, senior associate at the Institute for Governance and Policy Studies, and formerly independent advisor to the Tax Working Group.


1 These numbers were calculated by removing the assets and liabilities associated with owner occupied dwellings. However for Quintile 1 as this net figure was negative – excess of loans over assets – I have included this net negative in the calculation as it would indicate the loans were supporting more than the house itself – ie loan for private business.

2 (11773/9000)-1

3 (675,000-560,000)-1

4 https://www.mbie.govt.nz/assets/695e21c9c3/working-group-report.pdf

5 https://www.wgtn.ac.nz/__data/assets/pdf_file/0009/1863198/WP-07-2018_Cabral-Gemmell_NZcompliance-income-gap_IRD_-1.pdf https://www.wgtn.ac.nz/__data/assets/pdf_file/0012/1863768/WP-07-2019-Income-Under-ReportingNovember-2019.pdf

https://taxworkinggroup.govt.nz/sites/default/files/2018-05/High-wealth-individuals.pdf

7 It is true that this wealth could include some assets that have accumulated tax paid – such as term deposits – but GST, by taxing consumption, also taxes tax paid income and with a threshold of say $1 million it is likely to target most of assets that have not had its income taxed.

8 https://www.ird.govt.nz/about-us/tax-statistics/revenue-refunds

9 There are a number of large spikes on the left hand side too. These are correlated to benefits and income that can be earned before benefits are abated.

10 https://taxworkinggroup.govt.nz/sites/default/files/2018-09/twg-bg-appendix-4--closely-heldcompanies.pdf

11 It is true that there is an obligation to charge interest on these balances but given the scale and increasing level of them – either there is significant non-compliance or the cost of the interest is outweigh by the tax benefit from not paying the final 5 cents. And with interest rates falling, this requirement becomes less and less of a constraint and in any case the interest transfer does not change the net wealth of these individuals, other than tax on the interest.

12 https://www.ird.govt.nz/roles/look-through-company

13 https://www.wgtn.ac.nz/__data/assets/pdf_file/0009/1863198/WP-07-2018_Cabral-Gemmell_NZcompliance-income-gap_IRD_-1.pdf

14 https://taxworkinggroup.govt.nz/sites/default/files/2018-09/twg-bg-3985455-collection-challenges.pdf

15 https://www.ird.govt.nz/-/media/project/ir/documents/about-us/publications/annual-and-corporatereports/annual-reports/annual-report-2019.pdf

16 https://taxworkinggroup.govt.nz/sites/default/files/2019-03/twg-final-report-voli-feb19-v1.pdf Recommendation 64

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193 Comments

The tax working group were prohibited by their terms of reference from recommending a land tax, changes to GST or an inheritance tax.

15
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The tax issue no reporter wants to ask Robertson is kiwisaver. The Government is robbing kiwisavers with its FIF tax regime to the extent they are in international equities. On 1 April 2020 they happily tax everyone on 5% of their kiwisaver balances even though the vast majority had gone down substantially. Further as they recover during 2020 they will tax them on 1 April 2021 on another 5%. So yes, we get taxed when kiwisaver makes losses and then get taxed again when the recover to pre-existing levels. So this Government is not doing any favours to kiwisavers. It’s a tax cash cow for the Government that nobody wants to talk about. The same applies to anyone invested in equities outside NZ and Australia. All the while gains in houses supported by Orr and Roberston remain tax free. Grow some kahunas Labour and bring in a CGT and tax kiwisaver and international equities on a realised basis.

Kahunas? Labour? Like telling a dolphin to crochet.

IMHO neither National nor Labour have a spine - I always knew if you opened up a NZ politician that something was missing - in their case it is a spine. Worse however is that the NZ population are unwilling to go through any pain such is their sense of entitlement - NZ is not a team of five million but five million teams. It will be interesting to see how quick we revert to our old ways of spend , spend , spend on the assumption that nothing will change.

The real issue is kiwisaver itself, a private pension plan supported by the government cannot end good and they know it. Furthermore contributive pension plans just benefit the 1% that holds the equity until you can actually use your money, which by the time of your retirement will be insufficient, in contrast to that distributive pension schemes work for the reason that you do not get money you saved 30 years ago but current money contributed by fellow taxpayers by today's income standards

20
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I think a wealth tax will affect asset values. CGT will make people unwilling sellers. I think asset taxes are coming, it's the fairest and yes it's going to hit me, I also think new taxes should be tax neutral, we are already one of the most taxed countries in the world.
Farms earning 2-3% return would be hit hard by even a 1% asset tax but the correction in values would make a huge difference to young farmers wishing to enter the industry.

Around here the biggest problem is low wages and Im putting a lot of that down to immigration. Horticulture and dairy have a ready pool of workers available through the work visa program and those workers are little more than indentured labour while they wait for residence.
This puts locals at a disadvantage. Workers living in bunk houses without family to support can get by on a lot less than workers with families and a house to rent, it also shows the influence corporations have over government and sensible community outcomes.

You’re first paragraph is exactly what TOP propose.

What TOP propose is a 3% assumed return on assets that is then taxed at their flat 33% rate. They actually aren't proposing a 1% tax.

The detail is crucial, because in our current low interest environment, assuming a 3% return on assets is a big call to make. TOP are aware of this but don't have a formal position on it as yet.

They abandoned this broad-based RFRM policy earlier this year when they realised how illogical, counterproductive and politically unpalatable it is.

I never said they were proposing a 1% tax but I was referring to their tax policy on taxing equity in a property. This isn’t paid if tax from the income from the property (e.g a dairy farm) exceeds the value of the proposed property tax.

Aj’s last three words. Sensible community outcomes. My how such an objective would resonate. Local government mostly dead set against it though. Vainglorious and spendthrift projects are the fashion. Basic and essential services are just not sexy enough. And in the meantime the value based land/property taxes (ie rates) go up and up to support them that know best and their ambitions.

10
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""This puts locals at a disadvantage. Workers living in bunk houses without family to support can get by on a lot less than workers with families and a house to rent, it also shows the influence corporations have over government and sensible community outcomes."" Deserves repetition not just a thumbs up.

12
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Should be noted that many bunk house owners make a better return from the bunk house than from the produce.

There could always be exceptions. Exclude farms for example.

I agree with AJ. We should tax capital and labour the same - equity. Not taxing capital is a throwback to the landed gentry running the entire ship - labour earners never achieved equality.
Any form of capital tax will not be perfect - wealth or realized sale.
While we argue, discuss, think etc it gets harder for younger ones to buy farms, houses etc etc as the yield bears no relationship to capital value due to the tax distortions. Those with more capital in the past 20 years can now afford more simply by the large gains made because of the distortions. This will again be amplified with cheap/free money and having the existing capital to provide security to borrow more.
We need to act soon and do something before it spirals away still further. Im no expert on this but anything will be unpopular to the capital owning classes (me) but the alternative is a more unequal society.
I traveled through rural Hawkes Bay South and North last week and saw in towns like Paihiatua and Wairoa sold stickers all over real estate windows. Prices ramping upwards as owners of capital are finding the last remnants of cheap houses and vacuum them up and making them further out of reach of locals (labour earning) and consigning them to renters probably needing further top ups to be able to afford the rents once house prices go up further and owners want a yield on the higher price.

Policy announcement 1: Accommodation Supplement is scrapped. 4 billion more in to pay down debt. Rents will fall as tenants wont have the money. Policy announcement 2: All REALLISED gains on houses, farms and shares are subject to CGT. Rollover relief if sale is going into another property. CPI indexing so not taxing inflation.

In California the CGT is a huge incentive not to sell. I have friends who have borrowed against property rather than sell and pay the %44 CGT. I think farmers have 4 years to purchase another property. I looked at a farm in the high desert and the other guy looking at it was from south Ca , he only had 6 months left before tax kicked in, he purchased the farm. Nice farm some irrigation, good hunting but the high desert is cold in winter and isolated, hope it worked out for him, nothing like Southern California, the beaches and all the rest.

I am OK with what you describe so long as you are taxed on REALISED gains. If you don't receive the money you should not be taxed. NZ's taxing of unrealsed gains via the accrual rules for foreign denominated instruments including mortgages and in foreign equities outside NZ and Aust is too punitive as the gains can reverse and in the FIF regime you cant carry back losses or get your tax back. All the while large realised gains on houses have gone on untaxed.

No problem.
You own an investment property that has doubled in value. You want to buy your new Lamborghini. You don't need to realise the asset. Release some of the equity by mortgage on the investment property and buy the toy. The interest costs on the mortgage are tax deductible from the rental revenue.

Interest would NOT be deductible in your example. To get the interested deduction they apply a use of funds test. In this case the interest is being incurred to buy a car not buy the property that derives the income. Easily picked up by IRD

Can you please point to an IRD publication that defines that - I couldnt find one

You need a nexus between the interest expense and the production of income. This has been law since day dot for interest deductibility....

To satisfy section DA 1 Income Tax Act and get a deduction for interest a taxpayer must have incurred interest on funds borrowed to either: Derive income.

Or carry on a business for the purpose of deriving income.

See DA 1General permission http://www.legislation.govt.nz/act/public/2007/0097/latest/DLM1513555.html
Nexus with income
(1)
A person is allowed a deduction for an amount of expenditure or loss, including an amount of depreciation loss, to the extent to which the expenditure or loss is—
(a)
incurred by them in deriving—
(i)
their assessable income; or
(ii)
their excluded income; or
(iii)
a combination of their assessable income and excluded income; or
(b)
incurred by them in the course of carrying on a business for the purpose of deriving—
(i)
their assessable income; or
(ii)
their excluded income; or
(iii)
a combination of their assessable income and excluded income.
General permission
(2)
Subsection (1) is called the general permission.
Avoidance arrangements
(3)
Section GB 33 (Arrangements involving depreciation loss) may apply to override the general permission in relation to an amount of depreciation loss.
Defined in this Act: amount, assessable income, business, deduction, depreciation loss, excluded income, general permission, loss

Compare: 2004 No 35 s DA 1

And you think a decent acountant won't be able to find a loophole big enough to drive a bus through?

Your dreaming. That legislation has been in place for ever and its quite effective include the anti avoidance provisions for it. In a former life I use to advise multinationals on tax in NZ, UK and and Aust. One can always decide to practice avoidance but its wont be deductible and you can feel good claiming it until you get nailed. This is easy pickings for IRD as there software can pick the variation in interest deduction being claimed when it wasn't previously as then commence an audit. Resulting in short fall penalties or worse....

OreoContrarian...is it not the case with Companies that there need be no nexus with income or even carryon of a business (DB7 ITA07)?

Yep, but if you are driving around in a Lamborghini owned by a company FBT would be payable. IRD has many ways to skin a cat.

Agreed but if the money is in a company you need to get it into the individuals hands to use for private purpose of your private house as described in the writers scenario. Alternatively if the company buys the house that is mortgaged and you live in it as a shareholder or director you will be receiving a deemed dividend.

My mother lent me the initial cost of buying the property interest free - then she wanted it repaid so I had to mortgage the property to pay her back - then she lent it to me again under different times and promises so I could buy the car - there, fixed

Perhaps in your situation but most people dont get a loan from mummy for a house and a car! You asked to see the law and I served it up to you. One can do anything ultimately including total avoidance practiced by gangs etc until IRD come knocking and then no amount of BS will help you.

OK lets get tricky. A young couple don't have enough capital for a deposit for a suitable home in the area they need to live due to employment circumstance. They have enough for a deposit (plus mortgage) to buy a small investment property in another town or suburb. They spend 4 years aggressively paying down the mortgage as their compulsory savings program. Eventually the day arrives, they can afford to buy their own home. Their entire equity is tied up in the investment property, so they re-mortgage it to extract the deposit on their new home from the savings they have achieved by paying down the mortgage. The costs of the new mortgage are a cost of retaining the investment property. And therefore a cost of deriving the rental income. I would be happy to tangle with the IRD on that. PS.: I'm an accountant and an ex-employee of the IRD

A not very smart one. this is not tricky at all...it would not be deductible. There is no nexus between the interest paid and the income producing asset. You worked at IRD but needed me to point out the interest deductibility legislation? There is case law on this exact scenario!

The relevant legislation for deductibility discussed here is Tax 101 stuff for a commerce degree. Perhaps goes to illustrate the general level of training and sophistication (or lackof) of your average property "investor".

Worse yet puketepapa says "PS.: I'm an accountant and an ex-employee of the IRD"

He's referring to the practice of borrowing to repay a current account to shareholders who have sold a property into the the company, he's just not articulating it that well. It's easily solved by just denying interest deductions for land-rich companies as defined by the Brightline test. Interest deductibility is the real key for investors, targeting that would probably be too effective in reducing investor speculation.

There is no company mentioned or current account or other. More dribble. Read below what he has said. He has no idea what he is talking about.

"OK lets get tricky. A young couple don't have enough capital for a deposit for a suitable home in the area they need to live due to" employment circumstance. They have enough for a deposit (plus mortgage) to buy a small investment property in another town or suburb. They spend 4 years aggressively paying down the mortgage as their compulsory savings program. Eventually the day arrives, they can afford to buy their own home. Their entire equity is tied up in the investment property, so they re-mortgage it to extract the deposit on their new home from the savings they have achieved by paying down the mortgage. The costs of the new mortgage are a cost of retaining the investment property. And therefore a cost of deriving the rental income. I would be happy to tangle with the IRD on that. PS.: I'm an accountant and an ex-employee of the IRD"

You are very arrogant with your opinions. I also am very sceptical about your supposed history.. a multinational tax advisor, a tech company entrepreneur, an ex IRD employee and all this and retired by 42. I call BS on all of that. Just another "cut and paste" keyboard warrior methinks.
Funny how you keep on whining about the tax treatment of offshore stock market investments, haha - serves you right for not backing local IPOs and local companies.

....

"Having run a very successful tech company ."
"In a former life I use to advise multinationals on tax in NZ, UK and and Aust."
There's other examples of your obviously somewhat inflated "experience" but tbh I have no particular interest in your claims of expertise, fallacious as I believe them to be.

....

Getting a bit defensive now that someone calls you on your BS "experience" claims. HAHA.. you're a paper tiger

Back up what you are saying. You claimed and attributed statements to me which i am showing you made up....

Its a pointless exercise if you wait for realisation. Leverage up and buy another rental property, no tax. Do it on RV, with the tax on the gain (less CPI inflation) paid over the following three years till the next RV comes out.

CGT is an incentive to not to speculate, saying it is an incentive to not to sell is yet another neoliberal rhetoric lie.

No, its not.

Simple scenario: you own house in Auckland, its gone up $300k in value since you bought it. You get a job offer in Wellington, house prices are about the same as in Auckland, so when you sell in Auckland to move to Welly, you have to pay CGT on $300k, then buy an equivalent priced house in Welly. That wouldn't put you off moving unless the pay raise was substantial?

No, it would not.

For the simple reason the CGT is a tax on free money you earned by doing nothing at all. Even if I would pay 100% CGT I would still not lose any money at all.

The only ones that really benefit of these are not home owners but investors, it is just laughable how neoliberal narrative keep trying to make us all look like we benefit from what really is the profit of the top 1%, no matter how much you keep trying, this might have worked since the 80's but it is not anymore.

yeah, I doubt you'd take that position if the rubber ever hit the road and you were faced with actually making that decision.

I'm sure it sounds much better as internet warrior rhetoric than the reality, which is going from a $200k mortgage to a $300k mortgage to simply maintain the same quality of house to live in if you ever decide to move for a job opportunity.

Some people cannot see further than their wallets, as much as you might be surprised internet warrior or otherwise this would be my decision and this is why: If we would have a CGT we would likely have 300K lower mortgages by average to start with since it would have stop speculators from using housing as an investment asset. Greed and neoliberal lies are what brought us here in the first place, which just worked for the few that were already privileged.

I'd suggest basic economics is out of your grasp. It wouldn't stop investors buying rental properties they never intend to sell, as the CGT would only be levied on them at disposal (likely death), it wouldn't stop them leveraging up off the unrealised capital gains, and it sure wont stop rents rising with wage inflation to earn them money in the long run. Even the tax working group conceeded that a CGT would likely increase house prices and rent, not decrease them. https://www.stuff.co.nz/business/property/107359055/capital-gains-tax-wo...

It is so sad when some people feel cornered or their arguments do not make sense they tend to use falacia ad-hominem like you just did. Sorry for bothering you brother but ideas like the ones you support have been damaging for economy and there's enough proof around us.

chuckle, fine, ignore reality, and keep raving for something that won't work. Look how well CGT worked in Australia to dampen their house price rises.. oh, it really didn't do much at all, their prices are only a touch behind ours. Ignore the TWG that said CGT would probably increase house prices and rents.

Your "proof" doesn't prove the CGT will work, it proves that what happened in the past didn't work, and I agree, but more bad policy isn't the answer.

How about all other neoliberal policies they have been using to keep pumping the housing market such as giving grants for building houses which resulted in an immediate increase in prices of house and land packages, you ignore those? I guess you do.

Now you're going off on a tangent. We were discussing daft CGT policy.

The whole idea is that we *want* property investors who don’t intend to sell! That’s a service, not speculation. Many problems with our housing market arise because our landlords don’t actually want to be landlords- they buy property for the capital gains and the tenants are an unfortunate expense, rather than customers.

You might, most of the non-property owning people that want a CGT want landlords dragged out the back and shot.

Great point brisket!

- deleted duplicate

OreoContrarian, this is an entirely reasonable set of proposals. However, it isn’t extreme enough for most here. They want to tax unrealised income and the assets themselves. A great way to undermine the nation’s productivity and encourage capital flight is to tax capital. Not to mention that it introduces a fundamental disconnect between requirement to pay and ability to pay.

>They want to tax unrealised income and the assets themselves.

No, just one, not both. :)

Its well researched that once you over tax in a country you end up with reduced tax take due to avoidance and capital flight. Then you need to ramp up your audit and enforcement at IRD and IRD only has the dregs left all the smart people have been pushed out or left because of being disillusioned. 20 years ago when i was dealing with IRD they had really smart people and very efficient. Now if there is a complex issue you want to work out with them there is nobody left at the old Corporates who understands complex issues nor who can talk on the phone. A real shame.

What are your ideas to increase the net worth of the low quartiles?

Nothing heard so far. I believe that is because noone has actually thought about how to do it.

10
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Excellent comment. The problem is the lack of wealth, not the arguing about who gets what. NZ has got steadily poorer over the last 30 years while kidding ourselves that higher house prices represent wealth generation.

There are so many fallacies in how this article is framed, it's hard to know where to start, but SMEs create jobs, not trade unionists. If the small business owner is (a) supported by society, (b) sees opportunity and (c) has the money to fund expansion, then he or she will take the existential risks of expanding the business. The only place funds for expansion come from is from retained earnings in excess of money required to maintain the business. Yet, as a country we vilify business owners as tax cheats, invent unnecessary regulation every week and generally regard business owners as undeserving.

You reap what you sow. In this case a low wage economy.

Totally agree. Its propaganda!

The main NZ banks only want to lend on houses in the main. Even commercial property is much harder to get finance on even with 50% equity as they want personal guarantees on everything you own let alone trying to get finance for business expansion including plant and equipment.

But want to buy another rental in Auckland no problems! Very little equity no problems says Orr! Be bold says Roberston and Orr and loan to home owners! As your equity grows we will lend on it again no problems!

R W,

Absolutely, what have unions ever done but frustrate entrepreneurial business owners with their ridiculous demands. lets' get back to good old Victorian values asap. Why should modern day mill owners be frustrated by demands for decent working conditions, health and safety measures and other such nonsense. And tax? Why should businesses pay tax for goodness sake? It just ruins their ability to forge ahead and make this country Great Again.
I must assume that you are a great admirer of Friedman and the Chicago School and that you regard the Laffer Curve as akin to Holy Writ. I think you should immediately start a new political party-the TIT Party(Tax Is Theft).

DTIs and a land tax would help drop house prices I think. I've been out gunned at a number of auctions for my first home by investors. We could have no exceptions to the dti or lvr for investors? If the prices were lower, more people could buy them. Lower prices will also force lower rents due to the competitive cost of rent Vs mortgages, this would hopefully force some speculators to cough up their cash cows too as they won't yield a return. It's for these reasons I don't think anyone will fix it, to much of the population and the politicians are tied into it.

Tax equity at 1% on all property
Flat tax rate of 33% on all income
Universal basic income of $250 per week

why would you only tax equity? that would create perverse incentives. Who is going to pay the UBI?

UBI is funded by the 33% flat tax and the savings from no longer needing WINZ
Equity is your wealth you wouldn’t tax debt?

you would have to tax debt or it would be unbelievably unfair.

Equity is your money debt is the banks?
Housing is the only place you can park your money and pay no tax!
The incentive is to encourage the productive use of capital by taxing housing the same as all other assets.

I think you will find the debt actually belongs to you, it's your future earnings.

Where is the advantage in taking out loans you can't afford so you don't pay tax on them?

If you don't have a loan and don't have an asset, you don't pay any asset tax. How is that different to having a loan on an asset and not paying tax on that part of the asset's value? You still have to pay the loan back and pay interest on it, and as your equity increases, the tax you owe increases and interest will decrease.

if I have a farm worth 10 million and the guy down the road has a 44 million dollar farm but 34 million of debt, why should he not pay more tax than I do?

If I own a house why would I bother paying off debt if that equity was now taxable?

if I have a farm worth 10 million and the guy down the road has a 44 million dollar farm but 34 million of debt, why should he not pay more tax than I do?

Because you have the same equity in the property.

At such time as you're both mortgage free, you will pay tax on the deemed rate of return on a $10M asset and they will pay tax on the deemed rate of return on a $44M asset. Their farm will need to be 4.4x as productive as yours so that they're on a level playing field with respect to tax. This encourages efficient use of resources, such as land, and efficient use of capital. No point tying up $1M in a house in Auckland that has a rental return of 2% if the tax assumes a 3% return, is there?

If I own a house why would I bother paying off debt if that equity was now taxable?

Because the interest you pay is likely to be more than the equity tax.

Either you're paying interest on $5M and tax on $5M or you're paying no interest and tax on $10M. Either way you're paying money for the privilege of owning the asset, unlike now.

Also remember as long as the farm is producing a return equivalent to a minimum deemed rate it would not be subject to the property tax!
However if it was not using the land productively it would be subject to the property tax.

Using your thinking apply this to individuals and start with Politicians, so Twyford is not producing the productivity he promised the taxpayer so tax the difference which in Kiwi Build is delivery 3% and Light Rail nil, on this basis Twyford owes the taxpayer.

I don't agree with you, the bigger farm and we are talking asset taxes, should be taxed at the same % as a smaller farm. The problem we have at present is corporates are literally buying up all the farms around here. With low interest rates and easy access to finance it's not a level playing field. Asset tax should be treated like rates on the land value.

No farm will pay an asset tax!
Tax is paid on the productive use of the farm i.e. profits
However if you are land banking or money laundering and not generating income you will pay an asset tax!
If I have one sheep on my lifestyle block I am not a farm...

do you think farms are profitable every year? no such thing as a bad year?

Great question I'm not sure how that can be managed.
I got these two quotes from the policy document I hope it helps

Phasing in of the tax on rural & farming land to allow for the development of a suitable
implementation plan to prevent rapid changes in land value or tax liability and revenue.

In situations where funds are not available to pay this tax before better commercial
returns are achieved or the property is sold, then the tax owing will be held over until
better returns are made (within five years) or the asset is disposed.

This is where I think you are wrong. Why should big farms with lots of debt pay no tax? who do they expect to pay for hospitals, roads, schools etc?
If you lowed income tax and taxed land then the incentive would be to make more income not asset bank.
I have two chains of thought here, first for a stable society we rely on a land owning middle class, we are losing that at a fast trot. Second many big farmers have used debt and gone on a land buying spree with the belief that inflation would take care of the debt like it always has, that's the pattern they grew up with. That looks highly unlikely today, apart from what banks may say, many farmers are still on interest only loans. In the future this is going to come and bite us all, these properties should never have been aggregated, it was a really really bad idea. The value of that debt could become a bigger, a bigger hurdle as deflation grips us and real incomes fall.

I'm not sure I follow your reasoning about large farms with large debt loadings having to pay tax on unrealised gains - which is what I assume you're talking about. If someone creates a corporate structure (like MyFarm) and syndicates the ownership why should they have an extra tax imposition vs a standard "family owned" structure? Let's be honest - smallish family owned farms are barely sustainable unless they're freehold. Large corporate style farms can use "scale" to gain better returns and lower input costs.. you know this is true, it's been a bugbear for years.

no i was thinking of a straight asset tax, no exemptions at low %. Landcorp tells us a different story re large farmers.

Isn't the point of a farm to generate an income/profit?
Isn't that income/profit taxed to pay for hospitals, roads, schools?
If you're not generating a profit you're land banking and should get out of the way of the productive farmers.
So applying a tax to the speculators generating no revenue and leaving the farmers to farm would be useful in your objectives?

there is a lot of farm debt in NZ, almost as much as Australia which has something like 25x our production.

Too much debt is the problem and for some reason we think more debt is the solution...

it's not so much a solution as Central bankers in a blind panic not knowing what else to do.

It’s a risk free interest rate approach on your equity in a property. If the property is generating an income and paying tax like a rental there would be no additional tax
https://www.top.org.nz/property_tax

Mnky - Farming has more risks than many industries - Drought, Disease, price takers not makers, Govt legislation,weather, problems created by animals and people, as well as industry wide issues of supply and demand. This year has been trying with markets closed due to Covid 19 creating processing issues and timing, Farmers may seem to have an enviable lifestyle but so few want to even work in the industry to find out and progress to ownership and Farmers are an ageing population so keep on pressurizing us and look forward to buying BBQ steak at $80 a Kg for an annual only event and drinking soy instant coffee. Yes I am am Farmer ready for retirement but no interest from buyers who complain Banks unwillingness to lend even with a decent deposit but unable to meet the required serviceability of 6% with a return of 2-3% in a good year. Keep pounding your keyboard as practice for pounding your desk.

>Housing is the only place you can park your money and pay no tax!

Wrong, park it in nz shares that don't pay dividends and you'll also pay no tax.

If the purpose for your investment is capital gains, then technically you're supposed to pay income tax on it. IRD would have to prove it, though.

When the shares pay dividends it an easy case to make. When you take dividends away, you need to come up with some other reason (and there are plenty, I'm just saying this is taking away the easiest justification).

It’s up to tax payer to prove their intention was not one of disposal for profit at time of purchase... not Commissioner of Inland Revenue.
Here, IRD will take cases they believe evidence points to profit making venture... it’s up to you to prove otherwise

I brought the shares because i expected the company to start paying dividends once it got past its expansion phase...

Xero is a good example of share investments that pay no dividends in NZ and pay no corporate tax either and the holders making huge gains and not paying tax on realization. Its not the same for foreign shares though outside NZ and AU. See below

The negative tax consequences of investing in foreign shares instead of NZ & AU shares also significantly disadvantages investors saving for retirement.

Assuming I invested $100k in Nov 12 as follows and held them in the following two investments: Xero Limited. My gain is 1075%. Today my $100k has a market value of $1.075m. Xero pays no dividends so there has been no NZ tax payable. Berkshire Hathaway Class B. My gain is 156%. Today my $100k has a market value of $256k. BRK B paid no dividends over this period. As BRK B is a foreign share I must pay FIF tax each year from 1 April 13 onwards. For simplicity assume the 5% FDR is used. For the BRK B investment I am paying approx. $2000 actual income tax on deemed income of approx. $6000 on 1 April 13. By 1 April 19 I am paying approx. $4000 income tax on deemed income of approx. $12000 per year. So, over the 7 income years I am paying $20,000 income tax on a completely unrealised basis. Spread this over 30 years until I retire the taxes are insane.
The weekly FIF tax bill on the $50 billion New Zealander’s have in kiwisaver must be ginormous. I am not able to find any data on this. I would love to know what the tax bill would be for a year if only dividend flows and crystallised gains were taxed.

Why? if lending is at all prudent, your debt is smaller than your assets, so you have a net equity position that would be taxed. Bit rediculous to tax the young couple that just purchased their first house on $800k of house when they only have $100k of equity

minky - you clearly have no idea of how much money is paid by WINZ -- with the main benefit - accommodation supplement Temporary assistance ( which just rolls over) a couple with a child $478 or single parent $431 BEFORE their accommodation supplement ( $150) TAS and then a myriad of other supports - you would need a UBI nearer $750 for that to work -- i agree witha UBI and getting rid of WINZ which is a non productive activity - but we are talkigna government that wants more and more state help , assistance4 and employees - not one that wants less waste -

A couple with a child would receive $540 a week regardless of situation. Think of it as a $39k tax free threshold while working and a means to provide a basic level of food and shelter during Pandemics, AI, Automation, Retraining, Starting a business etc
The accomodation supplement and other extras are a direct result of exorbitant housing costs and can be unwound only after we fix the tax and welfare systems.

That’s right, with this policy there is an incentive to work because there are no abatements on the UBI and a couple would effectively pay no tax on the first $39k

and then waht -- as they wont be able to livev on 450 -- not in Auckland where their rent will be taht at least -- so they will need a benifit - aka WINZ -- so we are no better off - still all the costs and beuracracy of WINZ _- none of the savings -- and teh very wealthy will all get an Extra $250 - or is a means tested UBI you mean /

either its enough for people to live in -- or its a half way house mess -- taht only benifits the rich --

The UBI, Flat Tax rate and Property Tax all work together to reduce the attractiveness of housing speculation.
Encourage productive investment in businesses, exports etc
Encourage work by removing abatement rates and the welfare trap
Essentially the super wealthy with a tax on property will pay more then the UBI they'll receive
But most people will be much better off as every cent collected can reduce the tax burden on workers

https://www.top.org.nz/property_tax
https://www.top.org.nz/universal-basic-income-policy

I think a land tax based on the m2 your house is on and use a density zoning plan (unitary plan in Auckland) as a sliding scale of the tax rates. Will force development.

The Property Tax achieves the same result as that piece of the land not developed and not generating a return would be subject to the tax
Just like all those empty properties lying dormant...

Ugh dont get me started on empty houses... I live in Auckland South Central, during the lockdowns i did a lot of walking around my neighborhood. The number of houses lying totally empty when we have a house crisis like we have is criminal. On the block I walk around, about 2kms, I counted 15% of houses empty. Not on one night, every night for weeks!
My thinking with the sliding scale would be to really penalize land hoarding. In areas approved for more density.
I wonder if we could ping empty houses for double? Could IRD look at the Tenancy Agency's bond list? No tenant, double the tax.
Whats frustrating is this all seems straightforward, there are many ideas here in this comment thread... yet nothing is happening....

Yeah exactly we just need to stop voting Labour and National neither have the courage to fix it!
Two sides of the same coin...

UBI of $250 will do NOTHING to increase net worth of the lower quartiles of net worth.

It is widely accepted that low income earners will generally spend additional income.

I don't know why, but nearly everyone will default to comparing net worth (for wealthy people) with income (for 'poor' people). Folks, they are not the same thing.

If you are talking about net worth, then talk about net worth.

My theory is that it is far simpler, cheaper and therefore smarter to radically improve the net worth of the poor than it is to reduce the net worth of the wealthy.

Taxing housing wealth to lower taxes on the productive is surely a step in the right direction?

Reducing tax on the productive is the same as increasing income for the productive.

No, it misses the point. The article is about net worth, and inequality is about net worth.

Compulsory kiwisaver would do more to increase the net worth of the low quartiles than anything else I have heard. The govt would act as the employer for beneficiaries and low earners.

Now, you actually have a policy to reduce inequality. Work out the tax changes you need to make to fund the policy.

Here's an easy win and a vote winner too! Tax 'Empty Homes' in large city centres. Most empty homes in these areas are owned by overseas Speculative Investors anyway who can't vote in NZ and are using us as a tax haven whilst pushing up house prices. Take Auckland for example; we have 39,393 officially unoccupied dwellings (Based off recent census results). If we tax these empty homes at just 1% yearly tax, we could generate an average yearly revenue of $405,747,900!

This calculation based on Auckland City December 2019 median house price of $1,030,000. Evidence here: https://www.interest.co.nz/sites/default/files/hla/2019/december/Aucklan...
Auckland median house price $1,030,000 - 1% yearly tax = $10,300 per empty home. x 39,393 Auckland officially unoccupied dwellings (Based off recent census results) = $405,747,900‬ potential in revenue fist year of Auckland's empty homes tax!! A Win! Win! for NZ residents since this can help to build new homes.

The Property tax discussed can also be increased for foreign owners to say 2%, 3%...
If they're eventually welcomed back in to "assist the recovery" let them speculate but pay tax each and every year!
Obviously fix loop holes around trusts and businesses...

Yes Vancouver has already increased their Empty Homes Tax for Overseas Speculative Investors and it has been proven successful, a lot more then they realized. Here in Auckland we currently have 15 times more vacant homes then Vancouver had when they first introduced their EH Tax in 2016.
I agree with you we do need to rebalance our housing market in favor of wage earners.

VIA article: Vancouver increases empty homes tax by 25% for 2020. https://www.vancouverisawesome.com/vancouver-news/empty-homes-tax-increa...

maybe Phil G and few others realise there a quite a few empty ones owned by NZers and so don't won't to upset the status quo.

They're trying to diffuse a bomb and don't want to cut the wrong wire.
I just wish a politician would for once spend their political capital achieving something great for New Zealanders!
Not just doing nothing to hold onto power.
A vote for Labour or National is a wasted vote...

"Wages are fully taxed being well known" is a joke. Lots are paid under the table from cash their employers collect. So they pay no tax or ACC and in some cases collect a benefit as well. Its rife in the building industry.

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I think TOPs tax/welfare reform is a large step in the right direction. Greatly simplifies the tax system whilst smoothing out the distribution of tax revenue. If you’re tired of Labour and National not addressing inequality then they would certainly be worth investigating their policies.

https://d3n8a8pro7vhmx.cloudfront.net/garethmorgan/pages/2692/attachment...

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If IRD wants to increase the tax take they could stop dumbing down the organization and hire former architects of structured finance and transfer pricing structures created for multinationals from the private sector. They could then understand what they are doing and attack them. The ATO has done exactly this. Some adjustments result in $600m in additional income in a year. Instead we dumb down the organization and the clever ones leave for the private sector. All the while labour create a new board for Polytechs with 21 CEO's with the top dog on $688,235 and NZ's new mega polytech to pay six deputy chief executives $250k to $400k each. Put that money into buying high calibre people at IRD and the tax money will flow. Hipkins and Labour have no idea.....

wish I could give you 500 likes

I wish I could give all the poor people more.....How can they live on a pittance.....or a measly pension.

https://www.dailymail.co.uk/news/article-8750253/Subdued-Boris-Johnson-w...

Tax ...is relative. ...spend, spend, spend.

only a problem until she gets back to work. He needs to have a conversation with her about the choices she is making.
Stanley came to NZ last year to do some TV work on native birds I think,, he hung out with my girls in Wellington for a day, he is one of life's great characters.

Some peopleshould take the haircut, no matter where they are in the heap.
Saving money on haircuts at No10 is not good for the British image, never mind those of the Good Old USA.
Goldilocks and three 3 Bears is gonna kill the stock Markets and the Housing Markets, if they all take a cut in expenditure.
Growth may be thick, it seems. but we may all take a free haircut, if the stupidity prevails.
Borrowing and printing ones way to suck-cess is OK on the way up, but one is not always flush with suck-cess, it is a pound to a penny, the shite will hit the fan, when the next faze is done and we all come up Trumps, but down in the dumps. Rooking the Savers to encourage this pair, is why I dispair, one cannot always import more people when theHouseofCards is joined up with the Landed Gentry, who think they know best and import more slaves to serve their flights of fancy. Landed Gentry sitting on their arses doing shite, is the problem....as ye well know.
You know as well as I do AJ....all play and no work is going on behind the scenes...supported by Government Policies. Free money ain't. There is a cost in printing it. And I do not just mean that of Paper. The Rolls are OK when you have the money, but not worth the shite, when the shelves are empty. And a Fire Sale in America, is not worth a cent, when the grass ain't greener, in Hawkes Bay. Weather permitting, off course.

Taxation of realised capital gains is logical - it is essentially taxation of income. However, annual taxation of capital itself is the sort of illogical and immoral collectivism that has ruined so many communist states over the last century.

I understand what you are saying, it's like we are all going to be leaseholders, but somehow we have to change how we pay for government largesse

Mixture of progressive income tax (including CGT), and expenditure tax. Even a poll tax, which I consider to be terrible on a philosophical level, is preferable to what amounts to collectivisation of assets and turning us into a nation of leaseholders. This is contrary to basic principles capitalism and individual freedom. Goes against the moral fabric of the country.

Imagine giving them the ability to front-load spending on unrealised gains with the excuse that 'you can just defer it!' - there'd be no incentive to reign in government spending or restrain themselves. It would be a license to go hog wild with no consequences.

We are trying to address a fault in the system, while only using that system. All while using a false assumption at the very beginning. I challenge all these economists and experts to define what does rich/wealthy mean?

For most it appears to be:
- Owning a house
- Working as an employee who earns more an average wage.
- Retiring at 65 with enough to live on.
- Leaving anything but debt to your children when you die.

That is not rich! that is the minimum we should be striving for as a nation. If your ideas are to redistribute and/or increase the tax on the above, then you are incorrect. Not misguided, not slightly off-track. You are absolutely, definitively, wrong! Redistributing "wealth" from the less poor to the more poor, will not fix anything

We have tinkered with taxes for decades, but we have never targeted the actual wealth.
The questions we should be asking are how do we address:
- A company making a billion dollars in profit.
- A company sending all its "Profit" overseas.
- An entity with excessive revenue, paying zero tax.
- An individual "earning" 1,000x more from their "money" than the average employee does working.
- A govt spending xyz on some vanity project that has zero quantifiable benefits to the average citizen.

DP

What will actually fix a lot of these issues?

Tax corporates based on profit AND revenue
1% tax on revenue, then
30% tax on profit 50 Million in assets.

Ignore NIMBYs - benefits to a nation should not be stopped due to one person with the funds to fight.

Agree on having a revenue tax, but since income tax is tax on revenue, why should workers pay more than the companies they work for?

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oh FFS - older people have greater asset wealth ..... more educated people have greater wealth - people who take on higher level more stressful and skilled jobs have greater wealth -- people who do not smoke, drink excessively and take lots of drugs have higher wealth --people who invest their money in savings and assets not a party have higher wealth - bur hey those people deserve to be punished for these dumb choices over and over again -

You can say the same thing about income tax.
There's no perfect system, but I generally think a wealth tax, overall, is in the best interests of our society - as a whole.

Yes I agree with you Fritz. Particularly for those who use NZ as a tax haven, stashing their cash in land and empty buildings.

Kpnuts - So well put ! 500 ticks to your common sense ! Education in handling money and budgeting would be a great start. Perhaps going so far as no finance for buying toys and general stuff that soaks up so much earnings for many people.

Therein lies a problem. Easy access to credit. Lost count of the number of times in the past a bank has wanted to increase my credit card limit. Aware of far too many living on maxed our credit cards. Borrowing just for the sake of spending is not financially healthy, it is suicidal. If you cannot differentiate between money earned and money borrowed you are always going to have problems.

A flat 25% gst applied to all financial transactions regardless of origin, abolish all other forms of taxation.

That would have severe impacts on housing affordability

A house sale would count as a transaction. Speculation would be dead = very affordable housing.

Oh ok, good point. I was thinking of the impact on new housing costs.

What a disastrous policy that would be! Moving cities to for a new job, retiring, or just a change in lifestyle? Sorry you cant buy an equivalent house because you had to pay 150k in TAX!!!!!!

No major political party will play with tax thoigh all, knowing that is time for change for political vested biased interest.

NZ has politicians but No Leader - like many countries.

If Greens do well they might at least nudge Labour in the right direction.

The people of NZ don’t want their assets taxed, which would essentially turn us into a nation of tenants/leaseholders. Any political party that proposes this should rightly be booted. TOP barely registering in the polls and a guaranteed wasted vote, while the Greens have near dropped below 5%.

Due Dilugence there's always costs and benefits and consequences from all policy decisions. There would be from a wealth tax. There is from the status quo. And there is for all other options.

I guess it depends what your values are and what you think the best direction for the country is. I personally don't think the status quo serves the future of this country well at all, and it will only exacerbate inequality. But of course most people vote without considering the future.

But I recognize that there are plenty of people who are fine with that, as they believe in 'meritocracy'.

I don't want to see my country going further towards the USA outcome...

I value fairness and prosperity. Enforced equality is not an idea that I find appealing at all, as this experiment tends to lead to everyone being equally poor. Free market capitalism (efficient allocation of capital resources free from government distortion) has delivered prosperity to countries like NZ, so the disdain that so many on this site have for it seems strange to me. Like you say, probably just different values.

One of the reasons for NZ's prosperity in the past has been our relative lack of inequality. A country will struggle to be prosperous if a large proprtion of the population are left behind. The middle is becoming the new poor in NZ and a big reason for that is the unaffordability of housing. And a big reason for that is our tax system and monetary policy.
Another strong factor in our prosperity has been a strong education system. I would say our system is still good but it needs more investment. You need more revenue (and / or attain more debt) to spend more. Or cut back in other areas - but where?
Yes different values. Different strokes for different folks. I disagree with your perspective, but I need to respect you have different values.

“One of the reasons for NZ's prosperity in the past has been our relative lack of inequality.”

I think this is based on perception rather than reality. It sounds nice, but equality doesn’t cause prosperity. We are prosperous due to relatively free markets and efficient resource allocation. If everyone is equally poor there would be no inequality, but we wouldn’t be prosperous. Freedom to make different life choices and pursue financial success without government meddling will invariably result in inequality, but greater prosperity.

But it will be greater prosperity for a smaller pool of people.

Why? Efficient resource allocation results in greatest prosperity for the greatest number of people.

There is nothing intrinsically objectionable to some people being very rich, but the far left seem to find this unbearable. They would far rather everyone be equally poor as this represents equality.

Your second sentence sums up neoliberalism, and it doesn't work.

It is called free market capitalism and it works

Many of the best economists in the world right now would disagree.

Many would agree. Put four supposedly great economists in a room and they’ll come out with five different opinions on the matter.

Many supposedly great economists advocated for communism, and we all know how that works out.

In a game of monopoly the resources eventually become owned by one player - inefficient. In real life the mix of really wealthy and really poor with minimal middle class ends up with the wealthy terrified of rebellion and the really poor scared of hunger. A sensible prosperous society makes 'efficient resource allocation' as taxing those with wealth to provide the institutions they need (law & order, army, education, etc) to leave them confident of retaining most of their wealth. That describes roughly the society we live in - an improved system of taxes and benefits would help us all.

Depends on what you mean by 'prosperity'. If (for example) GDP increases, but the reason for that is that the 1% have gotten a lot wealthier, and the bottom 60% have gotten a lot worse off, I wouldn't call that 'prosperity' because the majority of people are now worse off. And that seems to be where we are heading (if not there already). The majority of people doing ordinary and necessary sorts of jobs (teacher, nurse, etc) are way worse off than their counterparts of even ten years ago.

Efficient resource allocation facilitated by free markets does not result in anyone being worse off. It may result in greater inequality, but it will not result in less prosperity. The “60% worse off” is a figment of your imagination.

New Zealander love to talk of "equality" an "inequality" but what do they mean?
Do they mean "equality of opportunity" or do they mean "equality of outcome"?
The latter requires total authoritarian powers. Is that what you want?

“Human beings are born with different capacities. If they are free, they are not equal. And if they are equal, they are not free.” — Aleksandr Solzhenitsyn

Good article Andrea, particularly like how you've mentioned Trust companies and their use being widespread and far removed from their original purpose. "Individuals are much easier to collect from than companies and trusts because there is no corporate veil or (potentially) opaque structuring separating the vehicle from its economic owners."

We certainly need more transparency regarding 'Trusts' otherwise many individuals will keep using them vehicle for tax evasion.

Can you give some examples of how they are being used for evasion in NZ? The trustee rate is 33% so they pay tax on income tax on income the same as you and I without marginal rates and higher than the 28% in companies. Your comments sound like propaganda that the likes of Andrea and Andrew Little come up with!

Well apart from all the money laundering that's transferred via Trusts NZ companies, then there's the smaller tax dodges like people putting their main homes in Trust companies and claiming back tax breaks as business expenses on large home improvements etc...

I stated evasion in NZ. There is no such thing as a Trust NZ companies. The foreign trusts that were used for offshore planning neither had income in NZ nor could residents of NZ use them so who really cares. In addition any countries they invested in taxed the income on a source basis. Getting rid of the regime meant that lots of accountants and lawyers lost fees that they paid tax on in NZ. So NZ lost out by shutting it down.

Re claiming tax breaks for home improvements for main homes I don't understand what you are talking about? Do you?

You really are talking twaddle aren't you to quote you: "There is no such thing as a Trust NZ companies"! Go and do some research if you can't respond in a coherent manner. Next you'll be trying to pretend that money laundering never happened here in NZ.

A Trust is a trust. A company is a company. They are not the same thing and there is no vehicle called a Trust NZ Company as you have been ranting on about. You can have a corporate trustee of a trust. But perhaps you should do some research as in all the years I worked in the field I never came across a Trust Company. Types of trusts in NZ are a Qualifying Trust, Non Qualifying Trust, and a Foreign Trust all driven by where the settlor was based. No Trust Companies....Do some research yourself. The Trust and tax law has always been robust for NZ residents and Citizens they were caught by tax net. That means no one in NZ could use them to evade tax as you have stated. Foreigners using our regime never had investments here and so were never going to be taxable here so i could not care less about what they did. It was just paper shuffling and generated fees that tax was paid on in NZ but we have moved on from this.

Sorry but you just jabbering on incoherently like you have something to hide.

Yes its a big conspiracy those rich people hiding assets and evading taxes that's how they go rich right? Incoherent as you don't understand tax and trust law.....

I agree totally with your comments Oreo.
From postings to previous articles, CJ099 has shown that he has very little understanding of trusts and his comments are driven by a misguided belief that trusts exist simply for sinister purposes. His common rebuttal is denial by labelling comments as "twaddle" and one as being "incoherent" as is demonstrated here.

Does the State want families to be able to accumulate inter-generational wealth? Such families would not depend on the State to fund their family members' education, health care, and unemployment welfare.
On the other hand, I do not wish to see the rise of a ticket-clipping rentier aristocracy in New Zealand. I want a robust, self-sufficient and self-sustaining middle class; not an idle upper class.

Capital gains 20% ( exclude family home up to 1.5million)
income tax bands. 1st 20,000 tax free, 20000-50000 at 10%, 50,000 to 100000 20%, 100,000+ 30%.
company tax rate 20%
Trust tax rate flat 20%
end working for families. Have a tax rebate system for kids. 1 kid, $2,000, 2 kids $4,000, 3 kids $6,000 tax rebate
Raise retirement age to 68

That will bring in much less revenue per annum so how will you make up the shortfall?

Thats a point. Capital gains would bring in a bit, retirement age rising & working for families scrapped would save a bit.

I would like to think my plan would make the real economy much more competitive, rather than the house trading status quo, encourage people to unskill & earn more. Maybe wishful thinking.

Further lower property prices would allow young people to become mortgage free quicker & start a business. A lot of young kiwis get saddled with so much debt they are basically stuck in there day job cause of mortgage, even if they have some very good ideas.

Why up to 1.5 million? Do families really need 1.5 million homes, I would make it exponential starting from zero in such a way that everything up to the median in the region would be pretty much zero-taxed.

How about applying the company tax rate to earnings and not profits and end for once with the unfairness of it. Income tax is not applied to the savings we get at the end of the yea, why can companies get away with this?

Raising retirement age to 68? Why not 71 or 83? This is just a neoliberal excuse to progressively make people that cannot afford a private pension scheme work until the end of their days.

1.5 million to stop people essentially dodging capital gains by hiding it in there own home. I.e buying 50 hectares of land at dairy flat calling it your home then paying no tax when the land is rezoned farming to housing. While you make a untaxed fortune.

Applying company rate to earnings will disproportionately effect companies/industries that operate on lower gross profit margins. This won't work very well.

Our pension system is unaffordable in its current state. We are not Switzerland we can't afford to maintain our current system. We need to change it to reflect reality

My point is that this is just an arbitrary number way over the average household price, if there should be a cap it should go way way lower than that or we would still have the same problem.

We workers also "operate on lower gross profit margins" but that seems to not to be a problem right?

Who says the pension system is unaffordable, we are a younger country than most and with a low unemployment rate, which makes it perfect for a public affordable pension system.

>How about applying the company tax rate to earnings and not profits and end for once with the unfairness of it.

LOL. So Fonterra puts the wholesale price of a 2L bottle of milk from say $3+GST, to $3.84+gst so they get the same amount after 28% tax is deducted, the dairy owner wants 50c per bottle margin to cover his costs and a small profit, so $3.84 + 0.50 = $4.34, x 1.28 to get the pre-tax price so shelf price is $5.67 +GST = $6.52. Hyperinflation here we come!

It is clear that there must be a re-distributive policy that shifts wealth from assets to productive economy and labor returns. Anything different from that would be a disappointment and cause of outrage in NZ society which has seen this going too far already.

Taxation of capital is an excellent way to diminish NZ’s already struggling productivity. And before you tell me that houses aren’t productive - they actually provide a pretty important service, unless you don’t think being protected from the elements is important.

We do not need landlords charity to protect us from the elements, we need housing to be affordable and redistribution of wealth via CGT or any other form so we can afford our own roofs and do it by ourselves.
You may try to make it look like a service as much as you want but reality is that most investors do not want to be landlords yet it is part of making the investment viable, it is nothing else than yet another type of usury in the original meaning of the word by which the wealthy monopolize resources to take advantage over those less privileged.

So create a regulatory environment and government building program that facilitates the constitution of two houses for every person in the country and see what happens to prices. I guarantee you they will be cheap. Trying to tax your way out of a housing crisis is illogical. It will never be tried because the people of NZ won’t stand for it, but those who advocate the tax route really should direct their energy towards more useful and realistic alternatives, namely addressing supply.

So remove all regulatory environment and government agencies and give all houses to investment funds and see what happens to prices. If you are using reductio ad absurdum I can do that too.

I don’t understand your scenario. Why would we gift all houses to investment funds?

Before we can have an equitable tax system we must understand what the real purpose of taxation is, and contrary to popular opinion it is not to finance the government. The government doesn't need our money, it is the issuer of the NZ Dollar, it is in fact we who need the governments money, economist Stephanie Kelton tells us.
Beardsley Ruml was a director and chairman of The New York Fed and he had this to say in 1945. Since the end of the gold standard, "Taxes for Revenue are Obsolete". The real purposes of taxes were: to "stabilize the purchasing power of the dollar", to "express public policy in the distribution of wealth and of income", "in subsidizing or in penalizing various industries and economic groups" and to "isolate and assess directly the costs of certain national benefits, such as highways and social security"
https://en.wikipedia.org/wiki/Beardsley_Ruml

why the rush to tax ordinary citizens who have saved, invested and worked hard as the first option

Instead of creating $3million worth of $270K+ jobs to oversee the ploytecs -- all who already have their own CEOs - why not invest that on some proper high level tax accountants and tax fraud investors -- and target Google, Apple, Facebook and others that are taking revenue from Kiwis - and booking it offshore - so not paying NZ taxes --
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=122...

I certainly agree with your first idea. Unfortunately the individual citizen usually doesn't have a vocal champion to represent them, hence they become an easy target. Also agree with your sentiments on the new "megaPolytech" - Labour doing what it has done time and again, increase bureaucracy and the associated paypackets for no great gain. As for the FAANGs, well I think that is a classic case of rainbow chasing.. What happens (and it will) when they say stfu?, not much NZ can do except count how much money has been wasted on a lost cause. Could also have unexpected ramifications when other countries (read the US) decide to do the same for our multinationals trading in offshore jurisdictions

Too easy. Financial transactions tax, stop all the bloody tax dodging, especially from large foreign corporations. Get rid of GST. Set right, it could just about remove the need for any other form of taxation.

Holy Moly ! You know that feeling when you have done so much damage that you feel that you might as well just destroy everything because it is all ruined anyway. Welcome to NZ Real Estate.

https://www.newsroom.co.nz/as-safe-as-houses

It's a good article, and I agree a lack of CGT and less investment alternatives in NZ compared to Australia are likely to at least partly explain the difference.
Prospective FHBs can 'thank' the current 'transformational' government for not introducing a CGT...

How embarrassing National's budget error.

They're only interested in lolly scrambles, not actual sound fiscal policy.

A National disgrace is allowing rentals to beat home ownership.

A Labour disgrace is to follow in their footsteps.

A subsidy to beat homeownership by rental, is mental.

A ponzi being part of the deal, is a no brainer.

Vote for them at your peril.

All change, no change, swap a seat, carry on.

Middle for diddle, your screwed.

Rinse and repeat.

Cannabis is a mind set vote, they want you even dumber.

Likewise euthenasia, die you say?, beyond all comprehension.

OCR, O-Credit-Really. Can I borrow your money cheap...thanks a bunch,,,,,,,suckers......I shall be always be indebted to you....I bought my 20th House....YAY?.

Theft is theft, a rort is a rort, a drug is a drug, a life is for life.......Vote accordingly.

Fix this all, once and for all. TAX accordingly. It ain;t rocket science......it is man-ipulation.

Debt is created. God knows in whose Interest...and it is not yours. It is a calculated rort....and Covid is only masking it.

Nuff said...

Idiots.

We seem to easily forget we already have a land tax called rates ~ its annual, its unavoidable and its based on the land plus improvements value.

As for wealth tax it's an absolute non starter. Imagine you have saved your ass off to find your retirement and then the govt turn around and decide that because your house is worth x and you have y in the bank you need to pay for the privilege of living here ? How is that going to work ?

Even death taxes are fairer than wealth tax as at least you have the choice to spend your money whilst you are alive.

Stamp duty and capital gains are the way to go because they work. Use the revenue to cut GST on staple foods, cut petrol duty and leave everything else alone. Make it neutral not a revenue earner, Auckland Council is taking enough away already without the central govt adding to the woes.

Funny how the 'fair share' thing suddenly stops being important when it comes to what portion of the population pays the most tax.

Andrea's articles are always informative and thought-provoking. Thanks, to Andrea and interest.co.nz!

I'm intrigued by this part of the article:
"Over the last few months, I have changed my view and now prefer a form of wealth tax – ie any of the other options - with a decent threshold to take out all but the top quintile. This is because taxing gains on a realised basis will not put a dent in the untaxed gains that are continuing to accrue."

That sounds like dubious reasoning to me. First and foremost we should be trying to improve the fairness of the system for future generations. What the author seems to be advocating is something that recoups gains made by people who have benefited from the current flawed system. Please, let's not focus on that or we'll just end up putting different flaws into the system. If we improve the fairness of the system, the wealth will redistribute soon enough.

Andrea you missed a key point: Those over $70k are paying 90% of the net tax after government transfers:
https://www.wgtn.ac.nz/news/2013/income-taxpayers#:~:text=Over%2090%25%2...'net%20tax,the%20highest%20tax%20rate%20payers
Seems important.

This is the fatal flaw in the 'pay your fair share' bit - we'll rejig the tax system on the basis that those who already end up paying nothing should be paying even less, but we won't talk about the simple administrative change to allow those who are earning money to keep the inflation component of their wages.

Between that, a stamp duty that scales at multiples for investors (and zeroes off for FHBs) and changing taxing Kiwisaver to be paid at final draw-down, not imputed returns, it would drastically lower the need for wholesale-level redesign of the tax system. But then there'd be fewer jobs for working groups, and we can't have that.

Promote constructive working and tax idle ebt based investment. Reduce paye to 25% flat, and introduce a land tax that punishes land banking and debt stacking. Land tax for foreign owners to be higher.

Tax change is needed. Let's promote working, and stop favouring asset speculation via more debt.

Taxing wealth has been on agenda since I can remember politically (1975?)
It will not happen for a number of reasons
Firstly, not many of bottom two quintiles vote and of those that do, about 25-35% vote for National
Secondly, understanding tax requires scrutiny of detail and at least 65% of electorate cannot be bothered to do that
Thirdly, mass media outlets are not interested in promoting such policy (or indeed, any policy) because of cultivated audience attention span of a gnat, for advertising benefit.
Fourthly, re MSM, see last point: advertisers don't like their wealth being taxed.
Fifth: Left leaning governments always tack Right in office to get the non-political in middle who decide elections. Media love to leap on a tax rise and say who will be worse off. People are far more inclined to believe negative potential impact than positive. Labour re-distribution policy has been a mirage since 1975 in most OECD countries , as % of GNP taken by workers has steadily declined, despite rising productivity.