By Bernard Hickey
Is an interest tax break a good idea?
This week the mandarins in Wellington seemed to agree on the need to look at a tax break for savings in bank accounts and bonds. Both the Treasury and the Reserve Bank said the Savings Working Group is looking at such a tax break and they said it should be considered as part of measures to get New Zealand saving more and reduce the economy's imbalances and vulnerabilities.
Currently interest payments on term deposits and bonds pay tax at regular income tax rates.
Often it is collected by the bank as a withholding tax at the marginal rate specified by the saver. It is the major reason why many savers have chosen rental property and other types of investment in the past. Once inflation has done its dirty work, savers are effectively paying a much higher tax rate than on returns from other sorts of assets.
"At present, the marginal tax rate on the real income earned on a pensioners' modest bank deposits may well be considerably higher than that on a wealthy business person's labour or entrepreneurial income," the Reserve Bank said in its submission to the Savings Working Group.
It added that the other side of the interest coin had added to the demand for rental properties during the boom. Rental property investors are currently able to claim the full nominal interest payments as a cost against taxable income, effectively widening the tax advantage compared with term deposits.
The Reserve Bank suggested that only the real component of interest paid could be claimed as an expense for tax purposes. Treasury estimated this week that savings in bonds and term deposits are paying an effective real tax rate of almost 50%, which is double the effective real tax rate on rental property.
No wonder it has been so popular over the last decade. But what if the inflation component of interest returns was exempted from tax? Currently term deposits pay around 5%. Once the effects of inflation of around 2.5% are taken out that would reduce the tax on interest returns by around 50%.
The Inland Revenue Department has estimated such a tax break would cost the government around NZ$1 billion a year. In the year to June the government reaped NZ$1.8 billion in tax from withholding payments on term deposit interest payments from NZ$92 billion worth of term deposits. Such a tax break would go some way to leveling the playing field with property, but it would be expensive from the government's point of view.
Foreign debt reduction
There are other benefits though.
Encouraging New Zealanders to invest more in term deposits would help reduce the reliance of New Zealand banks on foreign borrowing and short term foreign borrowing in particular. The Reserve Bank's core funding ratio is pushing the banks to raise more of their funding from local term deposit and longer term sources.
This reduces the banks vulnerability in the event of another Lehman-style freeze on global financial markets.
Providing this tax break would also reduce the incentive for many elderly savers to 'chase' higher yields in riskier savings schemes at a time they can least afford it. The finance company collapses are a lesson here.
One counter argument is that it effectively provides a type of government subsidy for savings in banks, thus, in theory, boosting the profits of the Australian owned companies.
It will be a debate that the government considers as it prepares measures to improve savings in the budget next year, the last before the election.
24 Comments
"At present, the marginal tax rate on the real income earned on a pensioners' modest bank deposits may well be considerably higher than that on a wealthy business person's labour or entrepreneurial income," the Reserve Bank said in its submission to the Savings Working Group.
It added that the other side of the interest coin had added to the demand for rental properties during the boom. Rental property investors are currently able to claim the full nominal interest payments as a cost against taxable income, effectively widening the tax advantage compared with term deposits."
So instead of chopping off the ability for landlords to claim the full nominal interest payments as a cost against taxable income.......the RBNZ thinks it better to introduce a subsidy to boost savings in term deposits and bonds......
This is mind boggling brainlessness....The answer to the savings problem will be found in ending the tax deduction rorts....bring a bloody end to the game....remove the demand pressure on rental property...watch the rents fall....watch property values fall....then you will see the growth in deposit and bond savings because the scam short cuts to capital gains will be gone.
But no, that is too easy...and too painful for National Party rumpers...and it promises reduced profits for banks....carry on with the scams, rorts and other dumb arse policies.
Face facts fellow peasants...the last thing this or any other Noddy govt will aim to achieve is an economy where banking influence is minimal....
bang wrong!
Bad idea to take responsibility off individual landlords and give it to politicians.
Got any idea how well people who spend other peoples money do at business?
Try getting the government to service half the number people NZ landlords do for just 1.5B, this cost would double over a few years for only half the tennant numbers.
Nicholas is onto it - no way jfal, was I suggesting the government needs to house all these people. Let the private sector do it but without the subsidy. If what a beneficiary can afford is too low - great - try renting the place to a working family - and if no luck - drop the rent or sell.
Take $1.5billion in subsidies out of the rental market and everyone's rents plummet to what is AFFORDABLE in accordance with incomes. The Government subsidy is just another means of keeping the rental property ponzi scheme going.
Wolly and Bernard... u use misleading terms like tax break and subsidy to describe what the IRD and reserve bank are proposing.
The DISTORTION is in the present method of taxing the inflation component of savings.
eg. $100,000 on deposit at 5% and inflation at 3%...Tax at 30%
That gives $5000 income less $1500 tax ... equals $3500 ..BUT the money has depreciated by $3000 ( 3% )....
SO the net income is ,in real terms, the savers real , net return, is $500.... which is shocking.
The effective tax rate is more like 75%.
Is it any wonder that property is our favoured investment....
What the IRD is proposing is to simply remove this fiscal/tax policy distortion, which destroys savings... and leaves retirees , in particular, .. raped and pillaged. Doing this only gets saver to the start line... .... just shows what a really terrible investment savings really is.
( Obama and the Fed , in the USA are basically transfering retirees wealth that is in savings, from those retirees to the Banks, wall street and Speculators... the real returns there are -VE and will be for a while )
Back to the start Roelof...the 'distortion' is the planned debasement of savings going on...your $1000 will be worth $400 in twenty years if you are lucky.
If the 'authorities' were honest they would have a zero inflation policy!
Removing the 'distortion' would mean less revenue for govt by way of that tax...and that fiscal hole would need filling...and that would be borrowing or higher govt fees and charges and taxes elsewhere......that would be the 'subsidy' Roelof....you would pay more tax somewhere, to enable the IRD to 'remove the distortion'.....
Far better to deal with the cause of the problem....the planned debasement of savings...but Key thinks that is good and is 'banking' on the debasement solving the debt problems....go figure.
You might also consider this is an idea backed by the Sir Humphreys....because the IRD would need to have the extra staff to deal with the claims etc etc.....see the game Roelof.
I was responding to your view that NOT taxing the inflation component of savings was somehow a "subsidy"..
the game I see is that the banking system "loves" a forever expanding money supply ...and people borrowing more and more.... I kind of agree with what u say.
I see the influence the banking system has had is formulating fiscal policy, looking back over time... etc etc..
How would the world look if interest payments were no longer a tax deductable expense..??? The financialization of the world would diminish..??
cheers Roelof
If the 'authorities' were honest they would have a zero inflation policy!
So then the government/taxpayer 'subsidy' would be zero? (no inflation/ no payout)...
I can't quite join the dots as usual....
Are we very slowly steering towards the end of fractional reserve banking?
Seems unlikely BUT
Douglas Carswell's UK banking reform bill, first reading (2010-09-15)
http://www.youtube.com/watch?v=HMGr-OuXihg
Know its been posted before... still seems relevant.
If I missed that then shame on me and I agree with you Bernard...but I do not see govt agreeing to roll back the landlord benefit system...it is woven into the fabric of the bubbles and serves to support the banks as they farm the economy for profits from the bubbles....as Kate pointed out another thread in the fabric is the rent top up scam...
This idea that depositors could be helped out re the debasement of the dollar and the tax on the interest.........it is a 'Sir Humphrey' answer that leads to the IRD staff numbers expanding....
There will be no improvements until the property bubble is destroyed.....The current policies are for that to be done with a steady debasement of the dollar....so govt will not act to speed up the demise of the bubble with any removal of landlord subsidies.
The can is being kicked down the road to ruin.
Via email from Rick
Bravo Bernard
RE: Your NZ Herald Article Today Equity,Fairness AND promotion of a national savings culture that is not based solely on bricks and mortar! Well Done - You have an Army of honest hard-working Kiwi's behing you. Keep writing and advocating this just cause. RickI can hardly think of a more stupid thing to do.
Distortionary, unfair, expensive to manage, moving of goal posts.
Since when have we taxed based on "real income"?
Am I only going to get taxed on the real income part of dividends from equity investments? Why not?
This would essentially reduce the cost of debt funding for corporates or anyone to the detriment of equity funding. (savers would demand less nominal return relative to other investments due to the tax component being lower)
i.e more leverage
Is that what is wanted.
TradeX - if your aim is equal treatment of equities and corporate/bank funding then extending this regime to dividends makes perfect sense. BUT, in order to be consistent, this would have to be accompanied by a capital gains tax on all equity transactions.
Given your stated vocation, perhaps you should choose your poison wisely....
Mind you, I agree that there are lots of possibilities here for transactions to be reclassified as 'savings' to exploit any new tax loophole. Just look at the proliferation of special purpose PIE's over the last few years.....
Currently Traders (in equities) do pay cap gains tax...
The whole purpose of the tax system should be to try and classify income and expense as uniformly as possible so that economic activity is driven by risk and reward, not loop holes, structures etc.
IMHO the current capital gain taxation sytem is an utter mess and honest people who declare capital gains currently subsidse the dishonest. what a shame when you punish the honest.
If there is to be a comprehsive cap gains tax I would welcome that as long as it was comprehensive and well policed and perhaps offset by lower income taxes.
It will only cost $1B and the deficit is only $5B a year.
Compare that to what's spent on having our cities designed so that everyone is reliant on cars:
2.2 million cars with $5,000 ownership cost each year - $11B
cost to maintain roading system per year - $2.2B
cost of accidents each year - $3.8B
cost of new roading projects per year - $1B plus
cost of emissions tax - ?
That's like probably over $20 Billion dollars a year mostly so we can live in suburbia. If half the cars were taken off the road and replaced with taxpayer funded bicycles we'd suddenly be running a huge government surplus and be a rich country.
From " The ascent of money " ( Niall Ferguson ) Quote :
" By a continuing process of inflation , governments can confiscate , secretly and unobserved , an important part of the wealth of their citizens . By this method , they not only confiscate , but they confiscate arbitrarily ; and , while the process impoverishes many , it actually enriches some . "
The whole tax system is a fiddle set up to suit the privilaged. The government gives a business owner a tax cut in their income then increases the cost of their sales (GST) making it harder for them to sell their goods. More and more of a business turnover is tax. When i go and buy their products i am buying a heap of taxes, i pay not only for the product but i pay towards their ACC costs, the PAYE they pay for their employees, company taxes and then i pay tax (GST) on these taxes. So just think of all the taxes you are saving by not spending, Oh, but that will create a fall in sales and lead to job losses and a recesion. They've got me by the balls again.
For years we have been almost reprimanded for not saving.But where is the incentive?
One group of people are the younger generation with young families still and surely
are not expected to have much surplus monies. Another group of people are the coming up
to retirement and the actually retirees. This latter group are the ones with various amounts of
money to invest. This group has been chased recently in the bank's fight for retail deposits.
This group is also expected to save by investing in companies via shares. Realistically
though this group can't take risks.Because of their age they cannot replace any losses.
So their options are term deposits.So they have been tempted by term deposits with finance
companies offering higher interest rates and the rest is history. It has been widely
known for years the term deposits with banks when the maths are done actually have
a poor return. Except for the years back a bit when the banks offered 20 per cent.
My question is do you think Dr Bollard would be very please with us if we saved via
banks term deposits? If so and if in some way these savings help our economy
why do they tax us so high as a disincentive considering the silent ingredient
involved..that is inflation. I want to know why in this country why there is a lack of
incentives to save? Why do our Governments irrespective of which one operating
are intrenched into a pattern of 'taking' with very little giving.?
For years we have been almost reprimanded for not saving.But where is the incentive?
One group of people are the younger generation with young families still and surely
are not expected to have much surplus monies. Another group of people are the coming up
to retirement and the actually retirees. This latter group are the ones with various amounts of
money to invest. This group has been chased recently in the bank's fight for retail deposits.
This group is also expected to save by investing in companies via shares. Realistically
though this group can't take risks.Because of their age they cannot replace any losses.
So their options are term deposits.So they have been tempted by term deposits with finance
companies offering higher interest rates and the rest is history. It has been widely
known for years the term deposits with banks when the maths are done actually have
a poor return. Except for the years back a bit when the banks offered 20 per cent.
My question is do you think Dr Bollard would be very please with us if we saved via
banks term deposits? If so and if in some way these savings help our economy
why do they tax us so high as a disincentive considering the silent ingredient
involved..that is inflation. I want to know why in this country why there is a lack of
incentives to save? Why do our Governments irrespective of which one operating
are intrenched into a pattern of 'taking' with very little giving.?
For years we have been almost reprimanded for not saving.But where is the incentive?
One group of people are the younger generation with young families still and surely
are not expected to have much surplus monies. Another group of people are the coming up
to retirement and the actually retirees. This latter group are the ones with various amounts of
money to invest. This group has been chased recently in the bank's fight for retail deposits.
This group is also expected to save by investing in companies via shares. Realistically
though this group can't take risks.Because of their age they cannot replace any losses.
So their options are term deposits.So they have been tempted by term deposits with finance
companies offering higher interest rates and the rest is history. It has been widely
known for years the term deposits with banks when the maths are done actually have
a poor return. Except for the years back a bit when the banks offered 20 per cent.
My question is do you think Dr Bollard would be very please with us if we saved via
banks term deposits? If so and if in some way these savings help our economy
why do they tax us so high as a disincentive considering the silent ingredient
involved..that is inflation. I want to know why in this country why there is a lack of
incentives to save? Why do our Governments irrespective of which one operating
are intrenched into a pattern of 'taking' with very little giving.?
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