Gareth Morgan looks at tax (again) and concludes we can’t get rich as a nation by selling houses and land to each other; we need to sell stuff to the world

Gareth Morgan looks at tax (again) and concludes we can’t get rich as a nation by selling houses and land to each other; we need to sell stuff to the world

By Gareth Morgan*

A principle of a good income taxation regime is that it is neutral, that all income gets taxed in the same way. Unfortunately ever since New Zealand moved from land and property taxes to income tax an anomaly has been present and the effects of that distortion have built up over time. They are now at the point where inequality between property owners and others has become obscene. This anomaly is starkest with our largest export industries, as they are also our largest landowners.

What loopholes?

In most countries the loopholes in the income tax regime are somewhat imperfectly addressed by the use of wealth taxes, stamp duty, land transfer taxes, and estate duties. None of these alternatives close the loophole efficiently and instead give rise to their own inequities, distortions and inefficiencies.

It is important that all forms of income be taxed in the same way, most notably because it improves economic efficiency – both allocative (where we allocate our investments) and productive (ensuring those investments are used efficiently). An efficient economy is one wherein consumers and investors make the same choices whether they consider the benefits in before-or after-tax terms. If those relative benefits differ because the way that taxes are imposed, then there is a loss of allocative efficiency. If businesses (including farming) make different investment and production decisions because it reduces their tax bill, then people will invest in ways that aren’t ideal for the economy. In other words, the tax regime inhibits productive efficiency.

In our 2011 book, “The Big Kahuna: Turning Tax and Welfare in New Zealand on its head”, Susan Guthrie and myself posited the Comprehensive Capital Income Tax (CCIT) as an overdue reform for the New Zealand income tax regime. We pointed out that until it was introduced our economy would suffer from over-investment in low returning capital assets – and by implication under-investment in high-returning capital assets. The argument was that the current income tax regime fails to tax the full return from investment in some asset-types and as a consequence investors compete to buy those types of assets. This is not because of the pre-tax return being created by the productive use of the asset, but rather because the favourable tax treatment makes these asset types attractive to hoard. The demand for asset types that reap at least some return that lies outside the gambit of the income tax regime becomes excessive as investors clamber to take advantage of the tax break. This results in a pricing of the asset that far outweighs its ability to produce competitive risk-adjusted income.

The CCIT is designed to remove that tax distortion – albeit only partially. It does that by subjecting to the normal income tax rates, a deemed minimum rate of return on the value of all major assets. So let’s say the cyclically-adjusted, risk free rate in the economy (often taken as the long term average of the government bond rate) is 5%. Then under a CCIT-augmented income tax regime, all assets would have to return at least 5% for taxation purposes.

Consider the consequences. It means for instance that owner-occupied dwellings would be deemed to furnish their owners a 5% return, and that return would be taxable. Such a step would remove the anomaly that exists today between the choice an investor has to put their money in the bank and earn interest and pay tax on that interest before they can spend it; versus purchasing a house with that cash and enjoying year after year the rental services that asset provides – tax free. This is a huge distortion in our economy and continues to drive the house price to income ratio up and up, placing that asset type beyond the reach of more and more people. Such an outcome is a nonsense result and totally unnecessary. As Europe’s most successful economy Germany attests, there is no need for the house price to income ratio to rise at all, if you tax the effective return to housing fully.

How the CCIT applies to business & farming

Now turn to business. Why do some businesses persist year after year without even making the risk free rate of return on the assets deployed?

Of course any half decent business test by the IRD would determine that they’re not businesses at all – but rather lifestyle choices. And why? Because the owners are able to effectively reap an income from the “business” in a tax efficient (read, “avoiding”) manner. Your friendly corner dairy or workman with a van could well be this type of “pretend” business. The impact of the CCIT on such an activity would compel the business owner to declare at least a 5% return for the purposes of income tax. If the taxable profit from the business is already above 5% of the assets deployed, then the CCIT would have no effect.

So finally we come to farming. It’s just a business like any other so under the CCIT regime it would be subject to a minimum taxable income of 5% of assets deployed, each and every year. If a farm already exceeds that on average, then the CCIT has no impact. If it doesn’t average that then the tax impost on the farm owner would rise.

Now of course farm income is volatile and the concept above is a year-by-year deemed income. That implies that for businesses with a volatile annual income there would need to be a smoothing regime in place for the CCIT liability. This is not of course an option to escape the tax, but merely to smooth the cashflow effects. One would expect use of money interest to apply and there to be a limit to how long tax could be deferred. Remember a business that doesn’t make the risk free return over time isn’t a business at all, so the assets are being either deployed lazily – or as one would expect as more likely – being deployed in order to reap benefits that lie beyond the gambit of the income tax regime (anyone heard of capital gains?).

On a final note the CCIT regime we advocate is a little different to the current income and expenditure regime. Rather than apply the 5% deemed income to the full value of the asset and make interest deductible, because the CCIT only applies to non-financial assets (interest and dividends are already subject to tax), the approach for assessment of the CCIT liability is to apply the 5% deemed income to the value of the productive asset less the liabilities secured against that asset.

Remember the objective here. It is to ensure that all forms of income are subject to income tax to some degree. A CCIT would be a huge improvement on the distortive, inefficient and inequitable income tax regime we currently have. In the household sector alone we estimate that there are $750bn of assets (net of financial liabilities) held that deliver untaxed benefits to their owners. On the principle that not an additional dollar of taxation is to be raised from deploying a CCIT, expansion of the tax base by the 5% of income deemed to come from those assets could provide a 20-25% cut in overall income tax rates.

It would also free up an enormous amount of capital currently sunk into housing and other unproductive assets to be invested in productive assets. We simply can’t get rich as a nation by selling houses and land to each other; we need to sell stuff to the world.

Nice.


Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director.  This content was first published here and is used with permission.

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15
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What about money laundering which everyone knows but government :

http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11706741

Yes totally agree with you Roy1; Gareth have you read the latest news about what's happening in Canda B.C in regards to property and money laundering. And you can be sure if it's happening there then it is certainly happening here!

Very recent article from Vancouversun: More Chinese cases target property in B.C., say lawyers

http://vancouversun.com/news/local-news/more-and-more-chinese-cases-targ...

Quote from article: Lawyers in Vancouver say they are seeing a substantial increase in B.C. court cases filed by Chinese companies seeking to seize real estate assets from Chinese immigrants in B.C.

“There is lots of cases coming down the pipe, and there is lots of appetite in China from the government, down to the banks, to come to B.C. to enforce judgments.”

Oh and here's a nice article from the BBC which outlines how the Chinese money laundering works: 'Gangster grannies' and China's shadow banking world

Quote from article: Moody's Investors Service says that the shadow banking system continues to expand rapidly, with assets held by these less regulated banks totalling some 78% of China's GDP.
http://www.bbc.com/news/business-37114643

10
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Once again Mr. Could We Have More Taxes Please, delivering his spiel... I like the ending best; he reminded of that hairy dude dressed in an orange woman's bathing suit, speaking with a Balkan accent, and wearing a silly mustache, saying : Niiice! Was his name Boron, or something as stupid...?

Gareth, What is it with you wanting to tax property owners who DO provide a service if they are a true investor and YES they do pay tax!!!!
It is a monotonous record and a bit hypocritical when you consider the business you were a shareholder in and sold for mega millions and as I understand you never had to pay TAX on what you sold it for.

If I am incorrect please advise on here.

Also genuine property investment rather than speculation is a far safer option than relying on Financial Advisors for investment.

Finally, can you kindly advise us all what you consider to be the productive sector, and how we go about investing in it, apart from the risky sharemarket!

12
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And wasn't his son Sam who sold Trade Me for untold millions and also payed no tax at all? I don't remember

Morgan asking for more taxes then. What a difference a few years make...?

Obviously hits a nerve with you huh?

18
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Even the world is talking about the role of overseas buyer in NZ property market but not our Hon PM.

https://www.theguardian.com/world/2016/sep/07/why-auckland-is-leading-th...

Roy1 with respect , the article does not talk at all about the role/significance of overseas buyers. The author of the article freelances for the Guardian, and is based in Dunedin, regurgitating some fairly basic information.

I agree. The Guardian's coverage of this is just opportunism. Besides, "the world" does not see these articles. They show up on your browser based on geo targeting. NZ readers see NZ related stuff. Readers in other countries see stories more relevant to their countries. The Guardian is into strong clickbait strategies these days - maybe not as bad as other UK and AU (and NZ) publications but they are chasing clicks hard, like most.

14
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With respect David; So do you see the the BBC clickbait as well? You can be sure the world is watching.

New Zealand tops global list for house price rises
http://www.bbc.com/news/business-37293588

Quote from article: Price rises in these cities have been driven not just by domestic demand but overseas interest from Asia, especially China.

It is the same targeted articles. Log in via a proxy in a different location and you don't see a thing about it.

The internet is now the most censored/biased news source to ever exist.

I agree but truth is truth.

In this particular instance - yes.

Glad you agree with us Noncents, lets not be fools to our selves, once its gone it gone (Our land that is).

Yes mate , we all agree with you !!

So you reckon that this moaning and whinging will bring it back??? or you are just fooling yourself ??
"truth is truth" huh?
NZ houses are among the most expensive in the world ... SO WHAT??
get over it !!... it is actually cheaper Today than next January !! cheer up !!

@ Eco Bird: Spoken like a true Estate Agent!!!

And just for the record; we are trying to do something about the out of control house prices, such as asking for the same tax measures that other wealthy parts of the world have introduced. Such as the Vancouver 15% tax on foreign buyers which so far has proved to be very effective at reducing their house prices to be more affordable - that's enough to make any Estate Agent shudder.

Cheer up Eco Bird it will happen!

Hi David and all who believes(if they believe) that overseas buyer does not play a role in this housing crisis, had read a comment by reena yesterday in the same website interest.co.nz. Is the reasoning not Valid.

If Overseas buyer have no role (We all know the truth) than why is Government not coming out with correct overseas buyer data (Not their manipulated version) and her comment is right people hide, lie and manipulate only when they are on wrong.

Her comment and reasoning as below :

"Many People are supporting John Key. We too were not against John Key (infact voted for him and now I wonder Why) but cannot stand his policy of denial and lies. People only manipulate and lie when they are at wrong and want to hide their true ulterior motives. Can any Chon Kee Supporter answer that if he is correct why is manipulating the overseas buyer data and giving rise to speculation. Instead if Correct and no hidden agenda he should come out with the correct overseas data and put in in public domain. Whether to act on it or not on that data, is his choice and we can agree or disagree but being PM it is his call BUT why manipulate and lie. No One Like Manipulators and liars. Only people who have vested interest and are gaining out of his manipulation and lie will like and support. May be I am wrong and they are correct and my perception is wrong and in politics perception is important so why not clear it one way or the other. Why be afraid"

I too am not an expert but being in Auckland and have friends in estate agencies, who do confirm that all that they want is one Chinese to sell the property and if have two or more chinesse than the property will go much above the expected price. Have been to few auction and does not need any data as seeing is believing. Data too will prove which many hide behind provided government realises one, without manipulating the defination of the word "Overseas buyer/Foreign buyer).

I too have always been a national voter but not any more not for them not acting but for not being truthful though many politicians may lie and manipulate but national have taken it to extreme height.

Facts , offshore buyers have played a part in buying/selling New Zealand/Auckland property for decades . Offshore buyers play a part in the majority of global real estate markets. Chinese migrants to New Zealand are more likely in percentage terms to own/purchase their own home than any other ethnic group. Fact, seeing a 'Chinese' person at an auction in no way means they are foreign buyers irrespective of whether they converse in mandarin on their mobiles. Fact, most real estate agencies in New Zealand are controlled by middle aged' White' people who will happily manipulate any data to create speculation , including speculation on the number of foreign buyers. Fact ,Auckland accounts for about 145Billion in current outstanding mortgage debt, if and only if offshore buyers account for a significant percentage of purchases, then Auckland/New Zealand has more of a problem with its debt metrics than previously understood

Actually Cowpat, the Foreign buyers interest in Auckland really took for around 2009. How do I know; well I watched the Auckland market like a hawk since 2006, since we (My Kiwi other half and I) were willing to move to NZ. Back in 2009 you could buy a good town 3 bed house in St Heliers or even Ponsonby for $600k.

Then everything went Auction, auction with the onset over foreign buyers. I can tell you now, I wouldn't have even contemplated moving to Auckland with an average property price tag of over 1 million.

Another thing that I think contributed to pushing Auckland into Crazyville was when a lot of that Christchurch insurance money was paid out, and instead of putting it back into Christchurch, they went shopping in Auckland.

Hi cowpat, you may be correct but if perception is different and government has nothing to hide, is it not a good idea to release correct overseas data and prove them (John Key) right and many many kiwi like us wrong.

Definitely John Key is not interested for does not want the true data to be out in public domain for than will have to act and he has some understanding or whatever the reason - comw what may he does not want to act.

We only want our government to come out clean for now John Key trust wiyh many is at low.

11
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John Key has been smart to divert few people attention from the issue of damnd (speculation) to supply only. Supply is important but by itself will never solve the crisis and this all is to protect...........

Ecenomy suggest that if it continue will be disastor not only for ecenomy but also socially. If controlled than may have a soft landing.

15
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What more proof does one needs to act. Still will deny, lie and manipulate- Sign of pathological liar

http://m.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=11706163

http://m.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11706831

To be seen how shameless can one go. History shows that power and greed corrupts and prevents just and reasonable thinking bringing downfall of not just themselves but generation to come.

Regards corruption - did you mean to copy this one in your second link?

Police and officials warn of property laundering
5:00 AM Saturday Sep 10, 2016

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1170...

#JKEXIT

i always have a laugh when someone like Gareth who is rolling in it suggests more taxes...id like to remind Gareth that tax is a form of slavery...

Seems to be his answer to everything. Perhaps because he never pays any.

Where does it say more taxes? My reading is that Gareth explicitly states that a CCIT would be offset against an equal reduction in income taxes dollar for dollar.

We are not going to get rich as a nation with the constant peddling of ideas by economists.

never a truer word spoken, did not national set a target when they took power of a %of GDP that exports was to get to, hows that going then.
"The fiscal update shows that exports will fall from 33 per cent of GDP when National came into office to 26 per cent of GDP. Their promise of increasing exports to 40 per cent of GDP is nothing more than a pipe dream"
we can’t get rich as a nation by selling houses and land to each other; we need to sell stuff to the world

Had to happen

We know immigration is good for outright GDP (but not per capita, that's falling)
As the population increases due to immigration, then, total exports have to increase by the same rate just to stand still

Unless all immigration is directed to export activities then exports as a % of GDP must FALL

Has to

Now you know the quantum effect

15
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Mr Morgan , Gareth : I love your theories ... really I do ... whether I agree with them or not , at the very least you are standing up , and expousing views outside of the mainstream orthodoxy ... no one else is having a crack !

... but ... we've heard these theories for several years now , and still this current asleep-at-the-wheel government does nothing new ... and frankly , the opposition are equally as bereft of fresh insights into the economy ...

So , what to do , champ ? .... there's a huge block of voters in the middle rump , who're desperate for a new party , a new champion to represent them in Wellington ...

... if Bob Jones could garner nearly 20 % of the vote when it was FPP back in the 1980's , imagine how much disruption the Morgan Taxation Reform Party could cause in 2017 under the MMP electoral cistern ...

We only live once , Gareth ... wanna have a crack at politics , about doing something concrete with your ideas .... the time is ripe , oh yes , the people are baying for something other than the incumbents ..

LOL, good idea!!

Can you imagine the impact of Gareth Morgan announcing the formation of his new Tax Reformation Party .... in a Wellingtonian primeministerial office , not so far away ,

... " Ah , John , you got a moment ? " ....

" yes , Bill " ...

... " John , brace yourself for this , but Gareth Morgan is going to contest the 2017 general election ! ... he's establishing a brand new political party to go head-to-head against you ........ ummm John ? ..... John ! .... geez whillikers John , what the hell is that smell John .... it's really off in here ? " ...

" I think the Prime Ministerial Nappies needing changing , Bill ... sorry about that ... must've been the beef vindaloo me and Bronnie had for tea last night .... yes , that's it Bill ... "

I was thinking the same thing. None of the present options really seem to address the real issues and if this site and opinions most of the people that I talk to are typical then there could be significant support.

Forget income tax. Forget CCIT. Forget GST. Forget all the myriad of deductions and taxes. Just have one. My favourite. A FTT. It is transparent and everybody and everything (businesses) would have to pay it. The Banks would collect it on behalf of the Government. It is so easy.

Fat chance of any action from this government - check how they are dragging it out on money laundering after advice from the police- $1.6bn from our home grown wide boys, god knows how much from "Asian" crims.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1170...

Not gonna get rich selling houses to each other. But selling your kids future to the Chinese on the other hand...

[ deleted because this is just a personal attack. Please stick to debating ideas, not slagging off authors, commenters or public officials on a personal basis. Ed.]

Xelnaga, Chinese house buyers and investors are not acting in unison or in a coordinated fashion to seize the future of New Zealand's children.

"Never attribute to malice that which is adequately explained by stupidity" - Hanlon's razor

I admit I speed read. However Local Body Rates Gareth? No mention. Out of control.

Maybe the question we need to be asking ourselves is, "what is this concept of getting/being rich"? If that really is the number 1 goal of mankind then how do we ensure that everyone is rich? Is there a benchmark measurement for being rich?

You watch a sporting match. Be it tennis, Net ball, cricket or rugby.
Some teams win. Others lose.
Wouldn't be contest otherwise.
The scoreboard doesn't lie. Might be different next week but ..
It is what it is.

Sorry but its too easy once YOU have made the millions too look about and start complaining and wanting to change the system. Have you not worked it out yet, the fewer people at the top with everything, the more everyone else suffers and the worse it gets until we look like the New Zimbabwe instead of New Zealand.

All the talk about tax reform always appears to be about adding new and cumbersome tax rules which only achieve keeping lawyers and the like in business.
What needs to be given serious consideration is the introduction of a debit tax at the expense of ALL OTHER TAXES. As you (Gareth Morgan) often approach things from left field, I am surprised that you have not put the notion forward. An internet search on Debit tax will reveal all and the numbers are compelling.
Just as a foot note, no one can escape such taxes, including Google and Apple.