PM English pours cold water on calls for tax treatment of 'other' forms of savings to be the same as for property; Also says case for corporate tax rate cut faces high hurdles

By Alex Tarrant

Those holding out for the tax treatment of property and other forms of savings to be equalised better not hold their breath.

Prime Minister Bill English poured further cold water on the idea – albeit with a focus on the property side of the ledger – at his post-Cabinet press conference on Monday afternoon.

The same goes for business groups calling out for a cut in New Zealand’s corporate tax rate, with English saying there was a “high hurdle” to show a move would be beneficial.

In other comments, English said New Zealand has “probably the best tax system in the developed world in the sense that it’s comprehensive, it’s fair and we have the lowest taxes on labour, pretty much, in the developed world.”

“You do another hour of work in New Zealand, you pay less tax on it than almost any other developed country,” he said.

‘Can’t just fiddle around’

Although calls for a comprehensive capital gains tax (CGT) to bring property fully under the taxation umbrella have been ringing through New Zealand in recent years, the political difficulties in getting changes through has seen campaigners raise alternative ways to level the playing field.

Economist Andrew Coleman and tax consultant Terry Baucher have recently appeared on interest.co.nz discussing one alternative, which is to bring the tax treatment of other forms of savings into line with property, rather than introducing a comprehensive CGT or imputed rent tax.

You can also read interest.co.nz’s coverage of the PSA's booklet on the fairness of New Zealand's tax system here.

Finance Minister Steven Joyce was asked about the property/savings tax fairness possibility during last week’s Budget lock-up. He didn’t dismiss the idea, although said it would be something to be looked at some time down the track, if at all.

Asked his views on Monday, English held off completely ruling the move out, but his response won’t lead to confidence that it’s being openly considered by the current government.

He offered up that property investment in New Zealand was treated like any other business. He had been asked about property as a form of savings.

But then on savings, his comments indicated the government did not see a reason to move: “You can have the argument about it, but the fact is that people make reasonably sensible investments,” English said.

Recent Reserve Bank figures on New Zealanders’ savings habits showed “the more we understand about it, the more diversified their savings look.”

“We’re always open to improvements. You need a pretty strong case,” he said. “Just fiddling with it to make it look like [you’re] ‘doing something’ isn’t really the threshold from our point of view.

“You need to see some significant economic benefit.”

High hurdle for corporate tax cut

English indicated the government would also need to see stronger evidence to consider a cut to the corporate tax rate.

He offered up a bit of hope: “You never want to close off the policy options of looking at improving the tax system.”

But: “You just need a high hurdle to show what’s going to be beneficial. It’s not…a panacea in the way that business groups sometimes market it.”

A corporate tax cut could have benefits, particularly in an economy like New Zealand’s, which consisted “basically of co-operatives and small businesses, where retained earnings matter as a source of investment more than publicly raised capital.”

“But the point I’m making is, those are fairly involved, complex discussions. The hurdles are pretty high for showing that we’re going to be better off than the fairly neutral system we have. But we’re open to that discussion,” he said.

In a lot of countries dividends were double-taxed, English said. “We have imputation, so that’s a different effective tax rate.

“And our top tax rate is lower than most countries. So, [business owners in other developed countries] might pay a lower intermediate tax rate in their company, but once the money comes out of the company, they pay a much higher personal tax rate,” English said.

“You need a pretty high threshold to show that there’s going to be equity benefits from it. The other challenge with company tax is that, because it’s an intermediate tax, it’s actually most beneficial to foreign owners of New Zealand businesses, because they just get a straight cut, whereas in New Zealand it just reduces your intermediate tax.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

31 Comments

If that is all true, why did they bring in the Bright-line test at all then?

To try to shut a few of us up.

up
18

Be realistic guys!!! why on earth will they do anything that hurts speculators......
Will they ever hurt the hand that feeds them????
Speculators = Current governments best mates

"Mortgage fraud is endemic, it's systemic....Asset Management hands back cash to clients citing an impending property market "calamity". When you speak to people candidly in the banks, they'll tell you very specifically that they are extraordinarily worried about the over-leverage of the Australian population in general. Mr Parker, displayed little nervousness about making such a significant decision. The finance industry is not short of dire warnings. "Let me tell you I've never been more certain of anything in my life"

http://www.afr.com/markets/fund-manager-hands-back-cash-to-clients-citin...

The warning signs are there and best to get out while the going is good.

..kept getting blocked on that link...this one worked for me..

http://www.smh.com.au/business/markets/fund-manager-hands-back-cash-to-c...

“You need to see some significant economic benefit.”
The great 'economy' god continues to be worshipped. Maybe it's about time some other god got a look in...say like society?

“You need to see some significant economic benefit.”

Yeah it's always great to see that comment. It means it has been looked at by a bunch of theoretical economists who manage to interpret it exactly as the government intends. They then do not follow up, they provide no evidence, and then never change anything once proven incorrect.

You couldn't be more wrong.
I doubt that there is any economist who believes that re-balancing the tax system in New Zealand is a bad idea.

You are blinded by your bias if you can't see that this is a decision based on politics, not good economics.

Oh I agree, they all seem to be for it. Take GM and the TOP party, their re-branding is tax on anything and everything.

My point is, that when you bring economics into it, there is seldom any quantifiable proof of the benefits. It is all just theoretical gains. When those gains aren't realised. There is no admission of wrong doing, or any attempt to rectify the situation.

"Oh I agree, they all seem to be for it."
So why in the first instance say that economists aren't for it?

"Take GM and the TOP party, their re-branding is tax on anything and everything."
Is that a bad thing?
You understand less than you think if you believe that anything that provides utility shouldn't be taxed.

"My point is, that when you bring economics into it, there is seldom any quantifiable proof of the benefits."
Again, really?
I doubt you spend much time trawling through journals, but if you did you would find numerous empirical articles covering the spectrum of policy decisions.
And again, you understand much less than you think if you believe policy is undertaken without substantial empirical analysis. At this point in history, very little policy is undertaken on a purely theoretical basis.

"empirical analysis"

Interesting, This is what I do for a living. I can tell you for a fact just how "empirical" the analysis is.

An assumption change here, a "start from here, not there", a "sorry we don't collect that exact data, but here try this", or my personal favourite "Please don't send this in *PDF as we were not able to amend it" and the truth quickly becomes nothing more than a fairy tale.

Simply, empirical analysis is only as good as the data allowed to be shown.

Anything released to the general public (and I am including both the private or public sector in this), has been through an absolute minefield of political management. End result is that what emerges in the public domain generally bares little to no resemblance to the actual "empirical figure"

I could provide pages and pages of examples from my own experience. So it is safe to say my cynicism was not born from naivety.

If you do empirical analysis for a living, then you should understand the disconnect.
The degrading of the analysis doesn't happen on the economist's/analyst's part, but on the politician's part.

So don't blindly blame the economists, as you have. Blame the politicians.

"Anything released to the general public (and I am including both the private or public sector in this), has been through an absolute minefield of political management. End result is that what emerges in the public domain generally bares little to no resemblance to the actual "empirical figure""

So, all those public companies that release financial statements every year - this is all wrong?
Our markets are pricing equities and bonds are all wrong?

C'mon, take off the tin foil hat.

Is it all wrong? hard to say with any clarity, as no-one but internal employees have access to the actual data.

Is it all morally, ethically, and logically correct? No, definitely not - It is presented in the most palatable way to the company.

I don't live under a tinfoil hat, rather I treat all "releases", "Reports", and any other material as the propaganda that it is.

Anyone that doesn't should go and do some digging themselves. If you have a few hours to waste go sit in the local ED for a day. Look at how quickly people are triaged, seen, and admitted. Then go look at the reported stats.

I gotta love that phrase "empirical analysis" Isn't the definition of that phrase something like quantifying ones bias? I'd rather see quantitative analysis than qualitative analysis (aka empirical analysis).

The endgame of taxing all forms of savings... isn't that called communism?

Seems to be heading that way, just with a different name.

We will tax you 100% of everything, but then give you an amount to do what you want with out of those taxes.

...

Some people have some radical ideas.

Who wants to tax people 100%?

I want to tax everyone 100%. How else will I complete my plans for world domination?

Well, when you put it like that...it seems like a perfectly sound plan. One can only hope you're a benevolent dictator.

At least our gulags aren't too far a hike from civilisation.

Wait for sometime as election not far away and this time will be vote for change.

No point though in voting for change for change sake. The grass isn't always greener. Some of Glabours policies also don't look too compelling, and National seem to be bringing in watered down versions of some of them anyway, without needing to change government.

The counter arguments to vote for more of the same are not greater the arguments to vote for a change in my view!

“Just fiddling with it to make it look like [you’re] ‘doing something’ isn’t really the threshold from our point of view" Bill makes no sense, all National do is tinker! their budget mainly benefits Landlords with no plan to address demand. Inequality, poverty and crime continue to sky rocketed.

Let's just pour cold water on this guy and his cronies having another term.

In regards to tax on property it isn't what I want to hear. However, the onus is now on those, myself included, to make the case. Despite what a lot of people say here the polls point to Bill English being PM after the election. He hasn't ruled it out - just now need to make a compelling case. Terry was right in regards to that we are taxed on Kiwisaver but not in the same way for land. So yes people will make rational choices. We need to convince people that taxing land is the best way to go.

Taxing kiwisaver capital gains is NOT equal to taxing land. It is equal to taxing capital gains on land.

I am quite strongly in favor of taxing capital gains (without exceptions) and am equally strongly against taxing static values (land tax). Please do not conflate a wealth tax with a capital gains tax, they are considerably different.

National's "laissez faire" approach to the economy would be more accurately named "faites rien".

IMO they are behaving similar labour did prior to the election they lost, where they start to lose touch his NZers feel. I am a National voter but think they need to do something about housing desperately. Tinkering at the edges over the last few years hasn't really had any affect in terms of bringing house prices down. I don't care about the affordability measures, because they rely on interest rates at the time they are caliculated. But interest rates are going to rise, so unless house prices drop, or incomes rise, then affordability will get worse.

So no link then between LVR and other rule changes, a significant reduction in bank 'investor' lending and now moderating prices in AKL - that was just tinkering and the recent improvement in affordability simply a random correlation?

Yes, they're just tinkering. Short-term measures so far that don't discourage housing as an investment for local or foreign investors, and don't increase supply. In addition, there's no reason to assume the moderation in prices is due to that and not the sudden drop off in foreign demand (that apparently never existed) when China introduced its new capital controls.