Friday, July 15, 2011

Mike Butler: CGT or sell assets?

Time to do the right thing for New Zealand, Labour Leader Phil Goff asserted as he tried to sell his unpopular capital gains tax proposal on Radio New Zealand on Friday morning. Why an extra tax? Because government spending exceeds income by $16.7-billion this year. Why has the spending ballooned? Partly because of expensive and poorly thought-out policies of the 1999-2008 Labour-led governments, of which Goff was a senior minister.

Goff tried to sell Labour’s new economic policy that would levy a 15 percent capital gains tax on the sale of assets excluding the family home, remove GST from fruit and veges, create a new tax margin of 39 percent on earnings above $150,000, and have the first $5000 of earnings tax free.

The capital gains tax will cover property, shares and business investments including farms with an exemption on all real estate, land and buildings in the Canterbury quake zone for at least five years. The tax is expected to raise $26-billion over 15 years, Labour said, and would be introduced from April 1, 2013. It will not be retrospective, meaning people would pay tax on any gains after the introduction of the tax. (1)

Goff’s own polling of 750 voters shows the CGT is unpopular, with almost a third, 31 percent, saying they strongly oppose the idea. There were 21 percent in the middle, with 17 percent strongly approving and 14 percent approving, an overall approval rate of 31 percent. (2)

Goff seems to be creating an either-or option for voters, pushing us to choose between an unpopular CGT, and similarly unpopular assets sales, promoted by the John Key-led National Party.

A poll on tvnz.co.nz showed an even 50/50 split from people asked whether they thought National's state assets sales or Labour's capital gains tax was the best way to reduce the country's debt.

Increasing tax is not the only way to stop haemorrhaging taxpayer money. Try cutting a couple of costly and counter-productive institutions – namely interest-free student loans, which cost $2.1-billion a year, and Working for Families, which costs $2.8-billion. If both schemes were stopped, the government would save $26-billion in 5.3 years.

Goff, who owns a rental property, is happy to scapegoat other property investors, while blurring the distinction between investors and traders by describing both as “speculators”. Property traders, those who buy property with an intention to sell, and subsequently sell, are already subject to tax on their gains. Investors who never sell would never be in the situation where they would have to pay a capital gains tax.

Goff repeats the lie that property does not create wealth, which helps him to argue that a capital gains tax would channel funds to the productive sector, including as he said “professionally”managed funds. He is probably the first politician to publicly promote managed funds while in office – most do it after they have been booted out of politics. He probably means that private property does not create wealth for the government and his CGT is a means of tapping into that wealth. (3)

Apart from the CGT there is not much more in Labour’s new economic plan apart from a policy of higher asset ratios for banks.

Goff thinks the lack of a CGT creates a loophole. He did not mention how that loophole has manifested, and that involved Working for Families, a policy put in place by the government he was a senior minister of.

In 2009, the Tax Working Group was told that more than 9700 families receiving Working for Families credits own rental properties and are using losses on them to boost the amount they get from the taxpayer. Other recipients of the scheme are using trading companies, sheltered within trusts, to pocket tax credits even though they are earning well over $70,000. LAQCs became LTCs in the 2010 Budget in a bid to address those rorts. (4)

The interest-free student loan scheme, also set up by Goff’s former government, has attracted its own rorts. Students enrol in papers and then dropped them to get their fees refunded while still receiving living costs. The annual $1000 course-related cost allowance can be be used to pay for international airline tickets, or anything. Students can provide studylink with a quote for a laptop in exchange for $1000 that can be used as a great interest-free OE starter. (5)

Students apply for the maximum amount of living costs, which is up to $169.51 a week during the academic year. That money may be invested in high interest bank accounts while the student works a part-time job to support him or herself.

“Doing the right thing for New Zealand” right now involves putting an overweight government on a diet, not feeding it more. Goff, who says he wants to do the right thing for New Zealand, was part of the government that created Working for Families and interest-free student loans, which together cost $4.9-billion a year, and which make up part of the problem Goff purports to solve. Goff is part of the problem and his “soak the rich” capital gains tax is more about getting Labour up higher in the polls than it is for “doing the right thing for New Zealand”. It is the politics of desperation!

Sources
1. Labour to target high earners in election fight, http://tvnz.co.nz/politics-news/labour-target-high-earners-in-election-fight-4304874
2. Ibid
3. "Labour’s new economic policy", Nine to Noon, July 15, 2011, http://www.radionz.co.nz/national/programmes/ninetonoon
4. "Well-off families rort system", http://www.stuff.co.nz/national/politics/2761239/Well-off-families-rort-system
5. "Here's how over 250,000 students are using and abusing over NZ$2.1-billion of interest free loans and allowances. Your experience?", http://www.interest.co.nz/personal-finance/54098/heres-how-over-250000-students-are-using-and-abusing-over-nz21-billion-intere

10 comments:

Ray said...

Quite right about Labours proposal. However, it would make interesting reading to see your comments about asset sales and what, if any, benefits might accrue from that. Selling assets is really a short term answer to a long term problem.

Mike Butler said...

Assets are supposed to sell at a value that includes expected profit over a time period, so future earnings can bring an immediate benefit. However, because I never sell personal assets to solve a cash flow problem, I would not expect any government to sell assets for that reason. My main point, however, is that there are enough loopy schemes that the government can just get rid of to reduce the deficit immediately. Working for Families and interest-free student loans are a couple of such schemes. Then there is the taxpayer-subsidised so-called savings scheme called KiwiSaver. I could go on.

Ray said...

Thank you, couldn't agree more. Please include payments to iwi as a saving.

Anonymous said...

Spoken like a good Tory Mike. The state asset I'd like to see sold is the Beehive and its inhabitants before John Key and his cronies drive wages to third world level to make NZ "competitive". By then of course all good Tories will be living on the Gold Coast with their rental properties (capital gains free of course) in New Zealand.

Anonymous said...

While I respect Mike Butler and despise capital gains taxes, I disagree completely that house price inflation ahead of the rate of increases in incomes, is "wealth creation". It is no such thing. It is a wealth transfer. It reduces the future generations of home owners lifetime of discretionary income by a substantial amount.

Check out page 5 of:

http://www.houston.org/economic-development/joel-kotkin/pdf/KotkinAppendices%20Policy%20Framework%20with%20table.pdf

Which cities there have a future? The ones where incumbent property owners and investors over the last 30 years have been laughing all the way to the bank?

- PhilBest

Anonymous said...

PhilBest continues:

This is like an economic WMD planted in a nation's economy by an enemy power. It all comes back to how "free" urban development markets are. Hugh Pavletich, "Performance Urban Planning", is the guru on all this. We don't need CGT's. We DO need "freedom to build". Low, stable urban land prices correlate directly with high economic performance over the longer term. Fact. Try and disprove it.

Anonymous said...

Why should i earn %100,000(income) and get tax at 25%,
and someone else sells a building $100,000 (income) and pays no tax.
Didn't Sam Morgan say when he sold Trade-me for $700,million (income) he paid no tax, and said it was daft.his words, not mine.Get Real Mike.

Freeman said...

How is CGT worked in relation to inflation? Is a house not a house? Say I bought a house 10 years ago for 100k that is today worth 200k is that 100k profit or did the buying power of the dollar half in that time? It is not still the same house whether I live in it myself or rent it to someone else?

Freeman said...

Property investors association released statistics a few years back that shed a little light on all these terrible investors that the socialists love to hate. From memory 95% of investors had only 1 investment property and only 1% or 2% had more then 5. I suggest that one of the main reasons that people don’t get past 1 or 2 rentals is because they aren’t investors at all but normal folk doing what they can to take some personal responsibility for their retirement. Most invest poorly and get disheartened when they realize they’re subsidizing someone else to live in it. Should we disincentive these people even further? What will happen if we do? Could it be that they may pull the savings out of rentals and put it into living in a better home themselves pushing demand for better houses even higher? Who would buy all the rental stock? The government? Or maybe the 1% of professional investors who know that cash flow is king when it comes to rentals. What will happen to rents when real investors own a far greater portion of the rental stock?

Freeman said...

No one wants to own a rental! What people want is some control or security for the future. The more security government removes the less people will invest. The numbers given by Mr. Goff are most likely based on everything staying the same. But they don’t. Remove the incentive and people move their money. Mr Goff may think “great, people will all invest in business and the economy will boom”. However how much of that investment capital will go into business? There are 3 main ways we invest in business.
1: Direct. We buy or build one. Most people borrow against their house to do this.
2: Shares: Now day’s people can trade on most world markets from their PC so this may just send lots of New Zealand investment capital off shore to far more attractive markets.
3: Finance companies: Will people really be queuing up to do that after the last few years lessons?

I almost forgot all these will be given the CGT treatment as well. That leaves spending it or putting it into the primary dwelling. Once again creating the exact opposite to what is supposedly trying to be achieved.