Frank Newman: The Future of prosperity

I recently outlined some of the proposals included in the Future of Tax, a background discussion paper to encourage submissions about how tax should be collected in the future.

I made the point that the review is not comprehensive, nor is it impartial. 

The discussion excludes areas that the government considers politically unacceptable, like a capital gains on the family home. It promotes possible tax breaks for those involved in the Maori economy. It plans to use the tax system to address environmental issues like global warming and biodiversity. And it sees the tax system as the way to address house affordability issues.

The report makes a significant pitch for equalising wealth through the tax system - which is a more palatable way of saying, taking from the ‘haves’ and giving to the ‘have nots’ via wealth taxes. That's certain to be popular with those that receive tax benefits (which are typically Labour voters) and unpopular with those forced to pay (typically National voters).

What is clear from their analysis is the significant wealth disparity between those who own their own home and those that don't. Home ownership is key to wealth accumulation and the sooner someone buys a home, the better. It's a truism that should be pretty obvious to those who seek an answer to the question, why do some people grow rich when others remain poor?  

Here's another truism: The more you earn, the more likely you are to accumulate wealth - but more importantly, the more you save the more you will accumulate.

Politicians would make better use of their time if they turned their attention to those truisms instead of focussing on new ways to squeeze more tax out of those who are already paying it. If they embedded these simple rules into their policy development process, they may come up with wealth creating policies like these:

• Policy 1. Transition those who are out of work into work. For some that means moving from welfare to work and, if necessary, being forced to do so - or at least being required to go into trades or skills training. On-the-job apprenticeships  is a good place to start afresh, especially given the skill shortage in the building sector. 

• Policy 2. Require everyone to save part of every dollar they earn. That will require compulsion because the reality is that those who most need to save, don't. Make KiwiSaver compulsory for everyone, but with an opt out option once a certain level of accumulated savings is achieved - enough to buy an annuity that generates a liveable income in retirement.

• Policy 3. Encourage people to own their own home as quickly as possible. KiwiSaver already has those incentives.

In February there was a media fuss about a state house in Remuera worth $3m. During the 37 years that the 81 year-old tenant has lived in the property it has increased in value by millions of dollars. Turn the clock back 37 years, and imagine if in 1980, the then 44 year old tenant had been required to save into a KiwiSaver account, and through that scheme, was able to buy the house from the state. Today he would be a multi-millionaire, and financially independent instead of dependant. Not only that, he may well have had a tidy sum in the kitty to pass onto the next generation so they too can get a step up on the wealth ladder. That lost opportunity is the true cost of the government policies that create dependency.

What is unfortunate about the Future of Tax is the underlying presumption that spending more money is going to solve the major social issues of our time. It won't. It will simply mean the man in the $3m state house will have a few dollars extra a week to make his dependency a little more comfortable, and the politicians will feel warm inside because they believe they have helped him.

The political reality is the new government will not entertain wealth creating policies because it does not suit their ideology about what it means to live in a caring society. They may however make KiwiSaver compulsory and progressively increase the employers’ contribution! 

Still with political decisions that affect our lives, at last someone from the National Party has made a sensible comment about housing. National’s new housing spokeswoman, Judith Collins, says that changes to planning laws are required to help developers build new housing subdivisions faster.

She says house prices are higher than they should be because developers have to hold land for too long before they obtain consent to start building:

“Every time there is a month delay, a year delay, in some cases years of delay in getting consents through that all adds to the cost of holding that land for a developer. That cost goes on top of the section. That’s passed on to the first home buyer or the buyer of that land and I tell you what, that’s something we can sort out…The interest holding cost, the holding cost for any land has to be paid for”.

Ms Collins says National sees changing the Resource Management Act as a pathway to making housing more affordable. It's a shame Ms Collins was not in charge of the housing portfolio during the nine years National was in government.

Frank Newman, an investment analyst and former councillor on the Whangarei District Council, writes a weekly article for Property Plus.