Just consider some of the numbers on what it would do for hurdle rates for wealthy investors in the top income tax bracket. Their next million in investment is hit by the wealth tax. What does that look like?
If inflation is 2%, then an investment must earn at least 2% in nominal returns just to stand still.
Income tax is due on the nominal returns, including inflation. So the investment has to earn at least 3.3% nominal interest, just to stand still and not lose value due to tax, inflation, and the tax on inflation.
Now add a wealth tax of 2.5% that does not only apply to earnings on the investment but to the full amount of the investment, including inflation.
That investment must now earn a 7.6% return, just to stand still.
We can put it more concretely. Invest one million dollars (above the tax-exempt threshold) at a 7.6% return and you have $76,000 in nominal earnings. Income tax, at 39%, takes just under $30,000, leaving you with just over $46,000. A 2.5% wealth tax on the investment at the end of the year takes just over $26,000, leaving you with $20,000. And you needed that $20,000 just to keep up with inflation.
Those numbers get worse under the Green Party’s proposed 45% top income tax rate.
If you cannot find investments yielding at least 7.6%, you will be stuck watching the value of your assets slowly decline until you no longer have wealth above the threshold to be taxed.
Or, more likely, you will have fled the country along with your moveable assets before it could happen. Investing in New Zealand would be a lot safer if done from Australia or elsewhere.
It is hardly the only problem with the policy. Valuation across any comprehensive asset base gets very tricky, especially for unlisted companies and small businesses. Trusts would not have the same exclusion thresholds as other wealth holdings, but trusts can be complicated to unwind. New Zealand startups would have a harder time finding investors.
But requiring an investment to hit a 7.6% hurdle rate just to stand still seems sufficiently damning, all on its own.
Ruling this out well before the election would be reassuring.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
Now add a wealth tax of 2.5% that does not only apply to earnings on the investment but to the full amount of the investment, including inflation.
That investment must now earn a 7.6% return, just to stand still.
We can put it more concretely. Invest one million dollars (above the tax-exempt threshold) at a 7.6% return and you have $76,000 in nominal earnings. Income tax, at 39%, takes just under $30,000, leaving you with just over $46,000. A 2.5% wealth tax on the investment at the end of the year takes just over $26,000, leaving you with $20,000. And you needed that $20,000 just to keep up with inflation.
Those numbers get worse under the Green Party’s proposed 45% top income tax rate.
If you cannot find investments yielding at least 7.6%, you will be stuck watching the value of your assets slowly decline until you no longer have wealth above the threshold to be taxed.
Or, more likely, you will have fled the country along with your moveable assets before it could happen. Investing in New Zealand would be a lot safer if done from Australia or elsewhere.
It is hardly the only problem with the policy. Valuation across any comprehensive asset base gets very tricky, especially for unlisted companies and small businesses. Trusts would not have the same exclusion thresholds as other wealth holdings, but trusts can be complicated to unwind. New Zealand startups would have a harder time finding investors.
But requiring an investment to hit a 7.6% hurdle rate just to stand still seems sufficiently damning, all on its own.
Ruling this out well before the election would be reassuring.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
3 comments:
Real inflation is currently in double digits. Better redo you example. Inflation never going back to 2%. Inflation, which is caused by increasing the monetary supply is the hidden tax now being weaponized against us.
Good news for asset valuers and, initially, those in poverty - bad news for a significant proportion of the more mature/established population and worse for all, in due course, as much ol the wealth migrates elsewhere. Overall, a stupendously dumb idea, but then it did come from the Benefits Party - sorry, I mean Greens.
" The state alone is responsible for inflation: inflation without government, or indeed against government is impossible". Felix Somary.
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