OnPoint by Keith Ng

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OnPoint: It's real

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  • Scott A,

    I also am going 'why' a bit with the changes in income tax. Given, as you're pointing out, it doesn't actually seem to do much to the government's books all up, why is it there?

    The 'envy tax' narrative - the punishment of aspiration and betterment criticism of higher levels of income tax - still exists and still finds air time (just yesterday I heard / read Mike Hoskin, David Slack and Sue Wells all mention it). It is still capable of derailing any positive messages from Labour's package. Why risk it?

    The wilds of Kingston, We… • Since May 2009 • 121 posts Report Reply

  • Lucy Telfar Barnard,

    I'm just so seriously relieved to see a party - any party - releasing some actual pre-election policy statements, so that there's a faint chance the election might actually be fought on policy rather than (or at least as much as, I'm not that hopeful) personality. Perhaps Labour finally figured out Goff wasn't going to win it on personality.
    The envy tax narrative would I think get more traction if Labour were just increasing the top tax rate, but it's a bit easier to debunk in relation to CGT. Capital gains are not due to value added by aspiration and betterment, they're mostly just a combination of luck and economic cycles. And buying bulk quantities of Resene Half Tea [*shudder*].

    Wellington • Since Nov 2006 • 373 posts Report Reply

  • DexterX,

    It is all such a good idea and if you are working self employed and over 55 you can avoid it, you can avoid it if you are savvy.

    As you said above

    we'd been foolish to psych ourselves up for endless tax cuts and WFF handouts.

    Like I said before:

    It will introduce structural problems into the tax system with the top personal rate being 39% , the company rate will be 30%, The top trust rate will be 33%, and the CGT will be 15%.. It will be avoided.

    Presently 10% of the top income earners pay 70% of personal taxes. and if Labour get in this will go up,

    We have 90% of all families in NZ paying no income tax when you take into account WFF.

    Gosh if they eased the WFF "thang" then they could afford to not sell the power generation and not to bring in a CGT.

    Referring to Parker's comments

    CGT encourages Kiwis to invest in productive businesses, which means businesses don't have to borrow as much overseas.

    Can any one tell me how a CGT will encourage a nation of Welfare addicts in productive businesses, and bearing in mind the rather limited and narrow base of the economy what are these new productive businesses.

    How will the 90% of all families in NZ paying no income tax when you take into account WFF become investors in productive businesses?

    My thoughts are the problem with the economy is the lack of growth and plans to foster growth.

    Auckland • Since Nov 2006 • 1199 posts Report Reply

  • Christopher Dempsey,

    Me, envious? Not at all.

    Parnell / Tamaki-Auckland… • Since Sep 2008 • 642 posts Report Reply

  • Andy Milne,

    Can someone please explain how CGT will suddenly encourage people to move out of property investments and invest in more "productive" areas of the economy? If CGT is applied as a blanket tax across virtually all asset classes barring the family home, I don't see how it incentivises a change in investor behaviour. I get the "fairness" argument to a point, but surely applying CGT across the board does nothing to alter the status quo of investor decision-making?

    Christchurch • Since Aug 2007 • 58 posts Report Reply

  • George Darroch,

    Can someone please explain how CGT will suddenly encourage people to move out of property investments and invest in more “productive” areas of the economy?

    I can see where you're going there. While this is true - that dollar for dollar a speculative asset is the same whether it's a house or a factory. The difference is that while share price inflation and capital gains on (real) capital assets are are one way a company makes money, they also make profits which are distributed as returns to owners, shareholders (dividends), and lenders (as repayments).

    Small investors have bought housing rather than shares because dividend plus capital gain plus risk meant less to them. The banks have chosen to lend to housing over businesses, on the basis that housing inflation is better for their returns than a business trying to run a profit. That made sense to them now, it will make less sense in future.

    As I understand things.

    The People's Republic of … • Since Nov 2006 • 2136 posts Report Reply

  • Craig Ranapia, in reply to Scott A,

    I also am going 'why' a bit with the changes in income tax. Given, as you're pointing out, it doesn't actually seem to do much to the government's books all up, why is it there?

    My (non-trolly) concern is that with all due respect to BERL, the income modeling is also based on very long-term projections. I think we've all learned to take anything coming out of Treasury with a pound of salt, shouldn't we do the same with a private company that I assume didn't do this work for Labour as a public service.

    North Shore, Auckland • Since Nov 2006 • 12034 posts Report Reply

  • Andy Milne, in reply to George Darroch,

    The banks have chosen to lend to housing over businesses, on the basis that housing inflation is better for their returns than a business trying to run a profit.

    Im not sure I see what you're trying to say here George. Banks don't make lending decisions based on whether their secured asset is appreciating in value, they lend on the basis of whether they think their loans will be repaid. As the underlying risks/returns haven't changed on a net basis, it won't affect bank lending policies and it won't affect investor decisions.

    Most peope who invest in property do so as it is generally (and correctly, IMO) perceived as being lower-risk than shares or bonds. CGT potentially makes property less attractive as an investment, but if it applies equally to equity and debt investments also, then this won't affect their investment decisions.

    Christchurch • Since Aug 2007 • 58 posts Report Reply

  • Andy Milne,

    To continue my train of thought: If govt really wanted to disincentivise property investment, wouldn't it be more effective to no longer allow investment property losses to be offset against PAYE income? That tax advantage seems to be at least as big a driver of investment property investment as capital gain.

    Christchurch • Since Aug 2007 • 58 posts Report Reply

  • George Darroch,

    Banks don't make lending decisions based on whether their secured asset is appreciating in value, they lend on the basis of whether they think their loans will be repaid.

    Yes, but they base at least part of that assessment on the assumption that if the loan-holder is no longer able to pay, the property will have held or appreciated in value sufficiently that they will receive their money back after the property has sold. To extent that this is assumed to be true, they're seen to be a very safe asset class, as you note above. Banks lent wantonly in the US on the basis of this truth. It almost collapsed the banking system. Thankfully New Zealand lenders have mostly avoided such practices.

    If speculative investment (as any investment predicated primarly on the basis that it will increase in value should be treated) was to decrease substantially, the equation would change.

    The People's Republic of … • Since Nov 2006 • 2136 posts Report Reply

  • BenWilson, in reply to Andy Milne,

    Well, to be fair, nobody in this town does.

    I do. Labour did it with Muldoon.

    Can someone please explain how CGT will suddenly encourage people to move out of property investments and invest in more "productive" areas of the economy?

    I think this question is fair. My own preference to that end is to introduce a compulsory super savings scheme, a proportion of which can be invested in the stockmarket. This is part of the reason share ownership is so widespread in Australia, super funds are massively invested in it. It's highly stimulatory to the stockmarket, and it also makes people look forward to their retirement more, rather than dreading it.

    Auckland • Since Nov 2006 • 8592 posts Report Reply

  • Craig Ranapia,

    Currently listening to Ganesh Nana on Nine to Noon. Did I miss the disclosure of BERL's blatant conflict of interest in any discussion of this policy?

    North Shore, Auckland • Since Nov 2006 • 12034 posts Report Reply

  • Stephen Judd, in reply to Craig Ranapia,

    After the way Jim Mora let Farrar go unchecked yesterday afternoon, I feel the Left is entitled to a pass on that one.

    Wellington • Since Nov 2006 • 2968 posts Report Reply

  • Rich of Observationz,

    My suggestion to avoid a slow start is this: the tax gets charged on an annual basis using the GV of the property and the general property inflator. (For the taxpayer, this would simply mean listing their assets at the start and end of the year - LINZ and IRD could get together and do the rest).

    The tax bill can then be accrued against the property until sold, rather than paid in cash (councils sometimes allow rates to be deferred like this). That makes it a tangible asset of the state and hence reduces net debt.

    Back in Wellington • Since Nov 2006 • 4463 posts Report Reply

  • Craig Ranapia, in reply to Stephen Judd,

    After the way Jim Mora let Farrar go unchecked yesterday afternoon, I feel the Left is entitled to a pass on that one.

    I think I can be atypically terse on this: No.

    If Curia is writing the costings of National policies (prominently displayed on their website) and David Farrar is on a panel discussion of those policies without a very full disclosure at the top of the interview, I'll be calling bullshit too.

    M'kay?

    North Shore, Auckland • Since Nov 2006 • 12034 posts Report Reply

  • Craig Ranapia, in reply to Stephen Judd,

    And one more thing, Stephen, I expect a little more from RNZ’s flagship news/current affairs shows than the lame magazine fluff after lunch. I'm not talking about the media ethics equivalent of the Higgs bosun here, just disclosure 101.

    North Shore, Auckland • Since Nov 2006 • 12034 posts Report Reply

  • DexterX, in reply to BenWilson,

    Blind faith in the mechanism of the stock and financial markets, I don’t share it.

    One should only invest in financial markets what you can afford to lose.

    The over cooked and bent nature of these markets don't make it an overly productive investment option in my view - Finance company collapse, the bail outs and the GFC.

    Auckland • Since Nov 2006 • 1199 posts Report Reply

  • DeepRed, in reply to Andy Milne,

    Most peope who invest in property do so as it is generally (and correctly, IMO) perceived as being lower-risk than shares or bonds. CGT potentially makes property less attractive as an investment, but if it applies equally to equity and debt investments also, then this won't affect their investment decisions.

    To the point where our productive sector is forced to seek overseas venture capital to earn overseas dollars. At the end of the day, property speculation is basically a glossy form of hanging out the neighbour's washing for a living. It also cartellises the housing market to a certain degree.

    The 1987 Crash, and the subsequent DFC bankruptcy and BNZ bailout, were major factors in the cargo-cult orthodoxy that pervades current economic thinking. Case in point - Peter Thiel. If he has faith in our would-be Sam Morgans, why don't our fellow NZ'ers?

    The southernmost capital … • Since Nov 2006 • 4355 posts Report Reply

  • Keith Ng,

    Can someone please explain how CGT will suddenly encourage people to move out of property investments and invest in more “productive” areas of the economy?

    (I withdraw my answer in deference to Dave's below.)

    Auckland • Since Nov 2006 • 535 posts Report Reply

  • Dave Howell,

    Can someone please explain how CGT will suddenly encourage people to move out of property investments and invest in more “productive” areas of the economy?

    Combination of tax treatment and effects of leverage.

    Shares return taxable dividends and non-taxable capital gains. Houses return taxable rents and non-taxable capital gains.

    However you can borrow money to buy a house, and offset your rent against mortgage costs, so you pay no tax (or even create a loss which you can offset against other tax). Since not all the money in the house is yours, but you're getting all the capital gain, your non-taxable return on investment is higher in proprtion: net result is 100% (or more) of your return is non-taxable..

    As banks regard companies as less secure than houses* , it's much harder to borrow to buy shares. So you're more likely to have little or no leverage. So you pay tax on dividends, and don't make as much capital gains. NZ companies, listed ones at least, pay relatively high dividends and have relatively low share price growth. So most of your return winds up being taxed - either directly through you, or via company tax.

    Plus if you're investing in offshore companies (and if foreign ownership of NZ assets is bad, NZ ownership of foreign assets must be good, right?) then you are already paying tax on capital gains through the FDR scheme, so it's even worse.

    Capital gains tax levels all that out.


    * which is probably true apart from the sector risk issue: while an individual company is more likely to go belly up than an individual homeowner, as the US found out recently, when homeowners go belly up they tend to do it in droves, whereas companies are more diverse so they don't tend to all fail at the same time unless things get really messy.

    Auckland • Since Jun 2008 • 14 posts Report Reply

  • Keith Ng,

    My (non-trolly) concern is that with all due respect to BERL, the income modeling is also based on very long-term projections. I think we’ve all learned to take anything coming out of Treasury with a pound of salt, shouldn’t we do the same with a private company that I assume didn’t do this work for Labour as a public service.

    BERL only did the part on CGT. They were very transparent and quite conservative, and you can read their report here: http://www.ownourfuture.co.nz/assets/BERL-report.pdf

    The income tax part was done inhouse, probably using models that I made for them ages ago. It’s pure arithmetics, scaling the current tax base using Treasury’s GDP forecasts – no magic beans whatsoever. Yes, it’s taken with a grain of salt. So? It could be wrong, but it’s the baseline from which we make decisions.

    Auckland • Since Nov 2006 • 535 posts Report Reply

  • Keith Ng, in reply to Rich of Observationz,

    My suggestion to avoid a slow start is this:

    BUT THE SLOW START IS NOT A PROBLEM.

    Why is it a problem?

    Auckland • Since Nov 2006 • 535 posts Report Reply

  • Idiot Savant, in reply to Scott A,

    I also am going 'why' a bit with the changes in income tax. Given, as you're pointing out, it doesn't actually seem to do much to the government's books all up, why is it there?

    Because Labour is a left-wing party and wants to roll back some of National's upwards redistribution. You can't just live off sterile economic management; it needs to be for something.

    Palmerston North • Since Nov 2006 • 1660 posts Report Reply

  • 3410,

    I expect a little more from RNZ’s flagship news/current affairs shows than the lame magazine fluff after lunch. I'm not talking about the media ethics equivalent of the Higgs bosun here, just disclosure 101.

    Happy now, Craig?

    Auckland • Since Jan 2007 • 2618 posts Report Reply

  • Keith Ng, in reply to Idiot Savant,

    Because Labour is a left-wing party and wants to roll back some of National's upwards redistribution. You can't just live off sterile economic management; it needs to be for something.

    For more money in your pocket?

    Auckland • Since Nov 2006 • 535 posts Report Reply

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