OnPoint by Keith Ng

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OnPoint: Why Rightwingers Should Support the CGT

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  • Rich of Observationz,

    (sorry, long, but it could be a 300 page book)

    Capitalists want to maintain capitalism. Way back in 1867, Marx predicted capitalism to be hosed. The vast majority of the population were oppressed workers and peasants, with a small minority of land and business owners living off their toil. Obviously revolution could not be far off.

    How did capitalism dodge the bullet? By creating the middle classes. Your average cotton mill (like Engel's dad's business) ran lean - a few dozen clerks and a few thousand workers. Modern capitalism changed that by creating a whole new class of marketers, designers, consultants, accountants and the rest, churning powerpoints and emails and taking home far better money than the old millhands got. All those people felt themselves to have a stake in the system, they "owned" a mortgaged house and identified with the owners, not the workers.

    That cozy arrangement kept capitalism going through the 20th century. Increasing productivity and moving real production overseas kept it sustainable. But now we've reached the point where the middle-class jobs are also getting retrenched and outsourced. Suddenly the settlement is threatened.

    The only hope for capitalism to keep the tumbrils at bay is to give the middle-class an alternative way of identifying with capital. Property speculation is that dodge - lend billions into speculative housing bubbles, saturate the media with house-porn and convince people that even though their job sucks, they can make a (tax free) fortune by simply buying and selling houses. They make money (even if all of it stays locked up in properties) and stay soundly Tory.

    Pull the rug from under that, and capitalism starts to look decidedly shaky. So the right are never going to be keen on capital taxes - turkeys, christmas and all that.

    Back in Wellington • Since Nov 2006 • 4209 posts Report Reply

  • David Ritchie,

    churning powerpoints

    Speaking of which, the Swiss Anti-Powerpoint party is seeking to a national referendum to abolish presentation software.

    Wellingtron • Since Nov 2006 • 163 posts Report Reply

  • Greg Sands,

    The "ideal" CGT you describe doesn't actually sound too bad - applied universally at a flat rate to all capital gains. However, even despite not knowing the details until Thursday, there is a snowball's chance of Labour's proposed CGT coming anywhere close to this. It will be just another set of "winners" and "losers" picked by the government, because some things (e.g. capital gains on a family home) will be exempt. That criteria doesn't fit your analysis - it's purely political.

    If a CGT was truly universal, across the board, applying to all gains in capital, and was balanced with reductions in all other taxes, I think there'd be much less "right-wing" resistance, just the usual complaints by "interest groups".

    Auckland • Since Mar 2007 • 7 posts Report Reply

  • Gareth Ward,

    Excellent post, all great points but the Tax Working Group did not, in the end, support it (falling back on that useless "it's a bit hard excuse"):

    Most members of the TWG have significant concerns over the practical challenges arising from a comprehensive CGT and the potential distortions and other efficiency implications that may arise from a partial CGT.

    http://www.victoria.ac.nz/sacl/cagtr/pdf/tax-report-website.pdf

    Auckland, NZ • Since Mar 2007 • 1712 posts Report Reply

  • Gareth Ward,

    If a CGT was truly universal, across the board, applying to all gains in capital, and was balanced with reductions in all other taxes, I think there'd be much less "right-wing" resistance, just the usual complaints by "interest groups".

    Hence why I think a good way of launching this would be to describe an all-encompassing, CGT to broaden the base and remove distortion. And THEN describe the "positive influencing" exceptions you've made to it :)

    Auckland, NZ • Since Mar 2007 • 1712 posts Report Reply

  • Keith Ng, in reply to Gareth Ward,

    Doh! Humbly amended.

    Auckland • Since Nov 2006 • 522 posts Report Reply

  • Keith Ng, in reply to Greg Sands,

    The "ideal" CGT you describe doesn't actually sound too bad - applied universally at a flat rate to all capital gains. However, even despite not knowing the details until Thursday, there is a snowball's chance of Labour's proposed CGT coming anywhere close to this. It will be just another set of "winners" and "losers" picked by the government, because some things (e.g. capital gains on a family home) will be exempt. That criteria doesn't fit your analysis - it's purely political.

    Sure, I agree - an all-encompassing one is better than one with exemptions. But the question is, is a CGT with exemptions better than no CGT?

    I think it's an unequivocal yes.

    It doesn't eliminate the problem that some forms of CG are taxed while others are not, but it substantively (or not, depending on what they exempt) reduces the kinds of assets that are tax-free.

    Auckland • Since Nov 2006 • 522 posts Report Reply

  • James Butler,

    Am I wrong in thinking that the family home exemption acts kinda like a combined incentive towards better housing and retirement savings? For most people it will not be cashed in until they either trade down in housing (which often happens after retirement) or die (passing the benefit to descendants); otherwise it just acts as a general subsidy on the house you actually live in, which (hopefully) people will be more careful and long-sighted in maintenance than investment properties. In this way it seems to cover some of the same goals as Kiwisaver incentives.

    Auckland • Since Jan 2009 • 790 posts Report Reply

  • Keith Ng, in reply to James Butler,

    Optimistic but intriguing! It doesn't change the efficiency argument: It's still going to mean that people will invest in things that are not necessarily the best investment (e.g. Houses), but it does mean that they won't consume the gains immediately. Unless they borrow against their houses for consumption...

    Auckland • Since Nov 2006 • 522 posts Report Reply

  • James Butler, in reply to Keith Ng,

    Optimistic but intriguing! It doesn’t change the efficiency argument: It’s still going to mean that people will invest in things that are not necessarily the best investment (e.g. Houses)

    Depends on the meaning of "investment". They might not realize the highest monetary return, but will perhaps on average live in a nicer house, which might be a good thing overall.

    but it does mean that they won’t consume the gains immediately. Unless they borrow against their houses for consumption…

    Heav'n forfend anyone would do that.

    Auckland • Since Jan 2009 • 790 posts Report Reply

  • James Butler, in reply to James Butler,

    Replying to self, OTOH no exemption might help drive investment in improving existing housing versus always trading up, which might be of benefit too...

    Auckland • Since Jan 2009 • 790 posts Report Reply

  • Greg Sands,

    Sure, I agree - an all-encompassing one is better than one with exemptions. But the question is, is a CGT with exemptions better than no CGT?

    I think it's an unequivocal yes.

    And I think not. Why? The same reasons why I think removing GST off fruit&veg is a silly idea. The exemptions and categories do two things:
    1. create work for people to push at the boundaries, which mostly benefits those who can afford to do so (i.e. who have the most to lose)
    2. becomes a "political football" where each govt chops and changes - they do enough of that as it is. And that's a recipe for ongoing uncertainty, which doesn't benefit the country in the slightest.

    Disclaimer: I own neither a farm nor an investment property, so I doubt I'll "lose" under whatever Labour proposes. But I'm sure there's an Occam's Razor for Economics - that the simplest solution is the most efficient.

    Auckland • Since Mar 2007 • 7 posts Report Reply

  • Angus Robertson, in reply to James Butler,

    They might not realize the highest monetary return, but will perhaps on average live in a nicer house, which might be a good thing overall.

    If capital improvements to private dwellings are to be tax free, whilst those on rental dwellings are taxed at 15%, capital improvements to private property will be preferred and those to rental property deferred. Overall this is not good for the people who rent, if their landlord is going to be penalised for making improvements to their accomodation.

    Auckland • Since May 2007 • 984 posts Report Reply

  • Ross Mason, in reply to Angus Robertson,

    Hmmm...my simple logic thus: If a landlord improves the rented house, he can up the rent. He thus receives the benefit from day one. He does not have to pay the tax on the capital gain until he sells it. A little bit of optimisation should figure out how much to raise the rent to cover the tax "loss" over x years.....

    Upper Hutt • Since Jun 2007 • 1457 posts Report Reply

  • James Butler, in reply to Greg Sands,

    But I’m sure there’s an Occam’s Razor for Economics – that the simplest solution is the most efficient.

    Well, both flat tax and poll tax are very efficient. The quibble is whether the most efficient solution is necessarily the best.

    Auckland • Since Jan 2009 • 790 posts Report Reply

  • Bart Janssen,

    So as far as I can tell the arguments against it are:
    It might be a bit difficult to do right
    All taxes are evil
    and
    Labour proposed it and we oppose anything Labour says

    Given there are a whole bunch of countries that have variations on a CGT theme it does seem as though we could pick one that works really well and implement it and then we wouldn't have to make the same mistakes as other people have.

    Sigh I'm left with hoping the ABs lose the RWC because that is about the only thing I can see able to damage the National Party halo at the moment.

    Auckland • Since Nov 2006 • 3108 posts Report Reply

  • Gareth Ward, in reply to Keith Ng,

    Doh! Humbly amended.

    Sorry!
    Although correction is actually more powerful and someone would probably have suggested the entire argument was invalid due to that one line...

    Auckland, NZ • Since Mar 2007 • 1712 posts Report Reply

  • DeepRed, in reply to Rich of Observationz,

    Pull the rug from under that, and capitalism starts to look decidedly shaky. So the right are never going to be keen on capital taxes - turkeys, christmas and all that.

    How better to fight wedge politics, than with wedge politics?

    The southernmost capital … • Since Nov 2006 • 3893 posts Report Reply

  • Ross Calverley,

    You are assuming that all policy gets forgotten after an election. That isn't true. A party will recycle policy if it thinks there is a need for it. Look at Act. Using Labour Party economic policy of the 1980s, while using National Party Racial policy of the mid 2000s. Look at Cunliffe borrowing ideas from the 60s and 70s for Labour's economic policy now.

    Since May 2011 • 5 posts Report Reply

  • Brent Jackson, in reply to Bart Janssen,

    Sigh I’m left with hoping the ABs lose the RWC because that is about the only thing I can see able to damage the National Party halo at the moment.

    I would really like to do something to try and stop National from getting into power again. But I don't like any of the alternatives enough to proselytise for any other party. So all I am doing is mentioning some of the appallingly undemocratic things that National has done while in office, in those very few instances when politics comes up in conversation.

    It just doesn't seem like enough ...

    Auckland • Since Nov 2006 • 341 posts Report Reply

  • Kyle Matthews,

    If capital improvements to private dwellings are to be tax free, whilst those on rental dwellings are taxed at 15%, capital improvements to private property will be preferred and those to rental property deferred. Overall this is not good for the people who rent, if their landlord is going to be penalised for making improvements to their accomodation.

    That's not my understanding of what we're likely to see. Capital gain is profit you make from your house value increasing just because houses do that.

    Investing money by improving the property would be exempt from the capital gains tax wouldn't it? Otherwise if you buy a empty bit of land, build a house on it, and then sell it, you'd be taxed on the whole house value as a capital gain.

    Since Nov 2006 • 6145 posts Report Reply

  • BenWilson,

    Sigh I'm left with hoping the ABs lose the RWC because that is about the only thing I can see able to damage the National Party halo at the moment.

    I actually think this move by Labour will be quite positive and powerful, and that National have either miscalculated or simply been outmaneuvered. I did not expect anywhere near the support the idea has received on this site. It's nice to see an issue the Left is not divided on. It gives me hope.

    Auckland • Since Nov 2006 • 8010 posts Report Reply

  • James Butler, in reply to Kyle Matthews,

    That’s not my understanding of what we’re likely to see. Capital gain is profit you make from your house value increasing just because houses do that.

    Investing money by improving the property would be exempt from the capital gains tax wouldn’t it? Otherwise if you buy a empty bit of land, build a house on it, and then sell it, you’d be taxed on the whole house value as a capital gain.

    If the tax is a tax on profit, surely it would be on the whole house value minus the cost of building the house? Anyway, IIRC the largest increase in capital value in recent decades has been on the unimproved value of the land, so house improvement is likely to be a relatively small portion of the taxable value.

    That said, I am rapidly wading out of my depth on economic issues, so take everything I say with a handful of salt.

    Auckland • Since Jan 2009 • 790 posts Report Reply

  • Rich of Observationz, in reply to James Butler,

    That is the normal way business taxation operates (and renting out houses is more like a business activity than banking cash or working for an employer). You pay tax on any profit after expenses.

    Also, buildings intrinsically depreciate in value. Land appreciates, mostly.

    Back in Wellington • Since Nov 2006 • 4209 posts Report Reply

  • Paul Campbell,

    I most foreign CGT regimes a capital improvement is not included as part of the capital gain on the asset.

    When I sold my California house I was able to to write off: the new roof we'd just put on, the money we spent painting it to tart it up for sale, and a depreciated cost of the new foundation and reshingling we'd done when we moved in ten years before - this brought the CG below the threshold for taxation under the new Bush era CGT rules for sale of the family home and as a result I got a nice tax refund

    Dunedin • Since Nov 2006 • 1958 posts Report Reply

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