Capital Gains Tax: Now or never says Sir Michael Cullen

Sir Michael Cullen, head of the Tax Working Group, has indicated that New Zealand is in a phase where best time to adopt a Capital Gains Tax is now, or we never take it. The comments come as the T.W.G. prepares to release its report into New Zealand’s tax structure and the changes that are recommended nearly a month early.

Dr Cullen was Treasurer of the Helen Clark Government from 1999-2008. During his time the governing Labour Party ran up significant budgetary surpluses. A capital tax was discussed on occasion, but never seriously considered as it would have been likely to give National and A.C.T ammunition for their campaign against higher taxation.

The report that Dr Cullen is preparing for Prime Minister Jacinda Ardern and her Treasurer Grant Robertson also deals on the ins and outs of a Capital Gains Tax. They are part of a Government of the only country in the O.E.C.D. that does not have a capital gains tax.

I personally have no problem with the tax if it means that the country’s high levels of social inequality can be addressed. I note that Australia only collects C.G.T. on realized capital gains, whilst Canada collects tax on 50% of realized capital gains on an individual tax rate. It is different in the United Kingdom where individuals who are residents or normally reside in the U.K. and are on the basic tax rate, pay 18% C.G.T. on profits from residential properties and 10% on gains from other chargeable assets. In the United States individuals and corporations pay on the net total of their capital gains. In Sweden’s case the C.G.T. may be up to 30% of realized capital income depending on the depot type..

Not surprisingly National have attacked and said that any C.G.T. will be disbanded should they win the 2020 election. A.C.T., the one man band of David Seymour, have said the same, with a dogmatic, ideological blindness in much the same way, Greenpeace have a blind dislike of oil and gas.

New Zealand First, who enabled Labour to get into power have thus far not said anything on the ins and outs of the C.G.T. It is possible that they are waiting for the report to be finished so that they can address internal ructions without a media circus taking hold.

What could a C.G.T. look like then?

I do not know whether a single C.G.T. rate that covers all forms of capital would be appropriate or not, or whether a better idea is to append the tax to assets and let the C.P.I. determine whether it increases or decreases.

I certainly believe that secondary properties that are not ones one normally resides in, but owns and may have holidays there should be taxed. As I am not believer of having anyone other than permanent residents and citizens own property, it would restricted to these people.

When would it be implemented?

National is committed to repealing it, as is A.C.T. Introducing one before the election gives them a visible target to aim at. Waiting until after the 2020 General election is therefore probably the most likely outcome.

The doubled sword of Crown Minerals Act change

It has been presented in the media as a double edged sword. On one hand we have the well publicized statement by Prime Minister Jacinda Ardern with full support of the Green Party that by 2050 oil and gas will be banned in New Zealand. On the other the more pro-development New Zealand First Member of Parliament and Minister for Regional Development Shane Jones is touting a $1 billion hydrogen gas development in Taranaki.

Taranaki in the 1980’s had a very large energy projects underway. These were part of the Robert Muldoon Government’s “Think Big” scheme which called for large industrial projects that would create hundreds of thousands of jobs, boost the New Zealand economy and address significant energy shortages. They included a methanol plant at Waitara and a synthetic fuel plant at nearby Motunui.

Now in 2018, Mr Jones is talking about the possibility of an American consortium developing a multi-billion dollar emissions free plant based on existing technology. 8 Rivers have announced a project in which they build a plant using Allam Cycle technology that they developed in the United States and which is used at a plant in Texas.

Whilst I am interested to see how the technology will be used and what any Government feasibility study will show, I have some concerns on both sides of the fence. Notably:

  1. It might be emissions free technology, but how will the gas be extracted. If it is fracking one can expect significant resistance from the Greens/Greenpeace over potential damage to groundwater, and other parts of the environment – one can also expect resistance purely based on ideology as well
  2. Who would fund it? My parents generation will be wary of anything that looks like another “Think Big” project on the grounds of the parlous financial state that the original ones left New Zealand in
  3. How would the American consortium construct the project and would New Zealand communities nearby receive due benefits for hosting it

Not surprisingly, especially with the Government’s statement on ending oil and gas by 2050, there is excitement among local businesses and Mayors, keen on getting some confidence back into a region heavily reliant on energy projects.

Back in 1979 when the Muldoon Government was pushing for energy independence, New Zealand was probably not ready for such ambitious projects and their costs. Despite worsening Middle East tensions and the rises in the price of oil caused by the fall of the Shah in Iran and the Arab oil shock of 1973 following the Yom Kippur War, compared with the price of petroleum today, it was even then quite low. Our transport system, energy market and infrastructure was not ready for something that then was probably a couple decades ahead of its time.

But 40 years later with concerns about the impact of fossil fuels now widely advertized and concerns about energy dependence in the future justified, this debate rears its head once again. The sword being wield though, depending on which side of the blade strikes you, is another thing all together.

New Zealand banks not squeaky clean; told to clean their act

An inquiry into the conduct of New Zealand’s banking sector has found widespread wrongdoing across the sector. The inquiry, which follows a damning assessment of Australia’s banking sector several months ago found that 11 banks have had instances of misconduct by staff.

In the Australian bank sector inquiry fee gouging, bribery, fraud, board level deception among other instances of misconduct had been found. The sector was left battered by a Royal Commission, though no immediate recommendations for overhauling conduct and procedures was made. That will be in February 2019.

Although the New Zealand inquiry found none of that type of severe misconduct, it did find much poor lower level behaviour. Among the failures of the banks the inquiry found that they had:

  1. Used high pressure incentives to get staff to sell products such as credit cards which a customer did not necessarily need
  2. Despite knowing they needed to be rid of them, banks had dragged their feet on ending the use of incentives
  3. Done this despite having huge profits

Notably the failings of the New Zealand banks were not found to be of the sort that were identified in the Australian banking sector inquiry, where not only was the wrong doing widespread it pointed to much bigger problems in the industry.

Still, this is not a great look for New Zealand banks and banking. Customers have a right to be disappointed that this has happened. I hope that the inappropriately charged $23.9 million is refunded where possible and that those who were identified as making the charges are sent to ethics training.

Banking like any other sector faces ethical issues from time to time and all staff, from the C.E.O. down to the person who started their first day as a teller in a branch, have ethical responsibilities that their training should identify. The majority will to the best of their ability try to do their job and remember their ethical and legal responsibilities. But as with any other industry there will be a few rotten apples who will steadfastly refuse or otherwise prove incapable of proper conduct. It is they who must be made to move on.

Iceland jailed their bankers as a result of the Global Financial Crisis in 2008. Their economy began to grow again the following year when most other countries, New Zealand included were still in recession. I am not suggesting we do anything like that if our banks fail to meet the February deadline, but I do like an earlier idea I had of requiring bank branch managers, and higher levels to be registered with the Financial Markets Authority who would have the right to strip them in instances of serious misconduct.

That I think would make all but the rotten apples stop and think about their conduct.


Another stock market crash coming?

One day in October 1929 the stock market suddenly went into a catastrophic
plunge. The resulting economic depression saw millions of people across the west struggling to feed and clothe themselves and their children. Farmers walked off farms in places like Oklahoma, that then proceeded to be ravaged by dust storms of particular ferocity. It also enabled the rise of dictators like Adolf Hitler who seized on Germany’s ill fortune to push extremist agenda’s that would ultimately prove horrendous.

89 years after the 1929 crash, with notable crises or severe corrections in 1987 and 2008 is it possible that another is looming?

Possibly. When the 2007-09 crisis ended, legislation.was being pushed through Parliaments and national Houses of Representatives world wide. It was an attempt to ensure that the appropriate legislation would have time to be passed by Parliament seeking to address those concerns knowing a contentious debate about anything that may entail restrictions or negative attitudes is likely to follow.

New Zealand should not fool itself. A large scale collapse would affect all economic sectors. Tens of thousands of jobs in New Zealand could be potentially wiped out by the collapse.

As was the case in the 1930’s a new collapse with prolonged depression could give rise to a new generation of hardline politicians and/or dictators. The key players however are already firmly entrenched.

The conditions are favourable. The key conditions in the United States that contributed to the Global Financial Crisis of 2007-09 include:

  • Reserve Bank failing to check toxic mortgages
  • Massive corporate governance breakdown
  • Powerful mix of debt and risk by a large number of households and Wall Street
  • Policy makers inability to.understand what was happening and how to fix it
  • Massive failure of public and private accountability

Attempts to rein in the banks were introduced under President Barak Obama. The reforms that were enacted by Chris Dodd and Barney Frank were meant to check the conditions that led to the 2007-09 Global Financial Crisis. They have been systematically under cut by President Donald Trump. On 24 March 2018 much of the gains that were made by the passage of the legislation that Mr Dodd and Mr Frank put their name to were undone by the Financial CHOICE Act.

New Zealanders need to spread their savings across multiple sources, so that their exposure to undue risk is mitigated. Although New Zealand banks are more transparent than American banks, they are lacking in corporate oversight. Between 01 January 2006 and 01 January 2013, 67 financial institutions failed in New Zealand between 2006-2010 costing New Zealanders more than N.Z.$9 billion in savings that they thought were secure.

What have New Zealand institutions done to reduce the likelihood of further collapses in the future and improve the chances of recovering the losses? Not very much. I cannot recall any regulatory checks and balances being put in place that ensure savings are not being squirreled away.

What new tools and ideas does the Reserve Bank have for dealing with the challenges a stock market crash, post Global Financial Crisis? Shamubeel Eaqub, an economist, painted a grim picture in 2017 of how well prepared New Zealand banks are.

It honestly seems like a really radical idea, and possibly one that would not work in New Zealand. When Iceland suffered the Great Financial Crisis like other western countries it decided that enough was enough, and that the banking sector was going to get a lesson. The bad players were arrested, tried and jailed. Whilst the rest of Europe wallowed in recession or very little growth, Iceland began to recover in a way that surprised many.

How could New Zealand learn from these experiences?

Is a market reset coming for New Zealand?

After a year of staggering rises in the stock markets, two days ago, the inevitable happened: a reset of sorts hit the American indices. By the time this publishes today, New Zealand will know if the reset has hit us as well.

So, what was the reset on the Dow Jones and the NASDAQ all about? In the last 12 months the Dow Jones has climbed nearly 25% to reach – before it plunged – 26,000 points last week. The causes could be several – a strident America first policy by President Donald Trump to keep American jobs in America by withdrawing from the Trans Pacific Partnership Agreement, cutting taxes and supposed red tape

But since about 2014 there has been growing disquiet about the potential for a massive stock market crash. Some analysts say conditions have not been this good for a crash since 1929 and others say since the more recent “Black Monday” of 1987 where the Dow Jones plunged from around 2400 to 1500 in just a matter of hours.

In New Zealand the Black Tuesday (it was Monday in the U.S. when the Dow Jones crashed)crash was particularly destructive since the Reserve Bank of New Zealand refused to loosen monetary controls in response. The New Zealand Stock Exchange (as it was known then)lost 60% and took years to recover.

Why should New Zealand be concerned? Several reasons:

  1. The Obama Administration era Dodd-Frank bank reform laws are in danger of being repealed by the Trump Administration, looking to weaken or repeal laws seen as hindering business – these were meant to reduce the risk of another meltdown such as that of 2007-2009, called the Global Financial Crisis
  2. Our own banking system regulation could be be stronger too, and although some of 32 bank or financial institution collapses in New Zealand between 2007-2010 eventually resulted in prosecutions and jail time
  3. There is no doubt that cryptocurrency is an “in” thing to be seen with in some quarters. The explosive rise of bit coin and its now equally implosive collapse, losing two thirds of its value in just a couple of weeks, will have tied up significant funds worth hundreds of millions of dollars
  4. ┬áThe property market and the dairy industry – both major players in the New Zealand economy are not sustainable in their current format. The rental property crisis has spread beyond Auckland and is affecting the ability of employers to hire; dairy has reached its environmental and social tipping point where the environmental costs are high enough that people are saying “enough”
  5. Would New Zealanders be more wary about investing in the market again after a major correction event

The Dow Jones plunged 1,500 points in a matter of minutes when it opened today. Since then the Nikkei Index and other significant index’s have had wild rides with the Nikkei at one point 7.1% poorer than when it opened for the day. The Australian ASX wiped 3.2% of its value.

Normally I do not pay much attention to the movements of the stock market. But in such volatile times as this, with considerable uncertainty on a number of fronts around the world – tensions with North Korea, the unpredictability of the Trump Administration and others – few should be surprised that the markets are having the wild time they are, and if predictions of a reset are about to come true, then things could get much wilder yet.