Can we still address poverty in New Zealand?


New Zealand has just ruled out one of the best measures for helping to address poverty. Is it still possible to do so?

Good question and one that irrespective of governing coalition, New Zealand must try to. The country that likes to think it is egalitarian and that the spirit of giving people a fair go is alive, has no choice if it wishes to reasonably continue thinking this.

It is a question that will rankle the supporters of the Labour-led Government of Jacinda Ardern. It will rankle many of them because the C.G.T. to many was a fundamental part of any policy platform for dealing with poverty. It would appear New Zealand wants to address poverty, but is absolutely loathe to introduce any sort of measure that check the unsustainable wealth accumulation by the top 5-10% of income earners. So, to cut to the chase, what are the options?

Is New Zealand even agreed on a definition of poverty?

To me poverty is the inability to afford and access the essentials for a life of dignity. What is life if it cannot be lived in a state of dignity where a human being is not degraded? To me, nothing. It is when one is unable to afford basic medical care, shelter, food, transport and education.

In one respect New Zealand is making progress, in that we are enacting a progressive increase in the minimum wage. It rose last year from $15.25/hr to $16.50/hr; from 1 April this year to $17.70/hr; from 1 April next year to $18.90/hr; from 1 April 2021 to $20/hr.

One thing New Zealand can do is ensure that the benefits administered by the Ministry of Social Development are fixed to a Consumer Price Index or other appropriate measure, and adjusted annually on 1 April each year. The rules for administering the schedule of benefits should be reviewed at the same time.

New Zealand can also try to implement the nearly 100 other recommendations that were made by the tax working group.

I still believe though that New Zealand should broaden its income tax regime. Currently the brackets sit at:

  • 10.5% for income up to $14,000
  • 17.5% for income between $14,000-$48,000
  • 30.0% for income between $48,000-$70,000
  • 33.0% for income above $70,000

A top tax rate of say 37.5% could take effect on incomes over $250,000 per annum, whilst the others are more evenly spread instead of a tight range covering just $56,000 between the end of the lowest bracket and the start of the highest.

No mention in the T.W.G. report appears to have been made of a luxury goods tax. Some might call it a jealousy tax. I disagree as it would be on assets that probably out of the reasonable reach of 95-99% of the worlds population. How would it be implemented and at what financial value does something become a luxury good? To be clear to me a luxury good is something that is surplus to the reasonable maintenance of life, and purchased simply because the buyer wants it for reasons of prestige and can afford it. As for what passes as a luxury asset, it would be any car, property, jewellery, aircraft, helicopter, rare items such as art works, other collectables. One can discuss valuations at which such assets can be defined as luxury goods upon inspection, however I think the following could be a good start (and exclude family homes, immediate business assets):

  • vehicles worth $250,000+;
  • yachts worth $1 million+
  • property other than the family home worth $1 million+
  • any helicopters, private jets

 

 

 

 

 

 

 

 

Government will regret abandoning C.G.T


This afternoon, Prime Minister Jacinda Ardern made a stunning announcement.

It was stunning for all of the wrong reasons, but perhaps first and foremost how it seems to have caved into the lobby group with the loudest megaphone, namely the Tax Payers Union, which is a right leaning group. It was a stunning announcement, because it was a complete u-turn to the image that the Government has been cultivating as one that wants to address poverty, the huge wealth imbalance in the country and the social disparities that it is causing. The Government will regret its move to abandon the C.G.T.

I saw this article from Craig Elliffe and Chye-Ching Huang after the failure to do anything about enacting such a tax in 2009-10. I cannot help but wonder what they would say now.

Not surprisingly the Green Party is disgusted. A C.G.T. was to be the corner stone of any plan to address poverty, which is high their agenda.

I am disgusted myself. New Zealand is the only country in the O.E.C.D. not to have a C.G.T. and possibly for as long as the next 18 years – with the exception of the Keith Holoyoake-led National Government of 1960-1972, and the war time Savage/Fraser-led Labour Government, no government has lasted more than 3 consecutive Parliamentary terms. And no National-led Government is going to introduce such a tax. Before then they would prefer to cut income tax or raise goods and services tax (G.S.T.).

How much did New Zealanders honestly know about a C.G.T.?

My guess is probably not a lot. I wonder how many of them have learnt to critically evaluate something, instead of just reading about the pros and cons. I never took accounting or economics at school and only did a first year economics paper at University that immediately screamed “give it up, Rob – you’re not an economist!”. Which I heeded – I haven’t touched an economics paper since.

So, what do I believe the consequences of this are?

In a purely political sense, provided they do not do anything dumb between now and the 2020 General Election, the Greens stand a good chance of enjoying a bit of a surge in support. It will come from those on the left flank of Labour who are not quite in the Green Party camp, but do not really feel as though they belong with Labour.

In a financial sense, Labour has squandered perhaps its best chance to enact something that addresses a long standing and well known problem – our treatment of capital gains is inconsistent, unfair and inefficient. The Government has indicated that most of the other 100+ recommendations made by the Tax Working Group in their report will be implemented or examined further. The question, though is whether the sum of these apparently lesser measure will be noticed. Nor is C.G.T. a new idea, having been examined by Governments in 1967, 1978, 1982, 1987, 1988, 1989, 2001 and 2009-10.

In a social sense, the potential support for those trying to get on the property ladder for the first time has been taken away by failing to address those who buy multiple properties to use as a money making scheme. It also sends an improper message to those who do indulge in this behaviour that the Government does not care much for making sure you pay due tax.

The blind rage against the Capital Gains Tax


 

Ever since the Tax Working Group’s findings were released, I have listened to the rage, the unrelenting anger at the possibility of a Capital Gains Tax. And the more I listen, the more I think it needs to happen.

Parties such as A.C.T. are blinded blinded by their ideological fury about the Capital Gains Tax. Be rid of it they all say: it costs the businessman and the landlord, the entrepreneur and the real estate agent, the industrialist and the farmer.

How dare you take away our wealth making means!

But hang on a minute. As Sir Kerry Burke, former Labour M.P., noted in The Press the other day, what about those who have acquired property simply because they could and not because they needed it or because they had any reasonable plans for them? Mr Burke gave the example of a person who had acquired 80 properties.

I believe a C.G.T. is needed, and that a good case can be made for one. The basics of it are that one would need to be simple but fair. So far people agree that the family home should be exempt for obvious reasons. I have given another reason above for going ahead – people who acquire property simply because they can stoke an overheated market and the distrust of the many who are literally priced out whilst the lucky few go about making millions.

There is another reason for wanting to do this. That is quite simply at some point it would be implemented anyway for better or for worse. We should try to implement this now with a fresh set of recommendations in front of politicians than try again at a later date.

If we on that basis proceed, then the questions should be about the rate at which it is set; what it covers and and when to make it law.

There is one final point that also needs to be made. The Capital Gains Tax is just a PROPOSAL. Neither it or any of the other 100 recommendations are law yet. And not all of them will be – although unlikely, the C.G.T. might be among them.

Capital Gains Tax lightning rod means significant other recommendations ignored


Nau te rourou, naku te rourou, ka ora ai te iwi

With your contribution, and mine, the people will prosper

The Tax Working Group’s final report has been out for a week now. Even after all that time, the politicians seem to have forgotten that Capital Gains Tax was just one recommendation in more than 100 made. So bent have they been on attacking/defending the recommendations, that the media coverage has been dominated by National Party leader Simon Bridges, A.C.T. Party leader David Seymour on the attack, Prime Minister Jacinda Ardern and Treasurer Grant Robertson on the defence. But what about the other 100+ recommendations?

This report, to be clear is not a compulsory check list of things that the Government needs to do. They are just recommendations based on a nation wide attempt in 2018 to gather from the public what would make a fairer and more just taxation system, that included a two month public consultation.

Those recommendations covered:

  1. Capital gains and wealth
  2. Environmental and ecological outcomes
  3. Taxation of businesses
  4. International tax
  5. Retirement savings
  6. Personal income tax
  7. Future of work
  8. Integrity of the tax system
  9. Administration of the tax system
  10. Charities
  11. G.S.T. and financial transaction taxes
  12. Corrective taxes
  13. Housing

I shall cover in the next few paragraphs a selection of recommendations from #2-13 – due to the heavy coverage elsewhere, there shall be none on Capital Gains Tax.

Environmental taxation is a regulatory tool that can be used as an incentive or disincentive in order to achieve certain environmental outcomes. The T.W.G. recommendations cover greenhouse gases, water abstraction and pollution, solid waste and transport. Interestingly, it does not appear to cover air pollution, despite aerial dispersal of dioxins and so forth being a significant issue.

Retirement savings are a constant concern, particularly for lower income earners who have to work longer in many instances in order to afford retirement. The recommendations include refunding the employers superannuation contribution tax for those earning less than $48,000; increasing the member tax credit from $0.50 to $0.75 for every $1 of contribution.

G.S.T. had concerns raised about it by the public. These were acknowledged by the T.W.G., but drew the conclusions that the existing rate should not be lowered on the grounds that the reduced rate would not target as lower income earners as welfare transfers or personal income tax changes (lower and middle income earners). Nor does the report recommend the removal of G.S.T. of certain items such as food and drink.

Housing is an area that one might have expected to come under C.G.T. However, this concerns residential land. There were two recommendations pertaining to vacant residential land. One was to recommend that the Productivity Commission inquiry considers a tax on residential land. The second was that vacant residential land be a local tax rather than a national tax.

This article is just a very brief look at a few of the range of taxation concern areas that were addressed by the T.W.G. – and which the politicians ignored, quite surprisingly given that several addressed some of the wealth that they were arguing over.

 

 

Analysis of the Capital Gains Tax


In the days since the Government Tax Working Group announced its recommendations, there has been a lot of discourse on them. Some of the discourse has been highly constructive, but there has also been a lot of ideological, emotionally driven commentary which has ignored the subject matter.

In light of that I have tried to write an analysis that is politically neutral.

It is important to note that New Zealanders buy property as an investment because it is one of the few ways of developing ones own wealth, without a significant tax measure applied. When I say an investment I am not talking about the family home, something everyone would like one of to be their own. Nor am I talking about the holiday home that might be a crib on land with a total value of $100,000. Rather I am mentioning properties that are going to be used in the rental market and have active tenants paying rent/board.

The idea of owning a rental property permits the owner to have control of the house and be paying off any mortgage that they might have without actually having to use their own funds.

The more properties of this nature that they own, the great the return per week from tenants. When the landlord exits the market and sells all of their properties, they are able to take all of the appreciation without having to pay taxation on it. Not surprising then that people with a bit of money to spare have flocked to the New Zealand market, invested in properties. However this has had a down side as in turn it has driven up property prices, which have forced a number of potential buyers from the market. In order to pay for those properties or gain appreciation on them, the matching rents have risen as well, which has put the squeeze on those with limited income means.

Contrast this with putting their savings into something like the share market or a long term deposit in a bank account, where it can be taxed. The share market obviously has a degree of volatility reflecting the trading environment of the day. How well the shares do depends on how will the company performs publicly – oil companies for example experience fluctuations in oil prices depending on the ability to supply the market, geopolitical conditions in the Middle East.

In terms of the long term deposit, the holding bank announce . However interest rates have stayed very low since the Global Financial Crisis, making it difficult to accrue significant interest. Some banks have interest rates so low that they are what I call acidic in that one actually starts paying the bank to have ones money invested in them, and the net outcome is a loss. The taxation of these methods of developing ones wealth poses a question:

If they get taxed, then why should the method of wealth development that is owning secondary properties  for the purpose of money gain not subject to tax?