http://news.bbc.co.uk/2/hi/europe/7296564.stm

Nobody’s talking about “system purity” for its own sake. The debate is about deadweight costs on an economy.

They recognise greater causes than system purity. We could do the same and have no GST on power and a higher carbon regime.

http://news.bbc.co.uk/2/hi/europe/7297528.stm.

Yes the increasing cost of building on subdivision land deterred new housing on this land – that is until the land values rose to such a level that it became viable despite the building cost/shortage of builders and RMA compliancy both. A lot of people on some larger sections must have been able to use their surplus land to secure loans for the new homes that gave acceptable property developer profits (oh those lucky enough to sell into the 2007 market) and of course a lot of jealous neighbours who had homes built in the wrong place on the section.

Ignoring the fact that new home building in response to demand occurs in response to (rising demand creating shortages and) the rising values resulting from these shortages and not before this occurs … .

And its not just an issue of building new homes if first home buyers cannot afford them. With the best will in the world in making more and more land available – keeping land values down, the problem would still be the cost of building new homes on this land. And the more new land which is freed up, the higher the cost of building a new home would be (we have a builder shortage). Some say we need to prefabricate more and that we have low productivity in this area …

That said, was the rising value of homes caused by a shortage of homes or rising demand for investment property fueled by cheap 100% loans and LACQ?

The question now is how many landlords will sell itno a declining market (for whatever capital gain is still there) and how many will increase rents to over the higher interest costs (so they can hold the property as an investment).

If the market was a bubble fueled by speculation and easy credit then we should soon know (there is of course a possibly incidental end to net migration which could exacerbate it all – some immigrants brought the capital to buy up homes and some people moving to Oz are selling them also).

I referred to both food AND power as local spending on necessities, taking GST off power depending on the scale of the zero rate would compensate for the carbon charging regime (in fact allow a higher rate and thus one with more impact without costing users more). Taking it off food would mitigate the rising cost of dairy products and soon meat). The higher 20% rate on other items would assist in lowering the trade deficit.

It would with a zero tax rate at low incomes allow a wider Kiwi Saver take up (this is a way of saving for a first home) and personal savings (lower tax on interest income) which should improve home affordability.

This with measures to reduce new home building costs and encourage investment property owners to sell to first home buyers, this is about the only way to return to former home ownership levels.

“What new restriction of land occured between 2002 and 2006 (but not 1999-2002) and what changed so that price fell in some regions in 2007-8?”

It is not necessary for NEW RESTRICTIONS of land to happen, just for not enough land to be freed up in the face of demand, under EXISTING restrictions.

The prices EVERYWHERE would drop even MORE than they are forecasted to IF LAND WAS FREED UP, and some of us who’d like to buy our first home might be able to do it with 12 years earnings, not 18……..

But the socialists LOVE to SCREW anyone of sufficiently independent mind to ACTUALLY WANT TO OWN THEIR OWN HOME – the FIIIIILTHY BOURGEOISE, SHOCK, HORROR!!!!!!!

Overall, markets tend to be best at providing balancing factors over time, except – as in your example – when governments ride in professing to “protect the public good”.

“The hoped-for increased efficiency from the flexibility and light handed approach of the Resource Management Act has not been realised in practice in the local authorities studied in the Auckland Region. The increase in costs to both applicants and to ratepayers has far outstripped the increase in the CPI. Papakura demonstrates that the implementation of the RMA need not necessarily lead to massive increases in charges to applicants or to ratepayers and that it is possible to run a local authority without rates increasing faster than the CPI.
The case study stories on which these findings are based are now common parlance in the industry and builders and landowners are becoming increasingly conscious of the high costs of development, especially if new subdivision is involved. These extra costs, often referred to as ‘the hassle factor’, are now being built in to the prices set for existing housing, and are likely to prove a significant deterrent to those who might otherwise be prepared to build a new dwelling, or to create a new subdivision.
Unless changes are made, the shortage of residential land in Auckland seems set to continue and new housing prices will continue to escalate, with a consequent impact on the CPI and monetary policy.”

Food happens to be your personal preference for preferential GST levels. Others will point to education, electricity, healthcare, books, “first home” housing, “basic clothing”, domestic tourism by overseas visitors, or any number of equally meritorious claims. An elected government is there to balance those conflicting claims and all the related vested interests.

But good luck with your share of the GST-free caviar, truffles, fois gras and chocolate-covered strawberries.

I use the term popular overseas in reference to public support for no GST/VAT on items such as food etc. When you say these exemptions are not popular overseas you mean …? You acknowledge its politically difficult for governments to do things their public opposes … And exactly what do you mean by their “economies” (having an opinion) supporting a universal rate of consumption tax… . I surmise you mean those who think they know best what is right for the economy and just have a problem convincing the majority of the people to accept this … . IMO the compliance cost problems are outweighed by the advantage of a higher rate consumption tax (politically impossible if it includes food) and this advantage is enjoyed by their economies. So maybe listening to the people and governing as a democracy, rather than imposing pure economic systems loved by some of the business sector and the great minds amongst the technocrats, can result in a better economy … .

We take a lot of pride in our GST system design and the RB Act, but we have problems in this area – our savings and consumption regime is flawed and the too high OCR and dollar are stifling economic growth.

But please don’t try to convince me that variable rate GST / VAT is popular overseas. It’s simply not. Most economies in hindsight would gladly adopt a non-variable rate tomorrow if they were not locked into populist variations conceded decades ago, and now too politically challenging to unwind.

“Oh and RESTRICTIONS ON THE SUPPLY OF LAND, don’t have ANY EFFECT? Remember 3rd form economics? Supply and demand? Or was that only taught back in my day, have the Marxists taken over the curriculum to the extent that supply and demand isn’t taught in economics any more?”

What school taught/teaches economics in the third form?

What new restriction of land occured between 2002 and 2006 (but not 1999-2002) and what changed so that price fell in some regions in 2007-8?

Land supply restriction, as a significant factor in a temporary abrupt house price increase across a country in a short period of time is unusual, its impact is more in the medium term in meeting rising demand for new housing (one can still subdivide in the short-term and this occurs when land price rises).

SPC As to capital losses, amateurs cannot claim them.

“That’s right, at present, but they would qualify under your proposal if they had made any claims for expenditure on their investment properties – interest, R&M, insurance, depreciation, rates, etc – all normal investment expenses. Then the system would have to cope with the tax treatment of capital losses, not simply dismiss it as of no consequence.”

That idea was from burt, not me.

“I agree with you that there’s room for genuine tax reform on a broad front. But as a starting point it requires a set of coherent principles rather than a smorgasbord of ad hoc tweaking manoeuvres. Otherwise we will simply open pandora’s box of further tax minimisation schemes.”

The difference is that some people see an ideology as guiding their “coherent principles” and impune deviation as ad hoc and unprincipled …. Actually reduction in tax on interest income, is a tax minimisation scheme … the pandora’s box is actually premised on economic policy being applied elsewhere, but deviated from here by people who think they know better.

The only reason we do not have capital gains tax was/is because Roger Douglas initially preferred an assets tax and by the time he realised he was wrong he was focusing on a flat tax …

waymad

I am aware that sector interest (compliancy issues) influences government, but the fact is governments introduce variable rate GST if they feel they cannot ignore the public. Variable rate GST is popular overseas and its probably essential here if we are to increase GST to 20%. IMO the public/economic interest in a better savings regime/consumption balance outweighs the problems. Especially when carbon taxing power source should replace GST on powern (this will reduce business cost and thus mitigate the Kyoto factor).

“The CGT, LAQC loss ring-fencing etc possibility was comprehensively canvassed in a series of articles in the NZ biz press last year sometime. By competent writers with deep backgrounds in the biz. They didn’t come out with a clear winner, and there was a lot of collateral damage with some options.”

Sure, most of the ideas have been around for years *** – a surcharge on mortgages to reduce the OCR, a CPI deducation off cash deposits before assessing interest income for tax purposes (also reduces the OCR) etc

“Tax redesign is happening as we speak, and will be in the May Budget. Theorising now is just electron torture”

Yeah sure, our experts have delivered the best government design and best economic policy in the OECD. Our productivity since the 1960′s speaks for itself.

Cynical SPC (***I suggested them years and years ago, shortly after the current lot arrived in 1999).

Variable GST = high admin costs. Ask an Aussie in the food business
Variable GST = Perverse Incentive to re-describe goods and services. Ask an NZ’er in business who remembers the ’70′s.

The CGT, LAQC loss ring-fencing etc possibility was comprehensively canvassed in a series of articles in the NZ biz press last year sometime. By competent writers with deep backgrounds in the biz. They didn’t come out with a clear winner, and there was a lot of collateral damage with some options.

Tax redesign is happening as we speak, and will be in the May Budget. Theorising now is just electron torture.

That’s right, at present, but they would qualify under your proposal if they had made any claims for expenditure on their investment properties – interest, R&M, insurance, depreciation, rates, etc – all normal investment expenses. Then the system would have to cope with the tax treatment of capital losses, not simply dismiss it as of no consequence.

I agree with you that there’s room for genuine tax reform on a broad front. But as a starting point it requires a set of coherent principles rather than a smorgasbord of ad hoc tweaking manoeuvres. Otherwise we will simply open pandora’s box of further tax minimisation schemes.

“There are three factors

1. net immigration from 2001/2002 (including expats after 9/11 who had cash)
2. global cheap credit from 2001/2002
3. people noticing the above, while LACQ existed, when we had no capital gains tax, and when tax on interest income (returns were falling as well) was at 33 or 39 cents. ”

Oh and RESTRICTIONS ON THE SUPPLY OF LAND, don’t have ANY EFFECT?

Remember 3rd form economics? Supply and demand? Or was that only taught back in my day, have the Marxists taken over the curriculum to the extent that supply and demand isn’t taught in economics any more?

Is there not “capital gains taxation” already in the “taxation” of the rental property business profits? Capital gains taxation, of itself, only really impacts on the truly “amateur” investors (investing their savings for at last some of the cost of the property) and for them a lower tax – say 20% is more appropriate. As to capital losses, amateurs cannot claim them. The property businesses can simply fail to make a profit whether there is a capital gains tax for amateurs or not. Thus if dome properly capital gains taxation should have no adverse consequences for tax revenue.

In so far as passive interest saving is concerned, ending discrimination against this form of saving is a necessity if we are to restore some balance to our economy (Europe has the 20% rate VAT, ours is a too low 12.5%) in terms of gaining greater saving and less consumption. Our too high OCR is always a factor later in the growth cycle because of this – as our BOP deficits, from rising borrowing costs and consumption, get too high to be sustained (a problem of the entire western world because of dependence on foreign saving). This is not a fault of the earlier RB policy decisions this time (they were overwhelmed by the global credit binge, which meant we attracted plenty of cash – so higher rates would not have prevented house prices rising from property investment and people feeling wealthy). As I see it, we cannot realise the necesssary active investment in production until we get the OCR and dollar lower (this to establish an expectation of competiveness in the global economy and some surety to making profits, only this will encourage reinvestment – and via lower interest rates make it possible for business to use the money we borrow, rather than those who buy up existing housing) and this can only come from first getting the passive savings and consumption patterns into better balance (otherwise we will be dependent on government to make the saving and contribute to investment through R and D breaks and subsidy). This through either a higher GST at 20% and or a lower tax regime on passive saving. The latter is easier politically and with a budget surplus also affordable.

Most preferable would be wider tax reform from government, rather than tax cuts, but our politicians seem too lacking in vision.

The ideal would be 20% GST (with zero rating for food and power – with tax on power moving to carbon rating – which makes it politically acceptable – which is why this happens overseas, because the economic gains outweigh the compliancy costs) and 20% tax on (after CPI adjusted) interest income, with a 20% capital gains tax (not payable when a first home buyer buys the property). This should allow some reform of the income tax thresholds. My preference then would be a 33 cents top rate, no income tax on the first $10,000 (helps the lower waged onto Kiwi Saver), then 20 cents and 30 cerns rates where possible -allowing for some continuing surplus for the NZSF-CF (and also annual dividends at the peak of the economic cycle, if investment in infrastructure is not required).

So you prefer a 30% company and income tax rate

Who said anything about 30% ? 30% taxation is way too high – for anything. No govt can justify taking almost a third of a persons or business income from them.

In adopting that course, should we first examine the possible distortionary effects in both the tax base and the wider economy? For example, on the basis of the above proposals, if you’ve claimed interest costs or depreciation on plant or buildings in establishing a successful business (including a farm), are there any widespread “unintended consequences” of a capital gains tax that would be imposed on eventual sale?

There’s room for caution, too, when all discussion revolves around a simple presumption of investment properties enjoying capital appreciation. The real world is not always like that. Suppose over the next five years a lot of residential investment properties (not owner-occupied) sell at a capital loss. That’s a prospect for new amateur investors of the last few years. So their short ownership periods have given them tax benefits that some people are complaining of now, yet (under the proposals above) they will also be able to claim capital losses on exiting to offset against other personal income. Is that the intention, or does it need some more thought? What could be the impact on the tax base over the next five years?

I’m also not convinced about preferential tax treatment for passive interest income. The economy needs more investment in productive activities – businesses – rather than in interest-bearing bank term deposits or finance company debentures. It runs against the grain to target tax advantages towards interest streams, as opposed to dividends earned from risk businesses involved in manufacturing, primary production, exporting or tourism, for example.

In my perspective, there are no simple answers for what are fairly complex issues. It’s hard to escape the feeling, though, that many of the current property investment distortions come from high direct personal tax rates (encouraging effort to minimise tax burdens) and from artificially high interest rates (Reserve Bank too slow and too timid in the early phase of the boom cycle).

I don’t agree – those saving in deposits are discriminated against because even the return which merely compensates them for inflation is being taxed – yet they receive no actual income from the investment until the CPI return is reached.

Many are actually charged more in fees than they earn in interest and they still pay tax!

Property offers the capital rise – usually greater than inflation because of population growth and growing land scarcity as well as rental (which is an investment which comes off borrowed money, not saved money).

Thus until this discrepancy is accounted for, the West will continue to rely on world savings elsewhere, while we save inside boom and bust asset bubbles.

Is there a problem with compliancy? are you sure?

So you prefer a 30% company and income tax rate – regardless of the impact on the productive sector of the economy – continuing high OCR and dollar and high borrowing costs for business.

And once again a 30% tax rate on interest income – under the current taxation regime still discourages us from saving and leaves us dependent on borrowing from overseas to buy our property and capital gains free gains from property will continue … (if anyone can get National to bring in capital gains tax on property – with a 30% top rate of tax, guess what, it will only apply on houses bought after it came in and thus will not reduce the existing over-valuation or windfall profits tax the rising value profits achieved during the boom).

PS

1. The RB is already looking at a standard 2% deduction from interest income before tax accrues (such could apply in place of a fluctuating from period to period CPI). A 20% (one off and final) witholding tax on the rest of interest income is simple enough.

2. I am sympathetic to a capital gains tax on rental property, but wary of the impact of 2006-7 home buyers and also on those paying for rent and or the accomadation supplement. I am also a little wondrous of how we have allowed people to develop a business of being a property investor simply by “borrowing” money for rentals. IMO the direction of incentives should exist for the purpose of expanding housing supply, encouraging more new homes.

The rental property regime seems to have been a deliberate policy of National to increase private supply of housing (reduce investment in state housing) and in Labour’s hands a way of subsidising rents (reducing Accomadation Supplement costs), but a convergence of net migration, cheap global credit (a provincial dairy boom an employment recovery etc) has made it look a little tacky (enriching a few). Both parties are now deep in a hole, as any policy change will be a factor in house pricing and house pricing impact caused too obviously by their policy can be dangerous when electioneering.

What should they do – a 20% capital gains tax on rental property bought since ….. brought in overnight, then no one would be able to sell housing and collapse the market before it was introduced. The money raised used as an insurance fund to either help “victims of this period” or get people into homes. Basically a windfall profits tax redistributed to those in need. As it is only at 20%, investors will still clear good profits when they sell. This somewhat distinct from the existing regime operating for businesses.

There being an exemption from this capital gains tax, if the house is sold to a first home buyer. This would cut home prices c10% for first home buyers (in any phase in the market).