Tax pros and cons

January 23rd, 2010 at 11:00 am by David Farrar

Brian Fallow has a nice summary of the pros and cons of various options. They are:

RAISING GST

Pro: GST is a robust and efficient tax, and shifting tax from incomes to spending might improve saving.

Con: It is very hard to prevent a rise in GST hitting those on lower incomes harder.

CAPITAL GAINS TAX

Pro: Potentially very lucrative, allowing more tax relief elsewhere.

Con: Lots of practical difficulties and the IRD, which would have to administer it, hates the idea.

LAND TAX

Pro: Broad base, low rate and could bring in billions.

Con: Liable to be undermined by exemptions as in the past. Hard on the retired, Maori trusts and farmers.

RISK FREE RATE OF RETURN FORMULA APPLIED TO RENTAL PROPERTIES

Pro: Targeted at a sector that seems undertaxed now.

Con: Because it is based on equity, it could perversely encourage more gearing in the rental property sector. Could flow through to tenants.

SCRAP BUILDING DEPRECIATION

Pro: Could be done quickly.

Con: It is not easy to distinguish buildings which do depreciate from those which don’t.

I hope the Government will act on at least a couple of these, using the revenue to reduce income taxes. What we tax does matter – not just how much we tax. The best system is broad based and low rate.

John Roughan looks at the current tax system:

Read a few lines further into the Tax Working Group’s report and the picture gets worse. Once you distribute family tax credits, welfare benefits and national superannuation those top 10 per cent of taxpayers have provided 76 per cent of what is left for general public services. Seventy six per cent.

Yep 10% of taxpayers provide 76%. And what happens if more and ore of that 10% go offshore?

The Working for Families refund alone results in 40 per cent of households effectively paying no income tax. It would be cheaper not to tax their wages at all.

It would be. The best system would be that no one pays any tax until they are earning what one regards as the minimum amount needed for a family of their size. Churning money from tax to welfare to inefficient.

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82 Responses to “Tax pros and cons”

  1. reid (16,183 comments) says:

    So where is the media discussion on the pros and cons of a Tobin tax?

    Brash doesn’t like it because imposing it on the Kiwi without the rest of the world also doing it on their currencies would be a distorting factor. My question to him is: why would that be a bad thing?

    The Kiwi goes up and down like a yo-yo because it’s small enough to be manipulated and therefore subjected to speculative raids. If a Tobin tax made those raids less profitable, why is that a problem for us?

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  2. Luc Hansen (4,573 comments) says:

    DPF, I completely agree with your conclusion, and it seems so simple, so why don’t they do it?

    [DPF: The concept is simple, the implementation is hideously complex as you get significant winners and losers. If Nats get a second term I hope they will ask for a mandate to look at doing that]

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  3. Luc Hansen (4,573 comments) says:

    And Reid, Gordon Brown floated a Tobin Tax and promptly got slapped down by Obama. End of story.

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  4. Anthony (789 comments) says:

    A Tobin tax is impractical to impose, particularly when currency trading can be done from anywhere in the world.

    I never understand why a capital gains tax is presented as difficult to administer. A property investor has a purchase price and a sale price – subtract one from the other and you have the gain. Well maybe not quite that simple as there may have been some capital improvements but investors usually try to write off everything as repairs and maintenance anyway.

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  5. CharlieBrown (987 comments) says:

    wow, due to John Keys short-sightedness in pledgning not to cut back on government spending, he has left himself between a rock and a hard place. The simplest thing he could do is at least half working for families, and use that money to offset tax lost in cutting the top tax rate to 30%.

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  6. Lance (2,619 comments) says:

    So…
    If Australia wrote to and encouraged that particular 10% of NZ’s (productive) population and succeeded in luring them across the ditch.
    NZ’s economy and social services would be completely fucked.

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  7. Redbaiter (13,197 comments) says:

    ” Con: It is very hard to prevent a rise in GST hitting those on lower incomes harder.”

    This is not actually a “con”. Tax should never be at a level that prevents citizens from paying it, and no citizen should ever pay the tax of another citizen. IOW, tax should be kept to the level that the poorest citizen can pay comfortably.

    If limits are not imposed, politicians will continue to raise taxes. Tying tax to the ability of the low income to pay is one of the best ways of limiting its expansion.

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  8. Gooner (995 comments) says:

    I hope the Government will act on at least a couple of these, using the revenue to reduce income taxes. What we tax does matter – not just how much we tax. The best system is broad based and low rate.

    It’s pretty clear from all the expert commentary that the government shouldn’t act on a couple of these independently, but rather look at the packages as a whole and then implement a package, preferably in one foul swoop.

    I agree that what we tax does matter and yes, the best system is a broad based one, and low rates.

    I just hope English & Key don’t lose their nerve over this.

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  9. Jcw (98 comments) says:

    A reduction in resident witholding tax should be considered. Not only would it encourage more savings, but would help compensate retirees who will suffer from the increased GST and land tax without gaining from the reduced income tax levels.

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  10. Viking2 (11,340 comments) says:

    So while you are enjoying our hospitality in the bay could you be a little more specific., like which tax you think is fairest.

    Raising GST, affects everyone equally except the lower paid. Well yes but as Bob Jones said way back in the seventies when Muldoon was in full flight, anyone earning less than $10k can’t afford to pay tax so stop taxing the lower earners. Simple easy to do and should have a minimum threshold of $20k. Of course Govt. would have to remove many of its supporters tax shelters to be fair. Unlikely to do.
    Affect consumerism; good and will encourage saving by everyone.
    Needs to be applied to financial transactions that are currently exempt.

    Capital gains tax; well what are you going to apply it to, housing of course, makes it a wealth tax good support for that I’d suggest. What about cars, boats businesses and the list goes on to gold precious stones, art works, various treasures, books, Maori artifacts(now that will make Pita unhappy),
    too complicated to be fair and basically unworkable except to pollies with a short attention span.

    Land Tax; well now apart from the fact we already have one in the form of local body rating which is currently beyond control and has expanded exponentially by the addition of outfits like EBOP. (and no doubt Tony can fill you in on them and their new empire) What Land tax doers is become a wealth tax on those that have saved or by prudent investing ot other means have accumulated some land. Like rates it will be applied to a supposed (read fairyland) value that some plod dreams up on a computer. Now DPF you are a statistics man and a graph man so tell us how you think anyone is going to determine a fair value to all our land. Very few currently challenge the land values currently used to assess rates but if this goes ahead I predict many thousands of challenges every assessment time. I for one will do my ten or 12 if its in my interest.
    How are you going to placate all Winston’s oldies who saved and freeholded a couple of houses for their retirement income and who basically pay little tax now. If you want NZ first back with a vengeance this is the way to go.
    Will affect every business that owns or leases a commercial property. All challangeable every year. Don’t we want to encourage business?
    Will affect much land that is now either retired or idle and will affect farmers who traditionally make stuff all profit from their business and usually manage to hide it in trusts etc to claim their WFF. Bill ain’t gonna tax himself more.
    Oh yes and don’t forget that 33.1% of kiwi’s in the last census didn’t own the property in which they lived so 33.1% of kiwi’s will not contribute one cent of tax to the coffers. Exactly the same issue that is a the problem with rates for local bodies. ONE THIRD of users contribute nothing. Not what we could call fair.
    As with capital gains it would be fair to assume that capital losses are claimable. Imagine the carnage if this had been in place last year. Govt. would not have survived.

    So basically a no go.

    Risk free rate of return. Now here’s where the experts are decidedly dumb.
    Most property investors have mortgage free own properties, after all why borrow and pay interest when you can arrange your affairs so borrowing comes from before tax income. So most are clever enough to have arranged to use their own house as collateral for borrowings which are secured against their rentals. So their equity in their rentals is usually fairly limited and when it drops like last year the amount of tax collected will go even more negative than it was.
    Indeed it would not be out of the way to borrow 100% on all ones rentals with a determined amount to be returned to the bank as collateral for the loan. Happens now and it happened with the money to purchase shares. Ask ANZ about the likes of OPUS in Australia.

    So not risk free at all and again only targets a small sector of well advised people who will climb over the wall as we always do.

    Anyone who thinks buildings don’t depreciate has never lived bu the Mount. While you are here wander along Oceanbeach Rd and see how many have been replaced in the last 10 years. Have a look at the ones still standing and note how the roof’s are stuffed the aluminum and iron are stuffed etc etc. Walk back a few streets and see the same. Inside fitments become old and out of date. Just not a reasonable argument when a lawyer or a DR. can claim depreciation and his $200K BMW to drive to the office and park all day. Maybe you could look at limiting that before you start on stuff that suffers real wear and tear.

    Seems to me there is much more money to be gained from attacking WFF rorts for the rich and free student loans. After all, according to the experts property costs 200 mill per year. Not that much when compared to these two items.
    Is it fair that people who invest wisely using the known rules should just roll over and allow themselves to be raped by Govt. to provide for free student loans (all care and no responsibility), and or family tax credits for those that are high income earners but who choose not the arrange their affairs in a business like manner but to spend it all?

    Cut the need for taxes and then there will be no need for new ones and no need to increase the ones we have.
    Apparently this simple solution does even enter the equation.

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  11. Andrew W (1,629 comments) says:

    Viking, I think you’re wrong in your claim that a land tax would mean that 33.1% of kiwi’s will not contribute tax to the coffers, rates are already built into the cost of renting.

    Personally I’d let people place their own valuation on their own property, and give IRD the power to buy it at that valuation,
    and rather than a “land tax” I’d make it an assets tax, and include all trade-able assets.

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  12. dime (9,793 comments) says:

    40% of households dont pay tax! that makes me sick to my stomach.

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  13. MajorBloodnok (361 comments) says:

    This is all looking at the wrong side of the coin. The problem with tax is simply that there is too much of it.

    Start by eliminating whole govt departments, and then it is much easier to remove the Cullen “envy” tax (was 39% on personal income, now 38%). That was the main driver into property investment — people trying to reduce their tax burden.

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  14. Dirty Rat (504 comments) says:

    Capital Gains would be a nightmare, but great for Accountants.

    I can imagine the Transfer Pricing Regime kicking in when determining arms length transactions between related parties.

    Done properly the Capital Gains Tax in property may increase Tax Revenue in gains, but losses utilised by related parties, such as LAQC’s would defeat the purpose.

    And its horrible to administer. Expect plenty of tax fiddles if this goes ahead.

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  15. Viking2 (11,340 comments) says:

    Andrew W:Residential Tenancies Act specifically prohibits a landlord from charging the tenants rates. So no I am not wrong. Rents are for the use of the physical property.
    Act by section

    * Contents
    * › Part 2 Tenancy agreements

    39 Outgoings

    *

    (1) Subject to subsection (2) of this section, all outgoings (including rates, insurance premiums, and water charges) from time to time payable in respect of the premises shall, as between the landlord and the tenant, be payable by the landlord.

    (2) Subject to subsection (3) of this section, the following outgoings incurred during the tenancy shall, as between the landlord and the tenant, be payable by the tenant:
    o

    (a) All charges for electricity or gas supplied to the premises:
    o

    (b) Water charges in respect of the premises (including the cost of charges for standard meter readings) if—
    +

    (i) The premises have a separate water meter; and
    +

    (ii) The tenancy agreement stated, at the commencement of the tenancy, that the tenant shall pay for any metered water provided to the premises; and
    +

    (iii) The water supplier charges for water provided to the premises on the basis of metered usage:
    o

    (c) All charges in respect of any telephone connected to the premises.

    (3) Subsection (2) of this section does not apply in respect of any outgoing which the parties have agreed in writing (whether in the tenancy agreement or otherwise) shall, as between the landlord and the tenant, be payable by the landlord.

    (4) In this section standard meter readings means all meter readings other than meter readings requested by the landlord.

    (5) In this section premises includes facilities that are exclusively for the use of the tenant.

    Section 39 was substituted, as from 1 December 1996, by section 17(1) Residential Tenancies Amendment Act 1996 (1996 No 7). See section 17(2) and (3) of that Act as to tenancies that commenced before 1 December 1996.

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  16. JC (942 comments) says:

    I understand why people say don’t tax the beneficiaries and low paid, but I’m wary about that because they then have no stake in the economy. Its bad enough now when the economy is down, tens of thousands are out of a job and maybe hundreds of thousands are affected severely enough in other ways.. but the beneficiaries are still getting their inflation adjusted benefits.

    Unless the beneficiaries, WWF, state servants, superannuants and MPs remuneration is tied to the fortunes of the country they will have no impetus to restrain or reduce govt costs and so called services like train sets.

    We have to stop thinking that the Govt and taxpayers are there to provide a non reducing income for the beneficiaries of the system.. until we do there is no incentive for small efficient govt and savings.

    JC

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  17. Viking2 (11,340 comments) says:

    Majorbk; Yes it helped the process but was driven very rapidly by the rapid increase in taxable earning because of increased wages. DPF blogged to graph a couple of days back.

    http://www.kiwiblog.co.nz/2010/01/the_average_worker_should_not_be_paying_even_33.html

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  18. Andrew W (1,629 comments) says:

    Viking, I thought you were brighter than that. All the costs intrinsic to owning rental properties are built into the price of the rent

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  19. Andrew W (1,629 comments) says:

    Similarly all the production costs of any business are built into the price of the goods/services sold by the business, if they weren’t the business would go broke.

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  20. Viking2 (11,340 comments) says:

    Can’t you read or are you just being disingenuous.

    Try owing a few and see for yourself. This last year rates went up and rental yields went down. Each year rates go up to satisfy the wishes of those that rent and use the facilities that the local body supplies, such as water, sewerage, roads, parks on so on.
    There are few rental houses that even go anywhere near paying their cost of capital.

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  21. Manolo (13,517 comments) says:

    “[DPF: If Nats get a second term I hope they will ask for a mandate to look at doing that]”

    If the first year of the first term is any indication of future performance, this will never happen under Key’s watch.
    Let me paraphrase Bill O’Reilly (with a small change): The spin STARTS here!

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  22. Viking2 (11,340 comments) says:

    Right JC which is why the Govt. should have its tax take capped and tied to the GDP like Hong Kong. not allowed to take anymore than the formula allows. Stops the pork barrelling etc.

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  23. Andrew W (1,629 comments) says:

    Go back to look at your economics 101 Viking, net returns are the landlords and any businesses main concern. It’s common for there to be a lag when there are changes in costs.

    And I’ve owned enough rentals.

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  24. Dirty Rat (504 comments) says:

    Andrew W is correct, however I would say in residential properties it is also net cashflow ( including tax refunds).

    Viking K is a bit ambiguos though regarding cost of capital and you have to ask why you are renting a property out in the first place.

    If it to provide housing for those who cannot afford to buy a house then you are probably a charity, however if an investment, then you should be tracking the increase in the value of the investment as part of the return on top of income.

    I may suggest that people who have bought rental properties this year as investments ( and on fixed interest) will have very healthy net returns for the next few years.

    btw Doctors and Lawyers can claim 100% of the vehicles if they are Incorporated, however the catch is FBT.

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  25. Viking2 (11,340 comments) says:

    The Law as written specifically states that a landlord cannot charge tenants rates, which means in simple terms that the tenants do not pay rates the landlord does. Therefore again being bloody simple the tenant does not contribute to the local body rates.
    Clearly that leaves any rental gained as the tenants cost for the use of the property. Again that is spelled out in the RTA.

    That the landlord is forced by statute to pay for the services that tenants use is simply another socialist event in our lives.
    Consider. in Tauranga the water is metered therefore tenants can be and are charged for the water they use. Rubbish is also their responsibility but in Rotorua both are part of the rates bill which the landlord pays. Therefore the landlord not only pays for the tenants living costs but also their community costs. That landlord may not even live in Rotorua, maybe Queensland.
    Now a quick perusal of the tenancy depts. fine website that gives regular updates of rents being paid shows that tenants in Rotorua pay less rent than those in Tauranga so a Rotorua landlord is shafted because the Council there can’t even get its act together and separate out its service deliveries and contract them out as it should.
    I can see no logical reason at all why the cost of council services for the community should not be fairly born by the people that use them i.e. every person who resides in that community.
    The problem with the system by which tenants are not required to pay rates is this. Apart from the community use argument, there is the issue of votes. A landlord gets to vote only where he lives and has no vote where his property is. Therefore the tenants, inevitably socialist, vote according to which councilor is going to spend the most on him or her. And why wouldn’t they. It doesn’t cost them a cent.
    Now if you gave a property owner the vote and removed the tenants from the system I could bet that there would be a major change in voting and spending.Tauranga for example wouldn’t have a money losing swimming pool 300 yards from the beach, we wouldn’t be about to build another money losing stadium and we would be charging motorists that use the access roads built from council funds instead of
    facing right now another rates hike to pay for roads citizens of another territorial authority are the biggest beneficiaries of.

    And why the difference between a commercial tenancy and a residential one? Commercial pays all outgoings including rates and insurance and residential cops the lot. Just socialist pandering to voters.

    If this Govt. see fit to further deprive a landlord of income for the benefit of the welfare state by adding further costs then surely those costs should be born openly by the tenant.

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  26. Viking2 (11,340 comments) says:

    And just to make the point about costs;
    http://www.theaustralian.com.au/news/nation/water-charges-are-set-to-spiral-in-desalination-squeeze/story-e6frg6nf-1225822705341

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  27. Pole (6 comments) says:

    Viking.
    ‘A landlord gets to vote only where he lives and has no vote where his property is.’

    What are you suggesting?, multiple votes for property owners,?…yeah that would be fair. I’m thinking,if the advantages of income sheltering and tax avoidance through the various vehicles of investing in residential property are not as good as they appear through the publicity around the tax reforms, then no-one would be doing it. I’m also thinking this has artificially driven the up cost of housing, and many tennants would not need a landlord in the first place had this been sorted out long ago.

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  28. Duxton (615 comments) says:

    “Yep 10% of taxpayers provide 76%. And what happens if more and ore of that 10% go offshore?”

    Umm, more than likely someone from the remaining 90% would step up and take their place (and, in turn, a new/unskilled worker would join the workforce as a member of the 90%); or a skilled worker would be attracted from overseas.

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  29. Viking2 (11,340 comments) says:

    http://www.smh.com.au/business/new-tax-system-focuses-on-jobs-20100122-mqlm.html

    New tax system focuses on jobs
    PETER MARTIN
    January 23, 2010

    Voluntary simple tax returns, longevity insurance, a Medicare-style disability levy and incentives to keep people in work head the recommendations of the Henry tax review, which is focused on the ageing population.

    It also recommends changes for business, including a 40 per cent mining resource rent tax.

    Recommendations that will be contentious include pay-as-you-drive road congestion charges, fringe benefits tax for charities, and a uniform alcohol excise that would push up the price of wine relative to beer.

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  30. RossK (277 comments) says:

    “Yep 10% of taxpayers provide 76%. And what happens if more and ore of that 10% go offshore?”.

    That would be the same 10% that makes (and takes) what DPF? – about 95% of the money. A comment like yours DPF is so loaded. The implication of your comment is that this 10% of taxpayers is carrying all the others. A lot of people take a more holistic view – which is that essentially we are all cogs in the machine. Most of us go to work, try to get ahead, and accept that we cannot all be in the top 5% of society’s members who own over half the wealth. Sure any given person might be able to avail themselves of social mobility to get uo there but it is not possible for everyone to be rich. To an extent that it is difficult to precisely determine the great majority of people are always going to be stuck in a range or wealth / income, not for lack of merit or effort but just because that is the way it is.

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  31. Viking2 (11,340 comments) says:

    Landlords tax deduction.

    “About NZ$800 million of those losses are directly related to rental property investments, the IRD estimates.”

    “New Zealand’s landlords need to understand that their drive to reduce their personal tax bills and target tax-free capital gains has distorted both the economy and the government’s finances.”

    For the tax year 2008-2009 the IRD reported $490 Billion collected. $800 million worth of losses is 1.6%. That is less than half the inflation of 3.8% year on year March 2009. The maximum possible distortion is insignificant to the governments finances. Bernard still has useful information now and then but he’s hiding it behind hype and sensationalism.

    http://www.propertytalk.com/forum/showthread.php?t=24423&page=4

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  32. Dirty Rat (504 comments) says:

    Viking

    Rates are only a cost of supplying the service and should be factored into the rent.

    You dont pay wages at The Warehouse, it is absorbed in the price.

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  33. kiki (425 comments) says:

    for all the debating you could just go here

    http://www.act.org.nz/

    Also stop looking at just some points as it is the system as a whole that needs changing. National stopped Rodney from making councils just do rubbish water and sewage because those in other fields like art were afraid their trough would disappear.

    and viking2 why do you own rentals? and who do you expect to pay for them?

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  34. Viking2 (11,340 comments) says:

    Dirty Rat, who uses the services? landlord or tenant?
    so who should pay for the services?
    Kiki;Because I chose to and income generated from all sources. Same as any business.

    Why is it you socialists automatically consider a landlord should be part of the social welfare system and subsidize tenants living in this country.
    If you removed the social restrictions on landlords we would all make a lot more money and be happy to pay our taxes.Two things determine profitability of rental housing. Rentals obviously and they are both restricted by govt. interference and bad govt. policy ( think new 3 bdrm houses for $80 per week), and interest rates. Here again we have unnecessarily high rates in NZ and have had since 1972. Bought about by govt overspending bad policy and high tax rates.

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  35. petal (705 comments) says:

    Beware the Law of Unintended Consequences….

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  36. Anthony (789 comments) says:

    Viking, you don’t appear to have read my earlier post. How is a capital gains tax so complicated? Any you don’t need to worry about all those asset types you mention as very few are purchased as an investment and appreciation is far from guaranteed. Property or at least land is almost quaranteed to appreciate and if that is why people become landlords than of course the appreciation should be taxed – just as a landowner planting a forest is taxed on the income from the forest after it has grown.

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  37. bchapman (649 comments) says:

    It shouldn’t matter how complicated it is to measure- income is income, and should be collected. Capital Gains are undeniably income, I don’t see how you could define it as anything else.

    Similarly taxing assets or assumed rate of return is ridiculous bordering on state theft. I’d be interested to know if NZers are to be taxed on assets (as opposed to income) held offshore. Other governments might be interested in this as they would then need to pay tax credits on assets held in their own countries.

    BTW the extremely lax policing of personel spending which is dressed up as business expenses are a major omission of the TWG. This area is subject to huge amounts of straight theft from the taxpayer which seems to be excused on the grounds that it is too complicated or difficult to police. Much easier to arrest a bank robber I guess.

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  38. Tauhei Notts (1,677 comments) says:

    Nobody has mentioned the very significant deferred tax liability for landlords.
    That is, when they sell the property there will be a huge sum for depreciation recovered which is all taxable in the year of sale.
    So, when demented landlords tell us that they are being picked on and threaten to sell their properties; whoopee; pay the tax on that depreciation recovered and spare us your dipstick ditherings.
    But for all that, I am concerned that an Inland Revenue Department that has had such serious staff cutbacks, will be unable to police all those depreciation write backs.

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  39. Viking2 (11,340 comments) says:

    Most houses don’t make capital gains they manage to maintain their purchasing power. So once you calculate the maintenance of the purchasing power see if there is any gain and whether its worth the effort to tax. Ye Gods the govt attacks all other options to remain at parity.
    All manor of objects would be considered for capital gains depending on your personal desire to collect. Some people spend a life collecting toys, cars, horses, boats, and so on only to sell them later at a profit. Thats capital gains.
    The end game is stop needing to collect the frigging TAX.

    Anthony, has land appreciated in Tokoroa, Morewa, Nightcaps and so on.
    Like I said if you are going to tax gains you had better be prepared to refund on losses. If we had all revalued last year Govt. would have been broke. would not have been able to pay Hickeys 30% devalue.
    A forest owner is manufacturing a product to sell therefore adding value to his initial investment and landlord is not. He makes a long term capital investment.

    Pole; most tenants will never own a house, didn’t when houses were cheap. Didn’t want, couldn’t be bothered, rather spend their money on other stuff life booze, cars oversea’s holidays. Most landlords I know suffer for years before they are able to do these things. Most houses take about 20 years to pay off and then they need refurbishing after being kicked to bits or just plain got old and outdated.

    Obviously so many of you think we should just pay whatever tax the govt. demands with no limits on their spending and on their demands. No wonder they do it. No wonder so many leave. 650000 in the last 10 years I think.

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  40. Viking2 (11,340 comments) says:

    Risk Free Rate OF Return

    · Rents non assessable, costs non deductible
    · Pay tax on equity ( not debt)
    · Tax payable irrespective of market going up or down
    · Tax payable despite asset not being sold – you have to find the tax out of cash flow
    · Leveraged investors relying on tax refunds to survive / get to break even cash flow, will go broke.
    · Westpac’s estimation that house prices will drop 34% if this option comes in, is in line with Sweden’s experience where they ring fenced tax losses and house prices fell 35% and mass insolvency enveloped the nation – the policy was reversed and the government thrown out at the next election. Sorry I don’t know the year this happened. Similar experiences in Aussie with state taxes trailed targeting property. I am told.

    Example Application Of RFRR Tax and Outcome
    · Example Scenario is Little Joe Bloggs, who has a rental property and earns $65k, has 2 kids and a spouse who works part time earning $15k. All household income is required to survive. The rental property is negative cashflow before tax refund $7,000, break-even cashflow post tax refund. The market value of the property is $400k, and the debt $350k. Currently Joe and his family get by – paying their living costs and mortgage payments ( just). The market equilibrium assumes the tax refund and hundreds of thousands of Joe Bloggs are doing this.
    · Enter this tax. Now Joe does not get a tax refund. He has to pay 6% of $400k(mv)-$350k(debt)=$50k which is $3k. So previously he was getting $7k tax refund, now he pays $3k, he is $10k worse off.
    · The outcome is he has to sell in a market that is flooded with other Joes. He goes broke and is mortgagee sold. He stops spending and kicks off another recession with the thousands of other Joe Bloggs in the same predicament. They all vote labour for the rest of their lives and everyone blames National for the massive blunder. The next government throws out the unpopular tax, and the market reverts to where it was before. WHICH IS EXACTLY WHAT HAPPENED IN SWEDEN WHEN THEY RING FENCED LOSSES.
    · Banking would also be destabilised and credit would stall again.

    So this tax would cause huge loss in property values, hardship, destabilize banking, reduce consumption ( credit will tighten and consumption drop), and kick off another recession….

    I ignored it in my overview above as a clever idea that does not work in the real world. A cynic would observe that it makes the other options seem more palatable.

    Also RFRR requires a lot of work for IRD, is subject to abuse ( through manipulating valuations) and will stimulate heavy leveraging.

    Example Of Potential Abuse Of the Tax

    · Little Jonny owns a rental worth $300k with debt of $250k. He pays RFRR tax on $300k-$250K=$50k times 6%= $3k tax.
    · Little Jonny’s friend has a similar house, similar suburb.
    · They sell each other their respective houses at $250k each, now 100% financed.
    · They achieve 100% financing by cross securing their respective investments to their homes, so they can borrow 100%.
    · Valuers will now tend to view the market value of the houses as $250k, – cost.
    · Now Little Jonny has zero tax to pay, under RFRR, $250k(MV)-$250K(debt)=$0 equity times 6%=$0
    · Is this tax avoidance – probably – but the point is the tax is open to abuse.

    I give Keys and the Nats more credit than to bring in something this radical, this dangerous. They are pro-business and clever people – no question about that. They understand that undermining consumption by destabilizing banking, kicking off another recession and causing mass insolvency, – is political suicide and not in the public interest. There is a better way in the other options of getting there (to a level playing field and weening Kiwis off property investment – if that is what the Government wants), and the change needs to be more gradual.

    More at;http://www.propertytalk.com/forum/showthread.php?t=24403&page=5

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  41. Anthony (789 comments) says:

    Hey Viking I totally support allowing the loss to be deductible if the gain is taxable. Who cares about those places you mention – no gain then no tax. Mentioning collectables is also irrelevant because collectors aren’t avoiding massive amounts of tax. You’ve obviously never mixed with middle class Aucklanders – all they can talk about is their latest rental property and how the taxman is helping pay the mortgage etc!

    Read Bernard Hickey’s latest piece. He predicts prices will fall no more than about five percent for various reasons. I thought the argument was that capital gains taxes elsewhere had not stopped big price rises – now it’s that they will cause big falls! You lot need to get your story straight!

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  42. whalehunter (479 comments) says:

    so with cgt, you would pay on sale, so if u dont sell could you still borrow against an untaxed equity?

    surely policing a cgt system would easier than policing our banks tax books.

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  43. Andrew W (1,629 comments) says:

    Viking, who pays the booze tax, the retailer or the customer? who pays petrol tax the retailer or the customer? who pays tobacco tax etc. etc. The tobacco companies would recognize that while they pass the tax on to the consumer, there’s a cost to them in the decline of their turnover.

    “Anthony, has land appreciated in Tokoroa, Morewa, Nightcaps and so on.”
    In Tokoroa house values have tripled over the last 15 years, most of that gain in the last 5 years.

    Viking, don’t assume that I don’t have the same view as you regarding the wasteful fuck-up called local government.

    There is an argument that increases in rates (and other costs, eg mortgage rates) can depress house prices so that while rentals don’t increase, the return on investment remains constant because the value of the asset has declined.
    (you were getting 5% on a $200,000 house, now you’re getting 5% on the same house only because it’s values dropped to $160,000, but in the long run if there is a net demand for housing in an area the market should ensure that the value will always be above land + construction costs. Construction costs have rocketed over recent years because of greater compliance costs.

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  44. whalehunter (479 comments) says:

    yea

    parks and reserve fees is near theft.

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  45. Andrew W (1,629 comments) says:

    “Obviously so many of you think we should just pay whatever tax the govt. demands with no limits on their spending and on their demands.”

    No, I prefer one simple (low admin costs to tax payer) direct tax with as broad a base as possible so it’s easier for people to understand just how much revenue the government collects, “progressive” income tax, as DPF recently illustrated, lets government increase its tax take in a very covert way.

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  46. whalehunter (479 comments) says:

    a 1 hour class a week showing every nz high school pupil how to save to buy a first house, pay it off,
    save, invest…. no excuses.

    or,

    we could just raise up some more tax, build heaps more state houses, sell a few back to tennants,
    give out some tax as first home buyer grants…. social eutopia.

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  47. kiki (425 comments) says:

    “Why is it you socialists automatically consider a landlord should be part of the social welfare system and subsidize tenants living in this country.”

    because tax payers subsidise you house purchase viking2, through tax back and often the rent paid by the occupants.

    did you look at Roger Douglas’s 2025 proposal?

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  48. kiki (425 comments) says:

    And whalehunter first step in education is to destroy the current system and let the parents and schools decide what education they need.

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  49. whalehunter (479 comments) says:

    im all for that, but if parents were to become more responsible then why stop at education, we wouldnt need a dpb or any social welfare.

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  50. kiki (425 comments) says:

    If you know history then you would know that welfare is needed, it is how these things are provided that needs to change.

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  51. Viking2 (11,340 comments) says:

    Kiki; taxpayers are always subsidizing someone and in the case of landlords it only happens because the tax rates are well above what they should be. and of course without us landlords 33.1 % if kiwi’s would have to sleep under a hedge so we are subsidizing their living. We put up with their not paying rents, damaging our property, having our property rights controlled by the state for the tenants benefit, and putting up with a lousy 5% return, less than we can get at the bank. If you tax us more or tax our ability to maintain our purchasing power then you better be prepared to buy our houses and service the tenants with your tax because we will either move to a lower tax country, rearrange our affairs to negate any new tax or just stop being landlords and find a commercial premises where we don’t have to pay more tax.
    Anyway we will beat you.

    As for welfare, yep some is needed but not cradle to the grave all encompassing, no effort spared soul destroying welfare that Kiwi’s have been practicing.

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  52. kiki (425 comments) says:

    Then take your money and put it some where else if it is so bad.

    Have you read Roger Douglas’s alternative for 2025?

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  53. Viking2 (11,340 comments) says:

    Anthony, the point about booze etc was that some would rather spend their money on that than save to buy their house. Follow the logic.
    Well plenty of Queen St lawyers, Dr’s and accountants are buying their dairy farms and batches the same way. Nothing new about that and if tax rates were way less and the use of trusts etc were reined in to avoid the tax then there would be less talk. Actually its more noise than reality as there are not that many investors in reality.

    As for Hickey, long ago gave up listening to him. Hasn’t been right in ten years of predictions.

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  54. Anthony (789 comments) says:

    Viking again you are wrong about landlords giving tenants a place to sleep. Landlords typically buying existing properties. They don’t add to the housing stock – they just push up prices. It would be great for first home buyers if lots of landlords got out of the business as prices would drop. Renters would become owners instead. The houses wouldn’t sit empty!

    By the way, there are over 300,000 private landlords owing $200 billion of rental property – not many eh?

    I cringed when some Act supporters said the last Labour government’s policy to go back to income related rents for state houses would hurt private landlords. The idiots forgot that decreasing rent for state houses does nothing to the supply of housing – it just gave a windfall gain to existing tenants and of course overnight a big waiting list for state houses was created as who wouldn’t want cheap rent!

    You increase the housing supply by easing regulation, RMA, land supply restrictions, etc – not giving landlords tax breaks! Unfortunately we have an over reaction to the leaky home syndrome to contend with. I hope Rodney Hide can make some progress.

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  55. kiki (425 comments) says:

    this is an interesting article vaguely connected to government spending

    http://www.economist.com/displayStory.cfm?story_id=15328727&source=hptextfeature

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  56. Avalon (39 comments) says:

    Anthony (228) Says:
    January 23rd, 2010 at 7:29 pm
    Anthony (228) Says:
    Hey Viking I totally support allowing the loss to be deductible if the gain is taxable. Who cares about those places you mention – no gain then no tax.

    The gain IS taxable.

    Just because New Zealand does not have a tax labled “Capital Gains Tax” it does NOT mean that property investors do not have to pay tax on the profit they make when they sell houses. If you buy and sell houses to make a profit – you have to pay tax on the gain – at 30% (company tax rate).

    Just because people such as Mr Hickey keep shouting from the rooftops that we get tax free capital gains – it doesnt mean hes telling you the truth.

    The only sure way to never pay tax on the capital gain in a rental property is never to sell it. There are many people who have bought and sold multiple properties and not paid that tax. That is Tax Evasion and is illegal. The IRD was given a huge sum of (tax) money to chase down these tax avoiders, and I wonder how well they spent the money. I undersatdn they clawed back significant losses, and continue to do so. As they should IMO

    The problem with the furore at the moment is that people want to dissallow the tax losses, but still tax a 6% gain that may not occur. With Property investing being the ONLY business class in New Zealand to be walloped by this. The people growing a few vines in thier gardens and caliming tax losses for running a “vineyard” will still be able to offset losses. Bernard Hickey will still be able to claim tax reductions on his expenses – while bleating about how unfair it is for property investors to do the same thing.

    There’s a lot in the report, and im just reading it now. But my gut instinct sys its not going to have quite the effect that most people think it will. I think rather than 7% of Kiwis being able to own investment propeties – you will now indeed have to be rich to do so – instead of just being an “average Kiwi with an average salary” trying to get ahead in life.

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  57. Seán (397 comments) says:

    “I hope the Government will act on at least a couple of these, using the revenue to reduce income taxes.”
    – it seems most people are being swindled into thinking that new taxes are a good thing, or at the very least a necessity. If implemented, who honestly believes the government is going to reduce income taxes to offset these new ones? Labour never will, and National have already promised income tax reductions, but I don’t recall them also mentioning on the campaign that they will bring different taxes, essentialy to pay for them.

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  58. Manolo (13,517 comments) says:

    “..but I don’t recall them also mentioning on the campaign that they will bring different taxes..”

    The above is entirely accurate.

    National and its many acolytes and sycophants are spinning at a 50,000 r.p.m. to make us believe the introduction of new taxes would help New Zealand. That’s a monumental lie.

    No country has ever advanced by increasing taxation to the point of choking its economic activity. The reverse is true. Empty-suit Key and his cheerleaders must be reminded of that.

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  59. Pete George (23,422 comments) says:

    Saying they shouldn’t restructure taxes because they can put them up is straight out stupid. They can put them up without restructuring. The tax take balance changes even if the government does nothing, as wage inflation moves earners into higher tax brackets – distorting more and more if un-addressed.

    So governments should adjust who pays how much, and in what way. Broadening the tax base makes it far easier to be more fair, and also makes it harder for some people to unfairly avoid their tax responsibilities.

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  60. Richard Hurst (825 comments) says:

    “RAISING GST

    Con: It is very hard to prevent a rise in GST hitting those on lower incomes harder.”

    No its not. Just don’t tax the first $25,000-$30,000 of whatever a person makes a year. Problem sloved.

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  61. Viking2 (11,340 comments) says:

    Who Wants to Tax a Millionaire?
    Veronique de Rugy from the February 2010 issue here:
    http://reason.com/archives/2010/01/13/w … illionaire

    The “millionaire’s tax” will affect more people than you think.

    http://www.nzcpr.com/forum/viewtopic.php?f=3&t=909&p=27889#p27889

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  62. Avalon (39 comments) says:

    I would prefer that instead of wasting time and resources inventing new taxes – the government police the current tax laws properly. Such as going after the Property Investors and traders who have not paid the tax they should have paid. Including all the people who dont actually consider themselves property traders, and yet buy, renovate and sell property after property but dont pay tax becuase they live in the property.

    They are still liable for the tax, and are breaking the law in not paying it.

    Then I would prefer the government stop wasting the tax they steal off us – such as turning an 11million budget to renovate the Supreme court into an 80million new building. Cos they dont have to budget – they just invent a new tax.

    The issue is they take more than enough tax – they just waste it because theres always suckers out there that will give them some more.

    I just wish we could demand more money from our bosses when we overspend at the end of the month.

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  63. MikeNZ (3,234 comments) says:

    what a load of codswallop.

    Where are we going with all this?
    That’s what I want to know, what is the snapshot in the future?
    What is the goal?
    What is our intention 5, 10 yrs out?
    20% flat tax?
    No tax and gst only?

    the changes must be Tax neutral, what a load of bollocks.
    we want lower taxes for everyone, not just me.
    we’re fed up being the 10% who pay 70 odd% of the tax after the middle class benefit WFF is taken into account!

    This whole discussion is rubbish unless we talk about what we can axe from the budget and lower our spending to fit a reduced tax take.
    VOTE Party Vote ACT, you know they make sense :-)

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  64. Anthony (789 comments) says:

    Avalon – you don’t know what you are talking about. I used to work for IRD and know full well there is a provision taxing the gain on sale of land if it was purchased if the intention of resale. However, it is very difficult to prove intent and the case law that has built up around the provision virtually guarantees that 99 percent of property investors will not get caught by it! The provision needs scraping and replacing with something workable – like if you have claimed a tax loss while owning the property then you will get taxed on any gain when you sell it!

    Of course depreciation on buildings needs to go too as any building that is maintained is very unlikely to depreciate in nominal terms.

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  65. big bruv (13,672 comments) says:

    I take it this working group was only told to look at taxes on a national level.

    For some time now I have thought that the most unfair tax in NZ is council rates.

    Those of us who own property subsidise everybody in a state house and all private rental properties, the sooner we introduce a ‘poll tax’ the better.

    We all use the toilet, wash and use public facilities, so, we should all be made to pay for them.

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  66. Anthony (789 comments) says:

    You have obviously learned nothing from history Big Bruv – trying to impose a poll tax in the UK was Maggie Thatcher’s downfall. Poll taxes just don’t work and rates are largely passed onto tenants of rental properties anyway. That doesn’t mean that the loss of the landlord’s tax subsidy can be passed onto tenants though as of course its impact will vary according to the landlord – and the loss is just as likely to lead to a fall in the purchase price of rental properties.

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  67. Anthony (789 comments) says:

    I would like a residential landlord to show me just how residential properties can actually give a reasonable return at current prices if it wasn’t for the tax advantages that are able to be gained.

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  68. Clint Heine (1,570 comments) says:

    Err Anthony, council taxes that were bought on by this horrid Labour Govt is killing residents. I think in comparison the poll tax may have been nicer to us!

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  69. bchapman (649 comments) says:

    If you wanted to reduce Land Tax/Council Rates you could. But then you would have to transfer infrastructure costs (fixing stormwater/potholes/footpaths) which is what most of your rates pay for, to the NZ Government. They would more than likely move to user pays. Might work but would be expensive to administer from Wellington. Either way someone, who they can extract the money from, will have to pay for it.

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  70. Redbaiter (13,197 comments) says:

    Annual poll tax. No other answer. Everything else is just deckchairs on the Titanic.

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  71. big bruv (13,672 comments) says:

    Anthony

    Clearly you know little, I lived in the UK for seven years, for the entire time I paid council tax (poll tax), everybody pays council tax, it is a great system and means that every single person pays their share.

    And please, don’t give me that bullshit line about renters paying via their rent.

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  72. Pete George (23,422 comments) says:

    Annual poll tax. No other answer. Everything else is just deckchairs on the Titanic.

    I haven’t seen anyone else suggesting taking all the tax eggs from a single basket. Most talk of broadening the tax base.

    Does any country operate on annual poll tax only? Has it ever worked anywhere?

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  73. Redbaiter (13,197 comments) says:

    ” I haven’t seen anyone else suggesting taking all the tax eggs from a single basket.”

    Why do you think Kiwiblog readers would be intersted in observations relating to the blinkered mindset of a tired old one track collectivist?

    “Has it ever worked anywhere?”

    What you and your lot have come up with is sure as hell not working.

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  74. Pete George (23,422 comments) says:

    I haven’t come up with anything and don’t have a “my lot”.

    What we have is working, with room for improvement.

    What Russia had early last century wasn’t working and they changed radically to a new ideology – which turned out to be an awful failure.

    Basing all tax on a single annual poll tax may seem to have some merits in theory, like communism, but in practice it is likely to be a disaster- and is as unlikely to be implemented as a communist revival.

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  75. Redbaiter (13,197 comments) says:

    “in practice it is likely to be a disaster”

    Where’s the evidence?

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  76. Pete George (23,422 comments) says:

    Don’t need evidence to show that. Evidence is need to show it could work for it to be considered seriously. There is none so it won’t.

    Recent attempts to implement partial poll taxes have not been successful. Neither was the 1381 attempt, which lead to revolt.

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  77. Redbaiter (13,197 comments) says:

    ” Don’t need evidence to show that.”

    Thought so. The usual subjectively negative crap that typifies your response to any suggestion that runs counter to standard collectivist thinking.

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  78. cha (3,920 comments) says:

    Tax resistance in Iudaea

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  79. dime (9,793 comments) says:

    NZ needs a new advertising campaign – “Its ok to be wealthy”. “you should aspire to make money”

    everything in this country is tailored to low income earners. fuck em. if youre on a low income, youre probably paying bugga all income tax. you income after rent/mortgage is say $300 a week – so apparently, $7.50 extra in GST is gonna kill these people. jesus.

    Lets pump some cash into the pockets of people that will invest it and grow the goddam pie. drag the poor up kicking and screaming.

    this whole thing is a scam anyway. taxes to offset lowering of other taxes ffs.

    Can someone form a new centre right party please.

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  80. Pete George (23,422 comments) says:

    No Red, common sense. The Tax Working Group didn’t suggest it, the Brash 2025 report didn’t suggest it, National haven’t talked about it as a possibility, not sufficient evidence for them to consider it. So it ain’t gonna happen. No point in bothering chasing after evidence for something that no one does and no one is likely to do.

    Now if you could come up with compelling evidence that it could be successful you might change some minds….

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  81. MikeNZ (3,234 comments) says:

    ahem
    http://www.nzcpr.com/weekly213.htm

    Key promised reductions not tax neutral.

    http://www.victoria.ac.nz/sacl/cagtr/pdf/tax-report-website.pdf
    Page 16-17 is their list of problems but they miss one.
    Making tax an ideological imperative not what is best for the economy against other economies we are in competition with.
    We need to change the tax emvironment so that those economic warriors we have can compete properly internationally.
    That means all socialistic ideology led taxes (envy) need to be repealed.

    http://www.2025taskforce.govt.nz/pdfs/2025tf-1streport-nov09.pdf

    so what needs to be done for the economic warriors we still have in NZ?

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  82. Ryan Sproull (7,093 comments) says:

    Tax pros?

    I THOUGHT WE STARTED DOING THAT WHEN WE LEGALISED PROSTITUTION!

    ZING! Thank you. Thank you.

    I’m also available for corporate functions and bar mitzvahs.

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