Fallow on Tax

April 5th, 2010 at 8:58 am by David Farrar

Brian Fallow writes:

“We need to stop the system creating the wrong incentives,” said Treasury Secretary John Whitehead in a speech last week.

Citing Inland Revenue data, Whitehead said 1996 was the last year that more people made profits than losses from rental properties, yet the number of such properties had increased significantly since then.

I wonder what the total amount of tax losses claimed in those 15 years has been.

“Now why would increasing numbers of people – rational New Zealanders – invest billions of dollars collectively in an area that is unprofitable?” he said.

“It’s hard to believe it’s not because of the tax advantages. People can claim depreciation against their investment properties – even when most real estate was significantly increasing in value. They can deduct tax losses on property against their other income.

“And if they sell a rental property the capital gain they make is usually untaxed.”

The depreciation is reversed at sale, but you may have had interest free use of that money for a decade or more.

A widely quoted passage of the Tax Working Group’s report in January said that in 2008 the $200 billion invested in rental housing yielded net rental losses totalling $500 million.

That meant that collectively landlords not only paid no tax on their rental income, they were able to escape paying around $150 millon of tax on other sources of income they had.

However, Michael Littlewood, of Auckland University’s Retirement Policy and Research Centre, has cast a lot of doubt on the robustness of the $200 billion figure. …

But if he is right to conclude that the true combined value of residential investment properties could well be less than half the $200 billion stated, how much ice is that likely to cut with policymakers?

I doubt it will change decisions, but it will change estimates of how much revenue the Crown may gain from any changes.

It depends what they are most worried about. If their concern is that New Zealanders are over-invested in property and that that is for tax reasons rather than, say, a shortage of other investment opportunities, then Littlewood’s results are highly relevant.

But if the concern is purely fiscal – how to fund the gap between the $2 billion and change that a GST increase would yield and the cost of comprehensive income tax cuts and compensating adjustments to superannuation, benefits and family tax credits – then the focus would be not on how much is invested in rental properties but on the aggregate $500 million of net tax losses.

A bit of both I’d say, with priority on the latter.

The IRD data charted by the tax working group shows a clear downward trend in net rental income for the past decade, and it was 10 years ago that the Labour Government raised the top marginal tax rate from 33 to 39 per cent, increasing the incentive to shelter income through highly geared property investment.

I sometimes wonder if anyone actually pays the (now) 38% tax rate? Much better to reverse Cullen’s envy tax, and clamp down on loopholes.

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63 Responses to “Fallow on Tax”

  1. Nigel Kearney (1,012 comments) says:

    >It’s hard to believe it’s not because of the tax advantages

    If you invest in a business, you have costs and hassles with ACC, Kiwisaver, employment law, OSH, the RMA etc etc in addition to paying tax. People invest in residential property to avoid the massive the tax and regulatory burden that diminishes the profitabilty of other forms of investment.

    Reducing the burden on investment in productive activity is the only viable solution here. Trying to make property as unattractive as other forms of investment is more likely to cause people to just invest offshore (or leave the country altogether) rather than switch to other investment in NZ. That’s what I’ll be doing if this goes ahead.

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  2. Redbaiter (13,197 comments) says:

    “We need to stop the tax system creating the wrong incentives,” said Treasury Secretary John Whitehead in a speech last week.”

    But the problem of course is that the taxation system is used to create incentives or disincentives. That is not its real purpose, and when it is used in this way, it only creates market inefficiencies. All of these devices to tax income in this place or that place, and the massive loophole industry, and its counter force, the massive anti-loophole industry are just a waste of resources.

    Socialists will come on here and argue that this should be tweaked, or that should be tweaked, that this will have this unintended consequence, and that this will have that unintended consequence. Its all just deck chairs on the Titanic.

    The most effective, efficient and fair tax system is a poll tax, and that is the direction that tax policy should start moving towards. Progressive taxation has to be the first thing to go, replaced by a flat tax, and then that should be replaced by a poll tax, and when that final step is made, we will have much more free markets, much less government manipulation of the economy and a much fairer and efficient tax system over all.

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  3. Caleb (479 comments) says:

    with all these landlords, there is no reason for housing nz.

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  4. Caleb (479 comments) says:

    investment in housing is driven by the banks and they must make a killing.

    they offer the ability to ‘borrow’ for your investment property business, at very low interest rates coupled with a very low capital outlay.

    Its safe allround.

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  5. Brian Smaller (4,023 comments) says:

    Yes – ten years interest free use of capital. Great. Also ten years of dealing with the low-life welfare class. That should be worth a tax break on it’s own.

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  6. reid (16,442 comments) says:

    Liarbore’s core working-class constituent would be the main group who have never participated in any way in these arrangements. Therefore it would have made a lot of sense for them to do something about this, especially during the boom times we experienced over the last decade.

    Instead they stood aside and let it continue, to the detriment of the tax base, until it took a govt with courage to step in. I recall Cullen’s comment in 02/03 that “a capital gains tax is political suicide.” The self-interest evidenced by their inaction on this issue is not a surprise nor is it atypical of politicians and parties.

    However the fact that it didn’t take action on this even when it didn’t affect their core whereas National is taking action when it directly affects their base, starkly exposes the ethical contrast between them and Liarbore.

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  7. Redbaiter (13,197 comments) says:

    NZ’s real problem is that so much of government policy these days is decided by public servants with a vested interest. Socialist policies are underpinned by the idea of redistributing wealth. This policy has not in actuality done anything for the poor, but it has stacked the government with thousands of over paid bureaucrats who do not really do anything other than suck up the confiscated wealth long before it ever gets close to the real poor.

    Consequently no effective decisions will ever be made that might impact upon the fortunes of this wealthy class of government worker. A class that does not really do anything for the economy other than add to inflation and thereby make things even more difficult for the real poor.

    Taxation policy has to undergo radical change, but this cannot happen while the government is so large and so many people with vested interests are part of that government. Well, that is not strictly correct, change of course is possible, but you can bet your gold bars it will only be change for the worse.

    Nigel Kearney has it nutshelled above. While government policies drive people away from investment outside property, all our government can come up with is an idea to make property as unattractive as the alternatives. Hopeless.

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  8. Viking2 (11,467 comments) says:

    Well unfortunately DPF you seem to by captured by the same amounts of misinformation.
    First of course being that amount invested in housing and its place in NZ. Dr Don’s report showed that we were right in the middle of the figures for the OECD. So nothing out of whack there.
    Tax paid depends on profits made and while landlords may only pay a small amount to the IRD we are the biggest single contributors to local body taxation. Known also as rates where you come from.
    Some 340,000 private rentals exist in NZ and each one of those, owned incidentally by either one or two and often more NATIONAL VOTERS, pays rates to local bodies.
    Under section 39 of The Residential Tenancies Act no Landlord is allowed to charge any tenant for rates, irrespective of the fact that often those rates include the tenants living costs such as unmetered water and rubbish collections.
    So that makes it illegal to collect rent and consider rates as part of the rent. The landlord must pay the rates or risk losing his property to the Local Body Act whereby the local body can sell the property, which they do not own to collect the living expenses of the occupying tenant.
    So, local bodies rely on the owners of a tenanted property to pay about 35% of the local body rates in NZ. Now everyone who pays rates knows that they have risen considerably and because of Maurice’s and the Govt.’s refusal to accept responsibility for the 60% of the leaky home debacle they created in the last National Govt. these rates will be set to go even higher ,so landlords will be even further penalized for their business decisions. For land lording is a business like no other. ( which someday you have expressed the wish to find out.)

    What effect does this have? Well it leaves the landlord with a shortfall in his rent collection and so when added to the increasing interest rates, greater amounts borrowed to fund their business, the IRD collects rightly less tax. And of course this is something that the Treasury boss forgets. The cost of the asset involved in the business has also risen. Most investors (as opposed to traders), are canny and don’t usually overpay but still the investment required has risen.
    You could argue that allowing a maximum LVR of x amount to be deductible would be fair but then you would have to consider what would happen if you applied the same rules to other business plant and assets e.g. farms, trucks, or to leasing of flash cars under various guises.

    All this of course is made worse by the now 38% tax rate which encouraged people to use the industry as a tax shelter like so many others like forestry, diary, goats, kiwifruit, deer etal.

    The real issue is and has always been the high personal tax rate versus the rate for Trusts and companies.
    Until the tax rate is lowered considerably below the company and Trust rate, the rorts around them will continue. A 25% personal rate with Trust at 35% and companies at 30%, will drive so much income into the tax net the Govt. will be embarrassed by the amounts. ( happened before in the eighties.)
    One thing many learnt from the Muldoon days was that for every rule there is a way around it.

    Its all about cause and effect and changing attitudes and therefore actions. Simple human behavoir stuff.

    Now if you could encourage MR Heatley to change the RTA so that landlords could charge the rates to tenants then some fairness will come into the process and naturally landlords profits will rise.

    And just a reminder again about those mostly NATIONAL VOTERS. yep that’s right the ladies that smile and wave encouraged to vote for all the rest of fugly and ugly.

    340,000 private rental properties in NZ.
    1 or 2 or more voters own the mortgage or property on each one. Naturally National voters so potentially English and his tribe stand to thoroughly piss off say a conservative 600,000 NATIONAL VOTERS.

    But wait, that’s not all is it because there are also many thousands of commercial property owners, who while better off because the can pass on the rates etc to their tenants, still are going to be slugged by either changes to Depreciation or ring fencing. And of course don’t forget things like farm sheds.

    And then of course there are the Maori Trusts and enterprises that will be involved.

    All up an impressive number of Voters both National and Maori. More than enough to dump a lot of National List MP’s.

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  9. nickb (3,687 comments) says:

    Lets not forget those people using their rentals as a deduction to claim WFF… disgusting

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  10. MT_Tinman (3,184 comments) says:

    “We need to stop the tax system creating the wrong incentives,” said Treasury Secretary John Whitehead in a speech last week.

    Good on him I thought, finally someone talking sense but from there it went down hill.

    Instead of addressing the main issue- finding ways of reducing taxes and making people responsible for their own decisions – Mr Whitehead simply carried on the communist line of more tax.

    Damned disappointing!

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  11. Seán (397 comments) says:

    Fallow says:
    “Now why would increasing numbers of people – rational New Zealanders – invest billions of dollars collectively in an area that is unprofitable?” he said.

    “It’s hard to believe it’s not because of the tax advantages.”

    Hmmm, or maybe it’s because of the average 10%pa increase in value perhaps?

    “People can claim depreciation against their investment properties – even when most real estate was significantly increasing in value.”

    As you said David, the depreciation is reversed at sale, but I would like to know the reason Fallow left out this important fact.

    “And if they sell a rental property the capital gain they make is usually untaxed.”

    And this is the way it should be. Doesn’t Fallow know that more taxation is bad?

    Fallow’s REASONS FOR CLAMPDOWN
    No 1. The Government needs the money.
    No 2. The status quo is unfair on other taxpayers.
    No 3. New Zealanders invest too much in property and too little in businesses
    No 4. It is imperative to avoid a repeat of the housing boom of the last decade

    No 1. Not good enough. Sell some non-core assets. What happened to the cash from the recent years of huge surpluses? Don’t make us pay for Govt stuff-ups.
    No. 2. Show me a tax system that is completely fair.
    No. 3. This is a valid point that I agree with.
    No. 4. Doesn’t Fallow know that the property market is cyclical? Granted though, the next peak need not be so pronounced.

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  12. MT_Tinman (3,184 comments) says:

    Viking, domestic rental property ownership and particularly the lower end of the scale – the slum-type stuff – has traditionally been the preserve of the socialists so while you are no doubt correct to include National party politicians in your summation including National party voters might be stretching it a bit.

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  13. GJ (329 comments) says:

    Sure a lot of Landlords make a loss initially, but how many of our small businesses also make a loss?

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  14. Rob Salmond (246 comments) says:

    DPF: “I sometimes wonder if anyone actually pays the (now) 38% tax rate? Much better to reverse Cullen’s envy tax…”

    1. I think everyone with a salary or wage over the threshold pays the rate. There are many such people. Wonder no more.

    2. If the previous 39c rate in New Zealand was an “envy tax” ascribable to the ideological dogmatism of the left-leaning Dr Cullen, I wonder if you can enlighten us as to the top income tax rates (accounting, of course, for both typical subnational income taxes and social security levies in addition to the thing called “national-level income tax”) that citizens paid in:
    – Australia under the right-leaning Mr Howard;
    – The US under the right-leaning Mr Bush;
    – The UK under the right-leaning Mrs Thatcher;
    – Canada under the right-leaning Mr Harper;
    – Germany under the right-leaning Ms Merkel;
    – France under the right-leaning Mr Sarkozi;
    – Italy under the centre-right Mr Berlusconi;
    – Ireland under the centre-right Mr Cowen?
    (Hint: They all have one thing in common…)

    And for a bonus, can you tell us if those right-leaning leaders aligned their corporate and top personal rates?
    (Hint: the answer is the same for all of them…)

    [DPF: They all inherited their top tax rates. Can you point to any of those leaders who raised the top rate by 6 percentage points?, let alone introduced it at such a relatively low level of income?]

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  15. gazzmaniac (2,307 comments) says:

    Sean – re your number 3 – residential property is a business.
    And re number 4 – if it were easier to develop land and make it available to residential building, we could easily avoid another boom-bust.

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  16. gazzmaniac (2,307 comments) says:

    Rob – the thresholds for the highest marginal tax rates in Australia are much higher than in NZ. At $70k in Australia you’re still paying a rate of about 30c; it is not until $200k or so that you have to pay 45c

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  17. nickb (3,687 comments) says:

    Rob, NZ’s highest tax rate kicks in at the lowest incomes of all of those countries, I would wager.

    http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#Year_2010_income_brackets_and_tax_rates

    USA’s top federal income tax rate for the last 4 years has been 35%, and kicks in at around $373,000USD. What is that in NZD currently, say $500,000?

    So as for one of your examples, the USA’s top tax rate is lower, and kicks in at an income around 8 times higher than NZ’s. Try again.

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  18. Rob Salmond (246 comments) says:

    gazzmaniac

    That is true (also sort of true in the US, but that is a more complex story involving different states…). Of course in the UK the threshold is lower, as a proportion of the average wage, than in NZ.

    But all these figures miss DPF’s point, which was about using the tax system to exact “envy payments” out of the country’s most successful earners. And on that point the figures are clear – the highest earners in all those countries I mentioned faced more of an “envy tax” from their right-leaning governments than NZ’s top earners faced from their left-leaning government. Which puts DPF’s complaining about it into perspective.

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  19. Redbaiter (13,197 comments) says:

    ” No 3. New Zealanders invest too much in property and too little in businesses ”

    Wrong. This is much more accurately expressed by “Business is far too difficult to invest in compared to property”.

    However, property is really a business. Investing in the property sector is not the bad thing that many make it out to be. Money invested in property does not just sit there, because the property sector employs all kinds of tradesman and service people, sub contractors and commercial sector workers.

    In fact it is a sector that thrives, and it does this because it is relatively (key word relatively) unregulated and lightly taxed.

    Stop attacking the property market and start making other areas of investment as equally attractive by reducing regulation and taxation.

    That is the obvious solution, but it ain’t going to happen because of 1 above (*government needs the money) . A reason directly allied to the fact that there are too many people living off the fruits of taxation. Government workers, welfare recipients, superannuates for example. (anybody ever worked out what it costs every working NZer to pay superannuation to all of those retired MPs and other ex-government workers?)

    The only real solution is to stop taking so much money out of the system to feed the ever growing and always insatiable beast of government. Government has to shrink. It won’t happen by design. It will only happen when the system collapses under its own weight. There is nothing that can be done to avoid this outcome, and it is an event that is getting closer everyday.

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  20. Rob Salmond (246 comments) says:

    nickb – For the US, now factor in state-level taxes and social security contributions and try again. You’ll get a different, and more accurate answer. According to OECD figures on this stuff, a typical American earning more than NZD100,000 (about 1.5 times the US average wage) pays more than 39% marginal tax.

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  21. Joely Doe (31 comments) says:

    [quote]I sometimes wonder if anyone actually pays the (now) 38% tax rate? Much better to reverse Cullen’s envy tax, and clamp down on loopholes.[/quote]
    We both pay the top 38% tax rate. After three years of discussion, we have switched to a new accountant, who informs us we can significantly reduce our tax liability. Not before time, as we are heartily sick of paying for others lifestyles.

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  22. Joely Doe (31 comments) says:

    I sometimes wonder if anyone actually pays the (now) 38% tax rate? Much better to reverse Cullen’s envy tax, and clamp down on loopholes.

    We both pay the top 38% tax rate. After three years of discussion, we have switched to a new accountant, who informs us we can significantly reduce our tax liability. Not before time, as we are heartily sick of paying for others lifestyles.

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  23. Seán (397 comments) says:

    gazzmaniac – re your comment “Sean – re your number 3 – residential property is a business.”- This was Fallow’s conclusion and I think it was obvious that he meant non-residential investment when referring to “business”. Surprised you didn’t pick up on this yourself.
    Re your response to number 4 – Yes, I agree the freeing up of land for development would probably damper any future boom. Basic supply/demand.

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  24. Crampton (215 comments) says:

    I’d be keen to hear what loopholes are out there for a uni lecturer without a side consulting gig who makes only salary income – I have a hard time seeing how I could avoid the 38 cent rate other than by exposing myself far too greatly to the local housing market.

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  25. Adolf Fiinkensein (2,903 comments) says:

    Rob Salmond , you are flat out wrong. One of the prime targets of the BlueChip sales force was high end salary earners. The incentive? Buy an investment property and lay off the creative paper losses against your PAYE.

    Furthermore, your table of so called right leaning governments and their tax rates is false. You will find, I suspect, that not one of them taxes people earning $70k at a marginal rate of anywhere near 39%.

    For example, in Australia, PAYE on the 74,999th dollar is 30c with ZERO tax on the first $6k of income.

    Total PAYE on $100k in Australia is $17,100. PAYE on the same salary in NZ is $23,352

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  26. Seán (397 comments) says:

    Redbaiter, actually my view on No. 3 is better described by combining Fallow’s comment with yours: “New Zealanders invest too much in property and too little in businesses because business is far too difficult to invest in compared to property”.

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  27. Viking2 (11,467 comments) says:

    No 3. New Zealanders invest too much in property and too little in businesses ”

    Well of course Dr Don showed that was not true and we should also show up that much money mortgaged against property is in fact used for business.
    It is not tracked in any way for if the banks did this they would have been outside their Basel ratios so it must never be said. Businesses of course used property because the interest rates are lower and they can get the money as opposed to not getting it from any bank without that security.

    RB. A poll tax would be the ultimate but it would also be difficult to collect. Better to load the costs to the user, noi reason why people cannot manage their own lives. Of course that would mean having a safety net and that’s ok.
    We do need to collect tax of tourists and incoming goods and services that are currently not caught in the net of GST. think computer programs etc. purchased using a credit card and downloaded. No GST paid for the supply of the service. Millions and millions a year escaping the net.

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  28. Mr Noisy (27 comments) says:

    I’ll stop claiming depreciation and offsetting the losses against my rental property when the government stops redistributing MY wealth in order to incentivise people to live beyond their means, by having children they can’t support using just their own wealth (primarily through WFF, but also other government benefits).

    The government uses taxation to incentivise behaviour. As long as they’re doing that then I don’t think they can claim the moral high ground against people using the tax system to their advantage. If it’s OK for the government to do, then why not the private citizen?

    I’m sick of being made to feel guilty because I’ve got my stuff in one sock, and because I’m not forced to depend on the government for a handout, which is obviously what they want.

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  29. Seán (397 comments) says:

    Viking2 said:

    “We do need to collect tax of…. Millions and millions a year escaping the net.”

    I love how lefties just think they are entitled to take my hard-earned money off me.

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  30. s.russell (1,642 comments) says:

    Exactly – some people are in a position to avoid the 38c tax rate, others with the same real income are not. And THAT is not fairness. I look forward to that whole tax bracket being scrapped, and the depreciation loophole being closed. And the greater equality of treatment that would result is one of the major reasons why this should be done.

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  31. gazzmaniac (2,307 comments) says:

    Viking2 – good luck collecting GST on overseas transactions. I imagine the costs of inspecting each parcel coming across the border and administering the collection will far outweigh any tax collected. Then you’ve got the problem of policing the internet, which isn’t (and shouldn’t) happen any time soon.

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  32. Jeff83 (745 comments) says:

    So Redbaiter is not even happy at stopping at a slightly regressive tax (i.e. GST) or even a non regressive tax (flat income tax) he wants to go the whole hog and go totally regressive, a poll tax.

    Fortunately it will never happen in this country thank god, as New Zealanders care to much about their fellow man.

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  33. Jeff83 (745 comments) says:

    Gazz. Actually mate it already happens, GST is collected when goods are imported over a certain value. Its done by customs. Duties if applicable are also done at that stage.

    Viking however was referring to software bought and downloaded over net, etc. Most of that would come under the de minimus exemption, and accordingly would not be subject to importation GST, accordingly the amount escaping the net as it were would be limited.

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  34. gazzmaniac (2,307 comments) says:

    I’d support a higher GST if there were no income/company/trust taxes. Then we get to decide how much tax we pay, by how much money we spend. Also pretty difficult to avoid it (with no company tax there is no incentive for cash jobs).

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  35. Rob Salmond (246 comments) says:

    Adolf: “Furthermore, your table of so called right leaning governments and their tax rates is false. You will find, I suspect, that not one of them taxes people earning $70k at a marginal rate of anywhere near 39%.”

    Of course I made no such claim. I am interested in the top rate of income tax, because that statistic more accurately captures DPF’s characterisation of the 39c rate as an “envy tax.” Your chosen metric, namely “tax on the 70,001st dollar,” is a crappy way to measure envy taxes. When you compare top rate to top rate (payable by the most successful earners), Dr Cullen’s regime charged a lower rate, and therefore by DPF’s logic contained less “envy,” than any of the others I mentioned.

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  36. Viking2 (11,467 comments) says:

    Sean, tourists cost the NZ taxpayer so why should they not contribute GST.
    Sean, I ain’t no lefty but then I dislike privilege being created by tax laws that righties use to discriminate against others.

    Gazza
    Its a good or service supplied for use in NZ. Captured by the law but not by the tax-man.
    Unless you remove GST and replace it with something else that’s fairer why should it not be captured.
    Downloads are all in this category so that creates a privilege. for those that download from overseas versus a download supplied from within NZ.
    How does that encourage Kiwi’s to create applications for NZ when its cheaper to buy them over the net.
    And its not policing the net but credit cards and pay-pal, all of which is done by other counties now.
    Just like we should look at goggles withdrawals from NZ.

    Far from being a lefty

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  37. gazzmaniac (2,307 comments) says:

    Viking2 – I never called you a leftie.
    There are pretty good incentives to develop software for NZ – pretty much supply and demand. However, aside from accounting software (the biggest player of which, MYOB, is Australian anyway) there is little that needs to be specifically designed for NZ.
    It also must be noted that as any overseas software purchase will not be subject to GST, so a company purchasing it will not be able to claim that GST in their return. Effectively they will collect the GST from their customers. For non GST registered entities, it is no different to buying it overseas in a no sales tax administration and bringing it home. I don’t have a problem with either.
    If a local software company wants to take advantage of that loophole, all they have to do is sell to overseas customers.

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  38. OliverI (112 comments) says:

    I would recommend a fundamental rethink on the drivers of the taxation on properties and instead make income from rental properties a capital receipt rather than revenue. It’s a simple change that cuts through most of the red tape, but the implication of it are that people cannot offset expenses against this capital receipt, so are forced to make the properties profitable rather than using properties as a vehicle to lower personal taxation burdens.

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  39. Viking2 (11,467 comments) says:

    gazza; so its ok then if I go bring in my new truck from somewhere and use a credit card to pay for it. No GST to pay by your logic.
    Will it get through customs I wonder?
    NOOOOO!!!!
    So we have a privilege based on portability.

    Now it may also affect other tax jurisdictions who have GST. Aussie for example.
    So potential for large tax rorts everywhere.

    The point really is that no matter what is designed by pollies and taxmen there are loop holes.
    The only way to minimize them is to reduce the need to collect the tax in the first place. More user pays. Just works.

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  40. Redbaiter (13,197 comments) says:

    “I look forward to that whole tax bracket being scrapped, and the depreciation loophole being closed. And the greater equality of treatment that would result is one of the major reasons why this should be done.”

    Great. Another vote for poll tax.

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  41. Viking2 (11,467 comments) says:

    By definition income is revenue, not capital. Capital is wat gets invested.

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  42. Redbaiter (13,197 comments) says:

    “Fortunately it will never happen in this country thank god, as New Zealanders care to much about their fellow man.”

    That the extreme left (like you Jeff) are so totally against a poll tax is probably enough of a reason for many to start considering it. Since when have the left ever got one damn thing right ever??

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  43. Viking2 (11,467 comments) says:

    From Lindsay Mitchell.
    http://lindsaymitchell.blogspot.com/

    Spot on as usual.

    An AUT survey shows that;

    Feeling as though the Government is listening to them is one of the most important things to New Zealanders, but it is the area where the country scores the worst.

    The best remedy for this is not more democracy, more participation, more consulting, more select committees, more representatives, more commissions of enquiry, etc.

    It is LESS government. If government weren’t so pervasive in all aspects of our lives its non-responsiveness would be less of a problem.

    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10636424&pnum=2

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  44. OliverI (112 comments) says:

    Viking2 “By definition income is revenue, not capital. Capital is wat gets invested.”

    In regards to the tax system a “capital receipt” or income which is capital in nature is income received that is non-taxable. When you were using the term “capital” you were referring to “capital expenditure” which is non-deductable expenditure. The term works both ways though in day to day conversation we do not think of revenue that is capital in nature often so I see your confusion.

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  45. OliverI (112 comments) says:

    In basic terms I am advocating for the income people receive on non-commercial investment property should not be taxable.

    This means that all the associated costs have to be paid at the landlords expense out of that income received and cannot claim losses against their personal PAYE (or whatever) income. lowering the incentive to make huge losses on property for tax expedient arrangements.

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  46. gazzmaniac (2,307 comments) says:

    Viking2 –
    there is potential for rorts in any tax regieme. There always will be, and I agree that the best solution is to not need to collect as much to start with.
    That said, there needs to be some sort of taxation to be able to pay for defence, police etc., and I really don’t think that poll tax idea that other posters have mentioned is the right one. Besides which, I would gladly give up my right to vote if I didn’t have to pay tax, as too would many. I really don’t think it’ll work.
    GST is the best option IMHO – it’s reasonably difficult to avoid, fairly easy to administer from the government’s and business point of view, and there are relatively few loopholes compared to income and company taxes. It also means that people only pay tax that they can afford – if you can’t afford something you don’t buy it and thus don’t pay GST. There is also the handy effect of taxing people who borrow to buy shit, and doesn’t tax interest on savings, the opposite of the current situation.

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  47. Rob Salmond (246 comments) says:

    DPF: “They all inherited their top tax rates. Can you point to any of those leaders who raised the top rate by 6 percentage points?, let alone introduced it at such a relatively low level of income?”

    Your answer is correct, if incomplete. You should have said “They all inherited their top tax rates, and chose in their wisdom not to bring them under 39%.”

    Can I take it from your second comment that your standard for judging the “envy” of a government towards its highest income earners is not the rate of tax it charges, but rather the rate of change in that rate of tax, regardless of its level? So a government increasing its top tax rate from 30% to 31% is more “envious” under your standard than a government that keeps the top tax rate steady at 60%. If so, 1. WTF?!; 2. I disagree; and 3. good luck selling that one out and about. I look forward to your angry chants about second derivatives and such.

    Also if the tax package leaked to the SST is correct, it seems that the threshold for the top rate in NZ is heading lower. Lower! Given all the moaning you have done about how low the threshold for the top tax rate was under Labour, I bet you are pretty upset about that. Looking forward to you denouncing that policy move if it comes to pass.

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  48. expat (4,050 comments) says:

    Removing the tax and benefit loopholes for residential property investment is so obviously needed to deflate the ongoing property bubble in NZ. Cullen knew it needed to happen but didn’t have the balls.

    All the arguments about relative top tax rates around the world are obfuscation.

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  49. OliverI (112 comments) says:

    The raising in the top personal tax rate led to crumbling of the integrity of the tax system. Fundamentally Michael Cullen did not seem to take into account the fact that people would be incentivised to change the structure of their tax affairs given the opportunity. A simple yet effective illustration of this is figure 118 of the briefing of the incoming minister by the IRD (below), almost on the day of the hike of personal income taxes, there was a huge channelling of funds into trusts to get the more expedient tax rates.

    http://www.ird.govt.nz/aboutir/reports/briefing/briefing-2008/bim-08/bim-2008-policychallenges.html

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  50. nickb (3,687 comments) says:

    Very important reading on the question of the appropriate top tax rate. Especially for living brain donor socialists like Rob, and anyone else who thinks we can whack tax rates up and see the revenue roll in:

    http://en.wikipedia.org/wiki/Hauser%27s_Law

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  51. OliverI (112 comments) says:

    (Sorry figure 18)

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  52. nickb (3,687 comments) says:

    Also of interest:

    http://en.wikipedia.org/wiki/Tax_rates_around_the_world

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  53. Rob Salmond (246 comments) says:

    I agree with Expat about removing our current residential property loopholes. There, I said it. In fact, I’ve never been in favour of those kinds of loopholes. But removing those loopholes does not require us to slash the top rate, align it with the corporate rate, or anything like that. That is where looking at other countries’ experience and policy is very helpful. Why try to reinvent the wheel when you do not have to? Maybe they closed thee loopholes in another way…

    I think when Expat says: “All the arguments about relative top tax rates around the world are obfuscation,” he means: “All the arguments about relative top tax rates around the world are inconvenient for me.”

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  54. OliverI (112 comments) says:

    My recommendation of defining residential property income as a capital receipt will in fact remove every single loophole in the residential property tax system with that simple one line as all associated expenses are null and void.

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  55. gazzmaniac (2,307 comments) says:

    residential property income by definition isn’t capital, it’s income. Why should it be any different to any other investment?
    If I decided to rent out cars, should any money I make be considered capital? I didn’t think so.

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  56. OliverI (112 comments) says:

    Well, it is defined as revenue income at the moment you are correct, I am saying that if it were treated as capital income then all of the incentive to use property as a vehicle to rort the tax system is essentially eliminated.

    I would argue that property has always activly been used differentially to any other investment, ROI on property is sitting around (3-5%??) in itself it is not a lucrative investment to make. The reason people invest so much in property and push house prices so high is the number of tax incentives that can be gained not the cashflow, and if they claim it is for the capital gain, then that capital gain is assessable income.

    I suggest we should do all we can do disincentives investment in property, it is a useless investment in terms of providing any meaningful growth, and its over investment in recent years have pushed house prices higher than many people can afford.

    and Gazzmanic it depends if you are “in the business” of renting out cars ;)

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  57. Viking2 (11,467 comments) says:

    Well, for those that think property needs beating up there are plenty of houses for sale in the under 200k bracket. You just wouldn’t want to live there so how come you think there is a property boom. Its only in popular places. Move and then complain.
    Good houses for sale in Tokoroa, Rotorua. Nightcaps Murapapa and lots of other places.
    Give me back my rates and let me charge the tenants and then you can take away depreciation, but, don’t forget to do the same for every other business

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  58. gazzmaniac (2,307 comments) says:

    I know of a house in Westport someone could buy for under $140k. Outside is recently redecorated and refurbished, inside is tidy but 1970s decor.

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  59. chrisw76 (85 comments) says:

    Viking2 – what a load of rubbish, of course landlords include the cost of rates in their rents. What kind of idiot wouldn’t consider their costs before determining their price? Sure, you might have to call it something else and bear a time when rates go up and income doesn’t for a little while, but every landlord who actually manages their property does an annual review and increases rents if the market justifies.

    Cheers, Chris W.

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  60. Viking2 (11,467 comments) says:

    chrisw76; they are included in the expenses that are non recoverable. Why should a landlord pay someone elses living expenses. Water, rubbish collection, library expenses, sports ground use, boat ramp use, and a million other community amenities. The tenant shares and uses them so it reasonable that they should pay towards their cost.

    Apart from that why should a tenant have the right to vote for councilors who they encourage to spend up large at the expense of the landlord. If you have any right wing tendencies that alone should make you see the error of your ways. But I’ll bet you are another bleeding heart socialist. They all come here.

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  61. gazzmaniac (2,307 comments) says:

    You’re allowed to deduct rates as an expense, so it’s really a ban on telling the tenant that $40 per week of their rent is actually tax.

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  62. Viking2 (11,467 comments) says:

    Well just read up that rates in Tauranga are going up 36% (already budgeted) in the next 3 years.
    And thats after some big increases in the last 3.
    Why, because socialists refuse to restrain their social welfare spending in councils just as they do in Govt.
    why, because socialists get voted in by those that don’t have to front up the money.

    And yes gazz that is because the tenant doesn’t have to front up to the tax bill, his landlord does.
    Clarity is what is required.

    assuming a fair return would be about 7%, because we can get that elsewhere, then a 300k house, really a cheapie these days should bring in 300 x7% after expenses. That’s 21k. or $404 per week after rates and insurance and repairs and depreciation. I guess around $430-440 a week.
    average rent for a 3 brm is about 310-330. Large gap there and we still have to pay the living costs for the tenant.
    Take away our depreciation, ring fence them and raise the interest rates a bit and which govt Dept is going to house everyone? HNZ. They can’t even buy a F… … computer without spending a fortune. But you, the tax payer doesn’t seem to mind that but you will attack someone who is growing their wealth by hard work and saving and subsidizing the living conditions of their tenant.

    Saving in the only asset that maintains its purchasing power over the longterm. And that’s what pisses you all off. You simply don’t have the wisdom to get wealthy regardless of any tax effects. You are just winging socialists who hate to see others do better.

    And just to clear things up I have never had a high income to shelter, I have been involved for about 15 years in rental housing and do have a few. Reckon I know a bit about the subject.
    Will be right pissed if English screws me after being screwed by the last National Govt. in the form of Mouth and Trousers Richardson and Jenny (I’m with China) Shipley.
    Neither have made a decent fist of anything before nor since. As bad as Clark. All on the Parliamentary benefit as well.

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  63. Redbaiter (13,197 comments) says:

    ” RB. A poll tax would be the ultimate but it would also be difficult to collect. ”

    For fuck’s sake..! You’re kidding me right? Its easy to collect now??

    ..and why the hell should it be easy anyway? We need a system that restrains these government arseholes, and one way that can be done is by making every man and woman aware of how much government takes from the economy.

    You pay your rates don’t you? What’s “difficult” about that?

    A poll tax should be paid in exactly the same way, A cheque or cash payment for an agreed amount from every NZer above an agreed age every year. Just like rates. (but not of course based on property valuation, another redistributive socialist scam).

    The only way to make tax fair, and the only way to simultaneously constrain the growth of government, and a much cheaper and easier method overall. It is the only thing that will save NZ and the west. The only thing that will break us out of the socialist death spiral we’re in now.

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