Joyce v Cunliffe’s numbers

July 18th, 2011 at 11:00 am by David Farrar

Labour have said that over 15 years their package will reduce debt by $8b. Steven Joyce says it will increase debt by $15b. Let’s have a look at where their numbers differ.

First it is worth recalling that what is undisputed is that Labour’s package will result in more debt for at least the next seven years. It is only if Labour win this election, the 2014 election and 2017 election that in their third term would their tax switch start to reduce debt – by their own calculations.

By Steven Joyce’s calculations, it will never reduce debt. At a time when debt is growing massively, Labour is actually proposing to borrow for tax cuts – they very thing they have accused National of in the past.

Now I’m going to go through the differences line by line. has also blogged on some of the differences. Keith, like me, is a former parliamentary staffer for Labour (National for me of course) so we both tend to have a more favourable disposition towards numbers from our own side. But that doesn’t mean one can’t also look at the quality of the argument.

– The $1.6b difference is not hugely significant, both Keith and I agree. This is for revenue over 13 years, so the difference is around $100m a year. Joyce uses a Treasury model developed in 2011, and Cunliffe uses BERL. Joyce makes the point though (which has not been covered much) that getting a in place by April 2013 would be nigh impossible considering the huge number of issues being left to the expert panel. You need time to appoint panel, have the panel do its work, then draft a bill up, and then go through select committee process.

New top tax rate – Joyce has this coming in at $934m less over 13 years. Not a big difference per annum. I would tend towards the lower figure because I think it is inevitable that a top personal tax rate of 39% and a company tax rate of 28% will see massive (legal) avoidance. We already know half the top 100 earners don’t pay the top rate. This policy will probably see it drop even lower.

Loss ring-fencing. The TWG said loss ring-fencing will lead to behavioural changes, so Labour’s policy will only bring in half of what Labour says. Keith Ng basically agrees, so little dispute there.

Anti-avoidance. Labour have just invented a figure of $300m a year from greater anti-avoidance work. Now this is pie in the sky. If Labour announced actual law changes to reduce avoidance, then maybe you can estimate revenue changes. But this is the equivalent of “I hope it happens”. Keith Ng is right that it is probably not realistic to say Labour will not be able to get any extra revenue at all, but when you consider most experts are saying their tax package will make the tax system more complicated, I think avoidance will increase not decrease. In the absence of any specifics around anti-avoidance measures, I think you go with zero.

Agriculture ETS. this is basically an argument about what the price of a carbon credit will be. Cunliffe uses $50 and Joyce $25. Ng backs Cunliffe on the basis that the PCE has said they estimate the price will be $50 by 2030 if there is little international action on climate change and $100 if there is a moderate commitment. Australia’s ETS is priced at NZ$30.

However against that the current international price is 11 euros, which is NZ19 only. And bear in mind this is for the whole period 2013 – 2025. Let’s say the PCE is right and in 2030 the price is $50. Then if you assume linear price increases, maybe an average price is $35 for the period of the forecasts. So around halfway between what Joyce and Cunliffe say. Personally trying to predict ETS revenues more than a few years out is very challenging as it all depends on if a post-Kyoto agreement can be reached.

The first $5,000 tax free zone has a $2.2b difference over 13 years. Keith says:

Everyone earning over $5000/year would get the benefit of the whole tax free threshold. That’s pretty much everyone in the workforce. So if everyone already gets something, how would more people get it?

The cost of a tax-threshold only grows when new people enter the workforce.

So unless Joyce thinks he can create 3 million jobs (and find 3 million workers to fill them) in the next decade, this is a patently stupid and ridiculous result. Common sense would tell you that it is impossible.

This one goes firmly in Labour’s favour.

But Keith misses a key point. It is one I have blogged on many times, but gets so little media attention. Labour’s tax free zone is not just for people in the workforce. They have pledged it will also apply to everyone on benefits, even though benefits are calculated on an after tax basis.

Labour are actually promising to increase all benefits by $10 a week – the first ever increase (beyond inflation) for over 20 years. Tax cuts have never applied to benefits in the past (as they are calculated on an after tax basis). Cullen’s 2008 tax cuts did not. But Labour is saying they will pay people on the dole more money for not working.

Also as superannuation is calculated with a floor linked to the after tax average wage, their tax free threshold will increase the cost of superannuation.

So Keith is wrong when he says the tax-free threshold will only increase in cost when new people enter the workforce. It will increase in cost whenever we get new workers, new beneficiaries or new pensioners.

Now having said all that, National’s numbers do still look a bit high with the cost increasing approx $80 million a year, which suggest an extra 160,000 people per year working (as tax free zone is $500 of foregone revenue), on benefits or retired. So while Keith gets some stuff wrong, National’s numbers may be too high.

On GST there is no dispute, and for R&D tax credits Keith says National’s figures look more robust.

Then finally we have the biggie – finance costs, or the extra interest on the extra borrowing. There can be no debate that one should calculate finance costs, unless Labour has convinced the People’s Republic of China to loan us money at 0% interest. This is an extra $7.5 b of costs. Even if you take Labour’s numbers for some of the items, you will still have billions in finance costs.

Using Cunliffe’s numbers Labour is borrowing for at least seven years. If you go to Keith Ng’s numbers then I’d say (Keith didn’t do formally calculate this) that the borrowing is for at least a decade, and if you think Joyce’s numbers are more realistic (and for the most part I think they are) then Labour’s package is never fiscally positive.

But the up to $15b of extra debt is just the beginning. You see Labour done a big lie, and said it is a choice of asset sales or their tax package. But they have not calculated for any increased borrowing through no sales. If you add on the extra $7b they will need to borrow, then the borrowing figure climbs to up to $22b. Of course there will be over the long term less income from dividends.

But even putting aside the asset sales issue, the big big issue is spending. You see Labour’s debt track is already up to $15b higher – before they even fund a single spending promise. it is impossible to think that Labour is going to campaign on spending no more than National. Labour were increasing spending at $2b a year and National reduced this growth to $1.1b, then $0.8b and finally zero. Each time, to protests from Labour. Let’s say Labour promises an extra $1b a year of spending (they have implicitly already promised many billions through their opposition to spending reductions).

The cumulative debt from an extra $1b/year of spending is:

  • Year 1 – $1b
  • Year 2 – $3b
  • Year 3 – $6b
  • Year 4 – $10b
  • Year 5 – $15b
  • Year 6 – $21b

Basically Labour are going to increase debt with their tax package, increase debt with their spending, and increase debt through not doing partial floats of SOEs.

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54 Responses to “Joyce v Cunliffe’s numbers”

  1. Whaleoil (767 comments) says:

    Too much detail David, the public isn’t interested in detail and you just look boring talking about it

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

    David, they’re not asset sales. (The term ‘asset sales’ is a creation of the Labour Party’s propaganda department.)
    They are ‘asset renewals’ and the sooner you stop giving Labour a free pass by using their terminology, the better..

    The replacement of old worn out assets with new assets of greater value. It’s the same reason we prune our roses each year. If you hang on to all the old wood, pretty soon you get no flowers.

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  3. Inventory2 (10,342 comments) says:

    Agree wholeheartedly WO; it can all be summed up in one succinct sentence

    Labour is going to be borrowing to pay for tax cuts

    Oddly enough, I’ve heard that line before; Labour has harangued the government since before the last election about doing just that. Perhaps that’s the “detail” that Trevor doesn’t think the public is interested in :-)

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  4. pacman (51 comments) says:

    Where are the extra taxpayers coming from for the tax free $5,000? I have four kids that I would pay $100 a week tax free to clean their rooms and be better off.

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  5. Auberon (873 comments) says:

    That doesn’t read to me like the apology Trevor was demanding of you David.

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  6. CJPhoto (221 comments) says:

    I think Pacman is onto something. with the different in marginal rates of 39%, business people will be paying previously unemployeed family members to do teh cleaning, admin etc.

    Then Labour will crack down on this “avoiadance” which is where their $300m pa comes from. Stopping avoidance that they created.

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  7. campit (467 comments) says:

    Has Steven Joyce suddenly become Finance Minister?

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  8. davidp (3,581 comments) says:

    Raising an extra $5billion through the agriculture ETS is going to make NZ produced food more expensive. I thought Labour were in favour of cheaper fresh food?

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  9. Jimbob (641 comments) says:

    Money from the ETS is like a monving target. The cost of a tonne of carbon trading in the USA is a dime a tonne. I think that is a fair price.

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  10. Roflcopter (463 comments) says:

    It’s ok, Labour know they can always rape and pillage ACC again for any shortfall.

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  11. Grizz (605 comments) says:

    Let me see if I have got this right. Labour wants to borrow more in order to bribe us so we can give them more of our own money. I don’t think they thought this through.

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  12. ross (1,437 comments) says:

    > It is only if Labour win this election, the 2014 election and 2017 election…

    Labour only needs to win the next election. That’s when a capital gains tax will be introduced. Labour doesn’t propose to introduce it 3 times.

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  13. side show bob (3,660 comments) says:

    Thieving diseased socialist bastards. Their motto, government debt free peasants on the bones of their arse. They are scum of the highest order.

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  14. ross (1,437 comments) says:

    > Has Steven Joyce suddenly become Finance Minister?

    That’s a fair question. I assume that Bill English is feeling aggrieved that Joyce has put one over him. Maybe Bill’s too busy deciding what assets he’s going to be selling.

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  15. seanmaitland (500 comments) says:

    Ok, so I just went and read Keith Ng’s analysis and its freakin’ terrible – a 4th Form economics student could’ve picked it full of holes.

    What a douche bag…..

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  16. hj (7,023 comments) says:

    side show bob (3,324) Says:
    July 18th, 2011 at 1:39 pm

    Thieving diseased socialist bastards. Their motto, government debt free peasants on the bones of their arse. They are scum of the highest order.
    ……..


    Tonight, a pumped de Roos tells his audience that he wants people to invest in property and write to him 12 months down the track and tell him they’ve “made one million or three million, or you’ve got 16 properties, or we’re taking six months off because our cash flow now exceeds our outflow!” He says, “I don’t know any other activity where the rewards are so huge. If you want to invest a million dollars in the sharemarket, you need a million dollars. If you want to invest a million in real estate, you only need $100,000.”
    You can buy one property, get it revalued, use the equity to buy another property and then buy another and another. “And you do it all with OPM. Other people’s money. OPM. It’s like being high on drugs!” What’s more, the wonder of depreciation claims on the building and contents means “the government subsidises your investment! It’s delightful!”

    http://www.listener.co.nz/uncategorized/house-of-the-rising-sum/

    … and along comes first home owner…. happy the government has looked after it’s mates in the property industry.

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  17. ross (1,437 comments) says:

    You’ve mentioned that Labour’s figures come from BERL, an independent and reputable group of economists. Who helped Joyce put his figures together – presumably a similarly independent and reputable outfit?

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  18. Pete George (23,567 comments) says:

    > Has Steven Joyce suddenly become Finance Minister?

    He is still Associate Minister of Finance. Seems relevant to this.

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  19. Nick K (1,244 comments) says:

    Basically Labour are going to increase debt with their tax package, increase debt with their spending, and increase debt through not doing partial floats of SOEs.

    #ownourfuture – under Labour our future will be debt; but at least we will all own it.

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  20. backster (2,172 comments) says:

    Then Labour will need to find a couple of billion a year to restore contributions to the Cullen Fund, more to double Kiwisaver subsidies.
    Who will be on the expert panel, maybe David Cagill (on every slush fund job) Michael Cullen (Finance expert) Geoffrey PALMER to add all the clauses that make it unworkable. Gareth MORGAN and enthusiastic expert who has made his dosh and wants to stop anyone aspiring to emulate him. He actually quoted Karl MARX in backing this scheme on Q&A.

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  21. KiwiGreg (3,255 comments) says:

    …and all this so that the state can continue to own commercial enterprises like power generators, ISPs, transport companies and banks; because after all, we know the state is a great owner of commercial enterprises. That’s why North Korea and Cuba are so wealthy.

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  22. Keith Ng (22 comments) says:

    “So Keith is wrong when he says the tax-free threshold will only increase in cost when new people enter the workforce. It will increase in cost whenever we get new workers, new beneficiaries or new pensioners.”

    I used the wrong word, but the right numbers. Labour’s costing uses IRD data. That data captures all taxpayers – including pensioners and beneficiaries. So all the stuff you said, that’s already in the costings.

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  23. Other_Andy (2,676 comments) says:

    @ross
    “Maybe Bill’s too busy deciding what assets he’s going to be selling.”

    What assett sales?
    I know that Labour deliberately portraits the ‘partial privatisation’ (retaining 51 per cent) of state assets as asset sales but can you please not repeat the deliberately misleading Labour propaganda.
    Thanks!

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  24. mikenmild (11,247 comments) says:

    This might be hair splitting, but is selling half of an asset not an ‘asset sale’?

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  25. Keith Ng (22 comments) says:

    “If you add on the extra $7b they will need to borrow…”

    If you want to count the proceeds from asset sales in the Statement of Performance (it usually goes in the Statement of Position, which is why it’s not here), you’d also need to count the loss of revenue from selling it.

    Forecasted SOE & CE revenue in the period: $15.4b.

    How much of that revenue do you expect us to lose, David? You can’t count the money you get from selling the asset but forget the loss of revenue from selling that asset.

    [DPF: I agree, and I made that point. I wanted to point out though that Labour's claim that their tax package is a substitute for asset sales is crap]

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  26. Other_Andy (2,676 comments) says:

    mikenmild
    “This might be hair splitting, but is selling half of an asset not an ‘asset sale’?”

    No it isn’t.
    I sounds good to scare the witless Labour voters but it is misleading (Then again, most are easily mislead).
    The majority shareholder (At 51%, the The New Zealand State) is the owner.

    If I raise money by enlarging my mortgage (Below 50% of the value), am I selling my house?

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  27. Other_Andy (2,676 comments) says:

    @Keith Ng

    “Forecasted SOE & CE revenue in the period: $15.4b.”

    Is that clean revenue, after all costs are deducted?

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  28. questlove (242 comments) says:

    You’ve mentioned that Labour’s figures come from BERL, an independent and reputable group of economists. Who helped Joyce put his figures together – presumably a similarly independent and reputable outfit?

    Yep the spin isn’t too subtle:

    Joyce’s numbers (what a National staffer came up with on a public spread sheet tool) vs.
    Cunliffe’s numbers (what a network of consultants and specialists from a reputable privately-owned company came up with)

    Apples vs. apples honest!!

    [DPF: No, no. no. BERL only did the numbers for the CGT. All other numbers are Labour Party generated as far as I can tell]

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  29. mikenmild (11,247 comments) says:

    Other_Andy

    No, borrowing more money agasint your house does not make you less of an owner. But the government is notptoposing to borrow against its 100% ownership of SOEs, it will sell a large share of the ownership. That’s an asset sale – ie, the government no longer owns the portion it has sold. Partial asset sale; partial privatisation – it’s the same thing.

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  30. backster (2,172 comments) says:

    Questlove…Not Quite JOYCE instructed Treasury to analyse the numbers.

    Keith Ng…Only half the dividend income is foregone by the state, the rest will be in dividends to NZ shareholder who will need to include it in their tax returns.

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  31. Elaycee (4,392 comments) says:

    “I would tend towards the lower figure because I think it is inevitable that a top personal tax rate of 39% and a company tax rate of 28% will see massive (legal) avoidance.”

    Exactly.

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  32. ross (1,437 comments) says:

    Backster sad “JOYCE instructed Treasury to analyse the numbers.”

    He did? When and who did he ask?

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  33. Other_Andy (2,676 comments) says:

    @mikenmild
    “PARTIAL asset sale; PARTIAL privatisation – it’s the same thing.”
    Correct, in financial terms yes.
    But asset sale sounds scarier doesn’t it?
    Thanks for using the all important adjective…PARTIAL.

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  34. questlove (242 comments) says:

    Questlove…Not Quite JOYCE instructed Treasury to analyse the numbers.

    That’s not what DPF said yesterday:

    Steven Joyce has put Labour’s numbers through the Treasury calculator (found at http://www.treasury.govt.nz/government/fiscalstrategy/model) and found that it is far worse than even Labour were revealing.

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  35. Pete George (23,567 comments) says:

    Don’t bank on a partial vasectomy.

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  36. mikenmild (11,247 comments) says:

    It might be a little off topic, but why are we talking about partial asset sales anyway? Shouldn’t there be a logic one way or another – public ownership or private ownership?

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  37. Other_Andy (2,676 comments) says:

    @mikenmild
    “Shouldn’t there be a logic one way or another – public ownership or private ownership?”
    Why?
    What about Air New Zealand?
    Doesn’t that work?

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  38. mikenmild (11,247 comments) says:

    Other_Andy

    If there is a gain from selling 49% of something, should we not look at selling 100% – repay more debt or invest in other things the government chooses?

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  39. dime (9,972 comments) says:

    mike – yes. but moron “kiwis” would go apeshit. this is the best of both worlds.

    it gives the govt some money. the govt retains control. the govt continues to get a dividend. it creates another investment opportunity in the country. its win win win

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  40. Other_Andy (2,676 comments) says:

    @mikenmild
    “If there is a gain from selling 49% of something, should we not look at selling 100% – repay more debt or invest in other things the government chooses?”
    I am not a complete free market proponent.
    It makes sense to keep strategic assets (Such as an airline, electricity generation and distribution, water) under your control (And you are in control as long as you own more than 50%).
    I am also against selling land into foreign ownership, land being the most strategic asset of all.
    All other state assets…sell them to pay off debt.
    Buy strategic asset shares back when needed and when you have a surplus.

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  41. Keith Ng (22 comments) says:

    [DPF: I agree, and I made that point. I wanted to point out though that Labour's claim that their tax package is a substitute for asset sales is crap]

    Tax changes and asset sales are fundamentally different. The tax package has a net positive OBEGAL impact (which you are, of course, free to challenge). But a) asset sales result in no change in net position (you’re converting asset into cash, then using that cash to buy assets again), only gross debt changes and b) asset sales result in a decrease in operating balance, because of the loss of revenue (because you’re selling an income generating asset, and buying non-income-generating assets).

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  42. Keith Ng (22 comments) says:

    “Is that clean revenue, after all costs are deducted?”

    Yes. It’s net investment income (i.e. dividends) for the government from SOEs and CEs to the government.

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  43. Keith Ng (22 comments) says:

    “Keith Ng…Only half the dividend income is foregone by the state, the rest will be in dividends to NZ shareholder who will need to include it in their tax returns.”

    a) Unless those shareholders sell it to overseas investors.
    b) Where do NZers get the cash to buy these shares? However it is that they get the money, they are foregoing the income that money is currently earning. (Or they’re borrowing and paying interest on it.)

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  44. Pete George (23,567 comments) says:

    (because you’re selling an income generating asset, and buying non-income-generating assets)

    That’s presuming the asset you’re buying is non-income generating.
    Infrastructure like bridges and roads could generate income through tolls.

    If you retained the asset and borrowed to finance something like a road you have to pay interest.

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  45. Simon Arnold (109 comments) says:

    … because you’re selling an income generating asset, and buying non-income-generating assets …

    What you are doing is comparing two ways to finance the purchase of an asset assuming it is non-revenue earning. The two proposals before us are (1) selling the future income stream from commercial assets or (2) raising future taxes to fund.

    Put aside the argument about whether the former is growth enhancing, the latter faces the deadweight cost of taxation – perhaps making it a 20% more expensive way to buy the asset from an economic cost point of view.

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

    iPredict should run a pool on the total cost of promises (measued by total accumulated debt) made by Labour up till Nov 26. How high will it go? $30billion? $50 billion? ….

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  47. Keith Ng (22 comments) says:

    “That’s presuming the asset you’re buying is non-income generating.
    Infrastructure like bridges and roads could generate income through tolls.”

    If roads are as profitable as power companies, why doesn’t the private sector build roads on their own?

    Do you expect the hospitals, schools, prisons to pay their own way as well?

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  48. Pete George (23,567 comments) says:

    “Do you expect the hospitals, schools, prisons to pay their own way as well?”

    No, that’s part of core services. I don’t expect parliament to be self funding either.
    I don’t think that’s what the extra capital is required for.

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  49. Keith Ng (22 comments) says:

    “Put aside the argument about whether the former is growth enhancing, the latter faces the deadweight cost of taxation – perhaps making it a 20% more expensive way to buy the asset from an economic cost point of view.”

    Fair enough with the top tax rate, but then you have the tax cuts at the bottom end as well. If you want to use a simple 20% deadweight loss figure, it’ll have to apply to both.

    With CGT, you’re going to get substitution with other forms of income, so it’s pretty difficult to argue you’ll get the full deadweight loss. You’ll also have to consider the status quo, where the gap in the tax rate (between income and CG) creates significant distortions – which is why CGT is needed in the first place.

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  50. Keith Ng (22 comments) says:

    “I don’t think that’s what the extra capital is required for.”

    Yes it is: http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10702232

    (I can’t be bothered finding the original speech, sorry.)

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  51. Falafulu Fisi (2,179 comments) says:

    Keith Ng said…
    If roads are as profitable as power companies, why doesn’t the private sector build roads on their own?

    What an idiotic question. The reason is because the Govt won’t allow it. They want to keep a monopoly on all the roads in the country. If the Govt privatizes our roads, then there will be competing enterprises/owners who will step in and build them. But you’re blind to the obvious, since you’re a state-worshiper.

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  52. Pete George (23,567 comments) says:

    Thanks Keith – I guess it doesn’t make much difference, it’s all got to be funded somehow.

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  53. Simon Arnold (109 comments) says:

    On the deadweight costs my original point was simply that selling assets is a better way to fund new assets than raising taxes because of these costs (all other things being equal). This is true regardless of how the taxes are raised – although some ways are cheaper than others.

    You raise the issue of whether the CGT proposals raise or lower deadweight costs. In as much as the proposed tax regime is not uniform (has significant exemptions) and lifts marginal rates on both GC (not indexed to inflation) and income (while the tax-free zone doesn’t lower them) I’d say the marginal deadweight cost has been significantly increased.

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  54. OECD rank 22 kiwi (2,752 comments) says:

    Wouldn’t Financing costs be zero when a future New Zealand government defaults on all New Zealand government debt?

    Of course public spending would drop as well, that’s what happens when you don’t pay teachers, doctors and police for 12 months.

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