Kiwiblog

I’ve said that in principle I support a CGT, if it is part of making NZ a broad base low rate tax system. Former ACT Leader Rodney Hide makes the argument against a CGT, as an effective double tax on business. He writes at interest.co.nz:

A business generates $100 a year. The going discount rate is 10 percent. The value of the business is $1,000. That’s if there’s no tax.

Introduce a tax of, say, 30 percent, and the business now yields only $70 a year. The business is worth only $700. The tax liability is capitalised into the value of the business.

Now let’s say I buy the business and fix it up. I double its income to $200. In the absence of any tax the business is now worth $2,000 and I can sell the business and pocket a $1,000 capital gain. However, if there’s an income tax of 30 percent the increase in the business’s value is from $700 to $1,400. My capital gain is now only $700.

My gain is not tax free even though I appear to pay no tax on my gain.

That’s because the capital value reflects the extra tax the extra income the business generates.

A capital gains tax of 30 percent reduces my gain from $700 to $490. I am doubly taxed.

Capital gains aren’t tax free and a capital gains tax doubly tax savings and investment.

Put like that, it does appear to be a double tax. Any arguments against the logic?

Capital gains tax is brutally unfair

There are plenty of ways a capital gains tax is unfair. Imagine a young widow with children whose husband poured his heart and soul into his business. Following his death the young widow has no choice but to sell the business. She has no income and no other assets.

The business was a start up. It generates $200 a year. After tax, that’s $140. The business sells for $1,400 upon which capital gains tax has to be paid at say 30 percent.

She nets $980. In the absence of any tax she would net $2,000.

The widow is taxed at 51 percent. That’s brutal.

A good case against by Rodney

Labour List MP Sue Moroney has been tweeting excitedly about the crowd who attended a public meeting today with Hon Phil Goff:

Labour Tax Costs

My column in the NZ Herald focuses on the numbers in Labour’s tax policies. They stuck up masses of data on their site, but the one document they did not stick up was the one above, which shows that it will take seven years for Labour’s tax package to be fiscally neutral. They’d have to win a third term for it to start to bring in more income than they forego. And they also project $300m a year less tax avoidance by waving a wand. In reality an 11c difference between the top personal tax rate and the company tax rate will lead to much greater levels of tax avoidance.

Lockwood refuses to allow Harawira to swear an oath which is illegal under the Constitution Act 1986. It was nothing to do with language – he is able to swear the oath in te reo. But he wanted to use words not allowed. he wanted to use the oath as a speech where he talks about reducing inequalities etc. That is what we have parliamentary speeches for.

Anyway, because Lockwood upheld the law, Idiot/Savant at No Right Turn has compared him to a member of the Ku Klux Klan.

That’s a pretty disgusting smear. It’s the extremism in politics that John Ansell was referring to. I didn’t agree with John’s ad, but I do agree you should be able to have a view that the Maori seats should be abolished, and not be called a racist.

Likewise you should be able to insist someone follows the official oath, without being compared to the KKK.

Thanks to John Stringer for this crossword. It is intended to be a weekly feature.

Aah, no broadband at home at the moment. That’s slowing things down posts.

Today’s shot is “The Itch”, our very own native fur seal.

Click for larger, higher res image

Going to be a crazy-busy day here…the espressos are flowing freely. Sigh.

Also, just a gentle plug to read my sciblogs post this week too – it covers some of the political economy of the parlous state of conservation in NZ.

Here are details to hand. On radio shortly so won’t have time to check full details of timing, and whether the numbers add up.

• Cullen’s envy tax of 39% put back on, but starting at $150,000
• The first $5,000 tax free (which includes increasing benefits by $10 a week)
• A CGT of 15%
• Boats will be exempt from the CGT.
• A farm house will be exempt, but not the farm itself
• Jewellery is exempt. So if you invest in a start up company which makes money you pay CGT, but if you buy jewellery which appreciates you do not
• If you are over 55 and have owned a small business for 15+ years then first $250,000 capital gain is tax free.
• No GST on fresh fruit and vegetables

I’d say tax accountants will be celebrating the extra work, if this came to pass

Congratulations to the team of debaters from Victoria University of Wellington who won the Australasian Intervarsity Debating Champs in Korea last night, the world’s second largest debating tournament with over 115 teams.

It is the second year in a row that Victoria has won the tournament, and the fifth time since 1975. The tournament features teams from all over Australia and Asia, including top universities like Sydney and Melbourne.

Victoria will defend the title as hosts next year in Wellington. I hope to get along and see some debates! The 2006 tournament in Wellington was excellent.

The winning team members are Seb Templeton, Richard D’Ath and Udayan Mukherjee. Well done on the win.

Tracy Watkins at Stuff reports:

There were dramatic scenes in Parliament today as Speaker Lockwood Smith refused to swear in new Mana Party leader Hone Harawira after he would not deliver his affirmation as dictated by law.

The former Maori Party MP was to be sworn in as MP for Te Tai Tokerau.

As Harawira left the debating chamber, supporters sung from the public galleries in defiance of Smith’s ruling for them to cease.

Harawira had earlier sought to speak in Maori after approaching the Speaker to take the oath.

Smith interrupted him and informed him he must leave the Chamber and “return on a sitting day when he is determined to make the affirmation according to the law of this land”.

There were calls of “shame” and “no respect” as Harawira left.

The Speaker informed MPs that he had advised Harawira prior to his affirmation that the law of New Zealand required the affirmation “to be [delivered] in a certain way”.

The Speaker does not have discretion on this issue. The oath is not a requirement of Standing Orders or the Speaker. It is a legislated requirement of the Constitution Act 1986. S11(1) states:

A member of Parliament shall not be permitted to sit or vote in the House of Representatives until that member has taken the Oath of Allegiance in the form prescribed in section 17 of the Oaths and Declarations Act 1957

And S17 says:

One can affirm instead of swear, so cut out the God reference. You can also say it in te reo. But what you can not do is change the wording as it seems Hone tried to do.

The Justice & Electoral Select Committee has reported back the Criminal Procedure Bill, and I am pleased that the submissions around the Internet and name suppression have been listened to, and agreed to.

The three main changes for bloggers and other content hosts are:

• S214 changed so non-traditional media have standing to appeal or amend a suppression order
• S215 gains an exemption from liability for content hosts who do not themselves break a suppression order
• The entire s216 is deleted which set up liability for content hosts unless strict criteria were met

Basically what they have done is that instead of creating a new offence of breaching a suppression order online, they have merely said liability “does not apply to a person who hosts material on websites or other electronic retrieval systems that can be accessed by a user unless the specific information has been placed or entered on the site or system by that person”.

So in terms of these sections, I’m pretty happy with the changes.

Kirsty Johnston at Stuff reports:

More than 20,000 offers of state housing were turned down by “in need” candidates on waiting lists in the past year.

Advocates say the figures show the state house stock is undesirable and in poor repair, but the Government says they raise questions about whether some people are applying without real need.

The figures, provided by Housing New Zealand, show 55,116 offers of housing were made to 31,838 individual applicants in the year to March.

Of those, 20,541 were declined, by 14,182 applicants.

So half the applicants declined. That is way more than I expected it to be.

Housing Minister Phil Heatley said most people who came to Housing NZ were genuinely in need of a home, and a lot of the declines were genuine and understandable.

“We want to match them as much as possible with houses that are suitable for their families,” he said. “But if they decline housing three times it raises the question about whether their need is significant.

The question I have is how many applicants have turned down three or more houses?

There was an interesting exchange in Parliament yesterday:

Michael Woodhouse: Which groups now pay most of the tax collected by the Government?

Hon BILL ENGLISH: Our tax and transfer system is highly redistributive, and the number of people paying income tax is surprisingly small. The lowest-income 43 percent of households currently receive more in income support than they pay in income tax. The 1.3 million households with incomes under $110,000 a year collectively pay no net tax—that is, their total income support payments match their combined income tax. The top 10 percent of households contribute over 70 percent of income tax, net of transfers—over 70 percent of income tax, net of transfers. This system is highly redistributive and we believe it is fair.

I asked the Minister’s office for the data, that answer was based on, and the table below sets it out.

This data deserves a wider audience. As far as I know it is the first comprehensive compilation of net tax, by income brackets.

The gross transfers includes Working for families, Accom Supplement, other benefits etc. It does not include NZ Super though. I suspect if you included that it would be even more dramatic.

So what does it tell us?

It tells us that overall households with income of $50,000 or below pay no net tax at all. Not only do they pay no net tax, they receive around $4.40 in benefits for every $1 of tax they pay. So they pay $1.7b in tax and receive $7.7b in welfare (and this excludes superannuation).

So that is 44% of households are net tax recipients.  And Labour’s tax policy is geared towards having them become larger recipients. Yes Labour’s tax policy announced in January even includes an increase in the level of benefit payments for all beneficiaries.

Now let us look at the households with income of over $150,000. We don’t know if this is one person earning say $150,000 or two people earning say $80,000 each but we do know it includes be definition everyone earning at least $150,000. Household income is used as welfare payments are normally made on a household basis.

So 10% of households have an income of $150,000 or greater. And those 10% fund 71% of net taxation. And these are the households that Labour are saying are not doing their fair share and must pay more.

If we go slightly further down to households with an income of $120,000 or greater – which is 17% of households. Well those 17% of households are paying 97% of net taxation.

Yet Labour seems to think this is not enough. Their tax policy (I don’t mean CGT, but their income tax policy) is that 97% is not enough. Those rich pricks have to be screwed over until they are paying over 100% of net taxation.

So the next time someone talks to you about fairness and tax, use the table above. 10% of households pay 71% of net (income) taxation and 17% pay 97% of net (income) taxation.

At Stuff I blog:

Politicians and voters often disagree on whether the government should be involved in certain activities, but there is a near universal consensus that when disaster strikes, it is the government that has to step up to the plate and ensure things are put back together.

In political terms, a disaster can be both an opportunity and a threat. I don’t mean to demean the suffering of those affected by using these terms. But it is a reality that a government which botches the response to a disaster can feel the public wrath. President George W Bush and Hurricane Katrina is a recent example.

On the other hand, if a government does manage the response well, it can benefit from having done the right thing.

On Monday, 3 News released details of polling on how New Zealanders viewed this Government’s response to the earthquakes.

The results of that poll, and what I think it means is detailed at Stuff.

I interview myself on Capital Gains Tax.

Can a capital gains tax be good for the economy?

Yes. Most tax experts say that the best tax system is one with a broad base and low rates. A Capital Gains Tax which broadens the base and leads to lower rates can make the economy more productive.

Is a CGT fairer?

To some degree, yes. In some cases not taxing capital gains is unfair. However it can also be seen to be unfair taxing such gains, when they are incidental – such as selling the family bach when the kids are older.

Aren’t capital gains already taxed?

Only when the person making them is deemed to be investing for the purpose of making the capital gain. It is then treated as income for them.

So how do you judge if a capital gain was incidential or deliberate?

With difficulty and a degree of subjectivity. This is one of the advantages of a CGT.

Would it be better to just enforce the current law more rigorously, than have a catch all CGT?

Reasonable people can agree to disagree on this. National has allocated $100 million to target tax avoidance, including those who should be paying income tax on their capital gains. This might be more effective than a comprehensive CGT. Tax experts disagree on this one.

Could some people pay less with a CGT?

In theory yes. Labour’s proposed CGT is thought at be a 15% rate. Most of those who currently have their capital gains taxed will pay 33% tax on their gains. Presumably Labour will want those people to still pay income tax on their gains, not CGT. But I foresee good times for tax accountants if a CGT is introduced.

Is a CGT necessary to stop over-investment in residential property?

Not really. The Government’s 2010 budget changes have made residential property investment significantly less attractive anyway, by stopping depreciation tax write-offs and other changes. Plus those countries with a CGT got hit by the property bubble just as much as NZ.

So should a CGT target residential property investors only?

No. The most economically efficient CGT should be as broad as possible. It should include capital gains on shares, futures markets (even iPredict), business sales, farm sales and even the holiday bach. One could even argue a case for including the family home, even though politically that is not viable.

So farmers might have to pay CGT when they sell their farm?

Unless exempted, yes. And this could disrupt the way many farmers structure their affairs. Outside the lucrative dairy sector, many farmers have a relatively modest income, especially as a return on the hours they work. Many of their profits are ploughed back into the farm, meaning there is relatively little ability to save for retirement.

The sale of the farm as they get older, is often how they generate their retirement income. A CGT on any increase in value over the last 20 years could significantly affect them.

How can a CGT be good for the economy if it is an extra tax? I thought higher taxes were generally bad for the economy.

Great question. This is key. The best tax system is broad base and low rate. If the extra income from a CGT is used to lower income tax rates across the board, then that can improve the economy, as we are reducing disincentives to work and earn.

If the CGT is used to fund extra spending, and hence increase the overall tax burden, then it is not a good thing in my opinion.

So will Labour be announcing lower income tax rates?

Sadly it seems not. To the contrary they seem determined to reimpose an envy tax on higher income earners, as well as a CGT.

They have also said they want to exempt the first $5,000 of income (which is not a bad thing) but at this stage we don’t know if their proposed CGT will allow them to do that, or will raise more money than  needed to do that. We need to see the details.

So what is most important with tax?

The key thing I will be looking for is whether Labour’s changes will increase or decrease the overall level of taxation in NZ. There is a mass of emperical evidence that countries with a lower rate of overall taxation grow significantly faster than those with higher overall taxation.

This does not mean every low tax country in every year out-performs every high tax country. But a study done of around 30+ OECD countries over around 40 years found very significant correlations.

So why not just abolish tax, to maximise economic growth?

Because then we would not be able to afford the services that most people want the Govt to provide. It is a balancing act between low enough to enhance economic growth and high enough to fund certain services.

Of course over time faster economic growth, even with lower tax rates, will lead to greater tax revenues and hence a greater ability to fund more services.

This is why the key thing for me is not increasing our overall tax take. I want economic growth to fund future services, not new taxes.

So how good or bad is Labour’s proposed CGT?

Ask me again after it is out. If it is a pure tax swap, reducing income taxes in return for a CGT, I’ll be favourably inclined towards it. Of course I will want to verify if it is a pure tax swap – I won’t accept their press release on it.

But if the reports are right that they will be increasing the top tax rate to 39%, then that partly spoils any benefits from it. If anything they should be reducing the top tax rate, due to a CGT, not increasing it. This is the politics of envy, not economic efficiency if they bring back a 39% tax rate.

The top income earners already fund a massive proportion of our tax system. More on that later today.

The Dom Post reports:

A high-risk sex offender proposed marriage and gave an engagement ring to a 13-year-old girl he met in an internet chatroom while he was supposed to be monitored 24 hours a day.

Shortly afterwards, Shane Frederick Stoneham, 26, took the girl, dressed in her school uniform, to meet his probation officer. They told him they were in a sexual relationship.

I guess there are stupider things to do than taking a 13 year old in school uniform to a meeting with your probation officer, and declaring you are having sex with her. But, I can’t think of too many off hand.

Judge Gaskell also gave Stoneham a first-strike warning under the three-strikes law.

In asking her to send Stoneham to the High Court for sentencing, Mr Gilbert said: “He managed to get engaged to and have sex with a girl who was turning 14 while on the most restrictive type of extended supervision order.”

I think the three strikes law was designed for offenders like this.

Katie Bradford-Crozier at NewstalkZB reports:

Politicians have rejected suggestions of raising the retirement age to 67.

Retirement Commissioner Diana Crossan says politicians have their heads in the sand over the affordability of New Zealand Superannuation.

She wants it raised to 67 years by two months a year from 2020 to 2033.

Prime Minister John Key says he has more important things to do than look at raising the retirement age.

He says that’s not going to happen under his watch as he has a lot of things to consider between now and 2020 when it comes to the economy.

Mr Key says he’s given a commitment to Kiwis that he’s not going to raise it.

Labour leader Phil Goff says it’s just not practical.

He says it just makes it harder for people who have worked hard all their lives, who turn 65 and are ready to retire.

The age will rise – it is inevitable. The only issue is how much advance notice we give people.

The increase suggested by the Retirement Commissioner seems reasonable to me. But I would do more than just tinker with the retirement age.

I would lock the current super scheme in place for those over 50. They need certainty so they should not have to worry about future changes.

But for those retiring after 2025 or even 2030, we should have a new sustainable superannuation scheme. The level of payment, the floor and ceiling, issues such as income and asset testing should all be considered. It should be a multi-year conversation or debate, and once concluded then set into place for the post 2030 retired.

Stuff reports:

Former Federated Farmers president Don Nicolson has been confirmed as ACT’s new candidate for the Clutha Southland electorate.

ACT leader Don Brash said Nicolson is highly respected by farmers, as well as in business and political circles.

Nicolson, a climate change sceptic, said he identified with ACT’s “core principles”

“I’m very pleased to be standing for the party,” he said.

Nicolson will stand against finance minister Bill English in the Clutha Southland electorate and will also be the party’s farming spokesman.

Don is well regarded in rural circles, and should help ACT gain some support in rural areas. I suspect he will be one of their top five candidates.

The challenge for ACT could be which female candidates make their top five or six. Brash, Banks, Boscawen and Nicolson will all be in the top six I presume. Heather is retiring. It is unknown what Calvert’s list ranking will be.

Simon Power has announced:

Commerce Minister Simon Power today announced that internet service providers will be able to charge rights holders up to $25 for processing an allegation of copyright infringement.

The decision was made by Cabinet when considering technical regulations to underpin the Copyright (Infringing File Sharing) Amendment Act 2011, which comes into effect on 1 September.

“The Government decided that a fee of up to $25 fee was an appropriate compromise between what rights holders and the ISPs wanted.

“However, we will review that six months after the Act comes into effect to make sure it’s at the right level.

I’m pretty happy with that level, especially as RIANZ wanted $2. From an ISP perspective it might not be enough to cover costs (which is regrettable) but it is definitely set high enough to deter rights holders from filing tens of thousands of complaints a month, and swamping ISPs.

The “downside” of a relatively high fee is that is you do keep infringing and get found liable by the Tribunal, you’ll be ordered to pay the $25 costs per infringement notice plus the $200 fee for taking it to the Tribunal plus the cost of any actual works infringed.

The Cabinet Paper is here. Note that the paper talks of a $20 fee, which is what was recommended to them by the Minister. Cabinet increased it to $25, which is pleasing.

The fee will be reviewed after six months. This is useful, as by then ISPs should have some hard data on what the costs have been, and what the volume of notices has been.

NZPA reports:

Labour has opened the door to a formal coalition with the Greens if it wins the election.

The Greens have never been in Government and were not wanted by the last Labour Government, but party leader Phil Goff said today that would change.

“I’d anticipate in the Labour-led government that the leaders of the Green Party, which would be a coalition partner, would have ministerial positions,” he told reporters.

“I think it’s premature to start talking about what positions those may be.”

This is after Russel Norman said he expects to be at least Associate Finance Minister in a Labour-led Government.

There is no doubt that if there is a Labour-led Government, there will be a coalition with the Greens. Labour snubbed the Greens in 1999, 2002 and 2005 but they had other options then.

In 2011, Labour plus Winston plus Hone just won’t be enough to be able to govern. They need the Greens.

If the Greens get 10 MPs, then they would be 1/6th of the Government caucus, and they could reasonably expect to have four Ministers. They’d be idiots to accept just the co-leaders becoming Ministers as Goff suggested.

I would have thought Kevin Hague would be next in line to be a Minister, followed by Kennedy Graham. Gender balance requirements though might mean Catherine Delahunty would be their fourth Minister.

Stuff reports:

A file containing details of Labour’s alleged breach of election advertising laws has now gone to police.

A spokesman for the police confirmed they received the dossier, from the Electoral Commission this morning.

”It will be assessed to establish the validity of the complaint and determine how we proceed from here,” the spokesman said. …

The Commission alerted police and Labour on Friday that they believed election advertising rules, which were tightened last year, were broken.

A full file of their findings has now gone to police.

Labour leader Phil Goff yesterday said people working on the literature didn’t pick up the law changes.

”We’ve expressed our regret, that won’t happen again.”

I’ve said this before – the need to have your ads authorised has not changed. This is a red herring. Labour’s ad would have been in breach of the pre-EFA Electoral Act, the Electoral Finance Act and the current Electoral Act.

The issue is that Labour have had a belief since 2005 that if it is taxpayer funded, it does not need an authorisation statement. This has never been correct, and they have been told numerous times it is not correct.

So in summary the law has not changed. The problem is that Labour’s attitude to the law has not changed either.