Facebook and Google tax

December 1st, 2012 at 4:00 pm by David Farrar

Oh dear. I have already blogged on Labour’s release about tax paid by Google and Facebook. But I overlooked they don’t even know the difference between revenue and profits.

David Clark, ironically a former Treasury staffer, said:

“It’s not just Facebook that funnels revenue through its low-tax Irish counterpart. Google New Zealand does it too. That company paid just $109,038 tax on $4,447,898 in revenue. That’s two per cent, way below our 28 per cent corporate rate.

This is as bad a mistake as Andrew Williams one. These are not statements made under pressure, but ones put out proactively by MPs for the media.

So David Clark thinks tax rates are paid on revenue. Sigh. An article in the Herald gives us some facts:

Clark’s comments that Google NZ appeared to have paid only 2 per cent tax last year was “a bit inept” and misleading, Vandenberg added.

“We get mesmerised by sales figures and people get outraged about how much tax companies should be paying but then you come along and apply a little bit of tax law.”

A company was required to pay tax on profit before tax, not on revenue, Vandenberg said.

Financial statements show Google New Zealand’s revenue last year was $4,447,898 but its profit before tax was only $56,803. It paid $109,038 in tax, making a loss of $52,235.

Facebook New Zealand’s financial statements show revenue of $427,967, a taxable profit loss of $66,696, and $14,497 paid in tax. The company ended up with a loss of $81,193.

So in fact Google paid more in tax than they made in profit, for their NZ subsidiary. Clark wasn’t just wrong with his 2% claim – he was massively wrong.

And Facebook NZ made a loss, yet paid tax (as some expenses are not claimable off tax).

Clark said his point yesterday was that companies were sending their revenues out of the country “one way or another”.

Trying to ignore the fact his statement was factually incorrect and bogus.

And Google are not sending any revenues out of the country. This is Labour xenophobia at play. NZ advertisers have decided to advertise with Facebook Ireland. This is no different from an American company hiring a NZ company to do research for it. Is Labour saying that any NZ company that has overseas clients should be forced to pay tax in the country their clients reside in?

He criticised the way Facebook used its Irish operation, which pays just 12.5 per cent tax, to determine revenue and expenses.

“This ensures the company can put most of its revenue through countries with low-tax systems,” he said.

Wah, wah, wah – it isn’t fair.  Of course they choose to operate from a low tax company. This is why low tax countries attract business.

He called for the New Zealand government to work with other major countries, like Australian, to review international tax treaties and create a fairer system.

Yeah, good luck with that. Unless every country in the world signs up – then companies that can be flexible with where they are based will be based where the taxes are lower.

This is like trying to ban countries from offering higher wages, as people may move to a higher wage country.

UPDATE: David Clark has updated his release to remove the references to tax being levied on revenue, not profit.

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Denmark scraps their fat tax

November 17th, 2012 at 12:00 pm by David Farrar

The Greens will be distraught. Denmark has scrapped their fat tax. The WSJ reports:

Danish lawmakers have killed a controversial “fat tax” one year after its implementation, after finding its negative effect on the economy and the strain it has put on small businesses far outweigh the health benefits.

Nations including Switzerland, the U.K, and Germany have held up the tax, which applies to any food containing more than 2.3% saturated fat, as a potential model for addressing obesity and other health concerns. But in Denmark, it has been a source of pain for consumers, food producers and retailers as the nation’s economy struggles.

“The fat tax is one of the most maligned we [have] had in a long time,” Mette Gjerskov, the minister for food, agriculture and fisheries, said during a news conference Saturday announcing the decision to dump the tax. “Now we have to try improving the public health by other means.”

The failure of Denmark’s fat tax is a demonstration of how difficult it can be to modify behavior by slapping additional duties on products seen by many as essential staples, especially during tough economic times. Products such as butter, oil, sausage, cheese and cream were subject to increases of as much as 9% immediately after the new tax was enacted.

So why was it dropped?

Lone Saaby, director of economic policy at Denmark’s Landbrug & Fødevarer farmers association, said the fat tax “increased border trade as well as administrative costs,” putting Danish jobs in jeopardy. Ms. Saaby’s organization lobbied the government to kill the fat tax and abandon the sugar tax before the impact to employment became too noticeable.

Mr. Giørtz-Carlsen said the fat tax cost his company about €670,000 over one year, and estimates “smaller companies probably had disproportionately higher costs.”

Many want to use the tax system to incentivise what they see as good behaviour. But the more complex you make it, the less effective it is. The best tax system is broad base and low rates with minimal exceptions.

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The tax burden

August 6th, 2012 at 9:00 am by David Farrar

Rob Stock at Stuff reports:

The parliamentarians found it was more difficult to calculate an average tax rate for middle income New Zealanders, but an indicative comparator for someone on an average wage was 17.9 per cent, although Working for Families entitlements would reduce the average net tax rate to 8.4 per cent for a single-earner parent with one child, or 2.3 per cent with two children.

Yep, most people who have children pay little or no tax.

Since the changes in tax rates things will have changed a little, and the wealthiest will have seen their effective tax rates drop on paper at least, because the IRD has been strenuously pursuing them to extract more tax, and the IRD expects to bring in an extra half a billion dollars in revenue from the high net wealth individuals in the next 10 years through its crackdown.

Good – I support a low rate, broad base, with few exceptions.

But actually, when it comes to income taxes, New Zealand is something of a tax haven, because when Working for Families rebates are taken into account, 40 to 50 percent of households “effectively pay no net income tax, and roughly 40 to 50 percent of total net income tax is paid by those in the top 10 per cent income bracket, suggesting that the tax burden falls most heavily on the wealthy”.

Indeed. I’ll be blogging more on this, based on some interesting tax data I got under the OIA from the IRD.

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Remember this when Labour proposes tax hikes

August 3rd, 2012 at 4:19 pm by David Farrar

3 news reports:

Treasury research has found the proportion of all tax paid by the highest earners fell after the 2001 tax changes that took the top personal income tax rate to 39 per cent from 33 percent.

Far from its intended purpose of increasing the contribution by wealthy people to the cost of running the government, the 2001 tax increase spurred the highest income earners to find ways of avoiding tax, the Elasticity of Taxable Income in New Zealand paper found.

It tracks the proportion of income tax paid by different income bands between 1994 and 2008, and finds the top 10 percent of income earners had begun to pay an increasing share of total income tax in the years immediately preceding the tax rate increase and peaked at 38.9 per cent at the time the tax rate increase was announced.

“However, following introduction of the 39 per cent rate, it fell to 33.9 per cent in 2001,” the report says.

This is no surprise. I recall another report that when Labour introduced the rich prick envy tax of 39% on incomes over $60,000 – the number of people earning exactly $60,000 increased something like ten-fold.

It can be as simple as you pay yourself a salary of that amount, as company tax rate is lower, and just let the income stay with your company. Then when you retire you just keep paying yourself a salary a just below the top tax rate, so you never have to pay it.

There is a reason why almost every expert says that a broad base and low rate tax system is best. That’s why I think a land tax is a good idea, but increasing the top tax rate is a terrible idea.

The paper is here, quite readable at 41 pages. Remember this is not a model or projection – this is what actually happened! The three authors are from the IRD, Treasury and the Asian Development Bank.

They find that the share paid by not only the top 10% fell, but even for the top 1%. Prior to the Labour hike the top 1% were 10.2% of taxable income for the seven years up to 2000, and 9.3% for the seven years afterwards. So the top 1% ended up having a lesser share of taxable income after Labour hiked the top tax rate.

Their conclusion:

For the top marginal rate bracket of 39 per cent, the welfare cost of raising an extra dollar of tax revenue was found to be well in excess of a dollar. Furthermore, for the top bracket the marginal tax rate was often found to exceed the revenue-maximising tax rate, for appropriate values of the elasticity of taxable income.

So if Labour in 2014 proposes increasing the top tax rate, don’t think that means more revenue. It may mean less.

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Six policies economists love

July 21st, 2012 at 9:00 am by David Farrar

Theo Francis at NPR writes:

Tuesday’s show presented the common-sense, no-nonsense Planet Money economic plan — backed by economists of all stripes, but probably toxic to any candidate that might endorse it. …

One: Eliminate the mortgage tax deduction, which lets homeowners deduct the interest they pay on their mortgages. Gone. After all, big houses get bigger tax breaks, driving up prices for everyone. Why distort the housing market and subsidize people buying expensive houses?

We don’t have that in NZ, but we did use to allow depreciation to be claimed despite house prices appreciating.

Two: End the tax deduction companies get for providing health-care to employees. Neither employees nor employers pay taxes on workplace health insurance benefits. That encourages fancier insurance coverage, driving up usage and, therefore, health costs overall. Eliminating the deduction will drive up costs for people with workplace healthcare, but makes the health-care market fairer.

Health insurance is not tax deductible here. Many argue it should be, but the evidence tends to be that it doesn’t help more people take up health insurance, it just provides a tax dodge for people who already have it.

Three: Eliminate the corporate income tax. Completely. If companies reinvest the money into their businesses, that’s good. Don’t tax companies in an effort to tax rich people.

Owners would still be taxed on dividends, but a zero company tax rate would get investment flowing.

Four: Eliminate all income and payroll taxes. All of them. For everyone. Taxes discourage whatever you’re taxing, but we like income, so why tax it? Payroll taxes discourage creating jobs. Not such a good idea. Instead, impose a consumption tax, designed to be progressive to protect lower-income households.

I doubt we’ll ever eliminate income tax, but generally it is better to tax consumption and land than income and capital.

Five: Tax carbon emissions. Yes, that means higher gasoline prices. It’s a kind of consumption tax, and can be structured to make sure it doesn’t disproportionately harm lower-income Americans. More, it’s taxing something that’s bad, which gives people an incentive to stop polluting.

Which we already do, to a degree.

Six: Legalize marijuana. Stop spending so much trying to put pot users and dealers in jail — it costs a lot of money to catch them, prosecute them, and then put them up in jail. Criminalizing drugs also drives drug prices up, making gang leaders rich.

Very true.

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Shewan on taxes

June 30th, 2012 at 9:41 am by David Farrar

James Weir at Stuff reports:

New Zealand should move to a low-level land tax and cut personal tax rates, retiring PricewaterhouseCoopers chairman John Shewan says.

He also says the “elephant” of rising national superannuation costs means a rise in the GST rate to 17.5 per cent in coming years was “almost inevitable”.

Shewan had his last day as PwC chairman yesterday. PwC partner Jonathan Freeman has been elected the new chairman.

Shewan said a land tax rate should be low, perhaps 0.5 per cent of land value each year, and be assessed like a city council rate, with an offsetting fall in the personal tax rate of a few percentage points.

“I still think that is the right thing to do,” he said. That idea was rejected by the Government when proposed by the Tax Working Group, which Shewan was part of. “I regret that,” he said.

High taxes on personal incomes were the most damaging to the economy for growth and jobs. The most efficient taxes were those people could not avoid, such as tax on spending like GST or tax on land “because you can’t hide it”.

I agree with a land tax, so long as other taxes are reduced to compensate. Land tax is both unavoidable, but also encourages better economic use of land, unlike income taxes which actually discourage labour.

New Zealand’s tax system was a “complete wreck” in 1984, but was now one of the strongest and most robust in the world.

The basket cases of Europe, such as Greece, Italy, Spain and Portugal, shared a common thread of poor tax systems, with high levels of tax evasion and fraud. “They regard paying tax as voluntary,” he said.

In contrast, in New Zealand most felt they should pay their fair share of tax. Shewan said he was “very proud” of the tax system here.

It is one of the better ones around, so long as we resist the stupidities such as GST exemptions for fresh fruit and vegetables.

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More tax tracking

June 12th, 2012 at 1:00 pm by David Farrar

Maxim has done some tax tracking scenarios, for four different people or households. They are:

  • Minimum wage earner
  • Median income earner
  • Median income household
  • High income household

The minimum wage earner pays an average 13.5% tax being $3,320. The high income household pays $33,240 tax. Some of the breakdown of what that goes on is:

  • NZ Super $4,745
  • Family Tax Credits $995
  • DPB $857
  • Invalids $622
  • Accom Supp $580
  • DHBs $5,611
  • Primary schools $1,355
  • Tertiary tuition $1,121
  • Secondary schools $1,010
  • ECE $653
  • Student loans $330
  • Tertiary allowances $289
  • Defence $926
  • KiwiSaver $332
  • Debt $1,748
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Tax forecasts

May 22nd, 2012 at 7:00 am by David Farrar

One of the memes being pushed by Labour and the Greens is that the 2010 tax package wasn’t revenue neutral. They assert this because tax revenues are lower than was projected. The problem with their arguments is that tax revenues often differ from what was projected, and there is no way of knowing how much is because of changing economic projections, how much is impacted by a policy change and even how much is just because the forecasts are imprecise.

As an example. Let’s say you forecast GST to be $12.5b at 12.5% and you increase GST to $15% and hence forecast GST will bring in $15b. That extra $2.5b of income is distributed back as income tax cuts. But let’s say once GST goes to 15%, the revenue only goes to $14b. Now Labour and the Greens are saying that $1b less is due to the policy change, and hence the tax switch was not fiscally neutral. They argue that it is purely because of the rise in GST that people spent less, and hence less GST was paid. But the drop in GST might just be because of lower economic growth, or a drop off in consumer confidence etc.

To give you an idea of how dramatically forecasts change over time, I’ve collated the forecasts from the last nine fiscal updates. They tell quite a story. Let’s start with total tax revenue.

The last two columns are best to focus on, as we get a full history. This is the total tax take projected for last financial year and the current one.

Back in the 2008 budget Dr Cullen projected $62.1b in tax revenue for 2011/12. Then by the PREFU it had dropped to $61.2b. It further dropped to $58.3b in the DEFU, which takes accounts of National’s election tax cuts. However those changes were compensated by expenditure reductions – mainly KiwiSaver.

A huge drop occurred between 2008 DEFU and the 2009 budget, with tax revenues dropping $4.3b! Now bare in mind it was in the 2009 budget National cancelled its planned tax cuts for April 2010 and April 2011, so it would have been an even bigger drop without that. This change was pretty much all due to the global financial crisis and recession.

By year end forecasts got more positive, going up to $56.6b, and then the tax switch in the 2010 budget projected it to go to $57.4b. However then forecasts dropped again, dropping to $56.7b and then $54.7b.

Now Labour and Greens say that the difference between 2010 Budget and the latest forecasts is all due to the tax switch. But as one can see over time the wider economy is a far bigger factor in tax projections. Recall how in 2009 tax revenues forecast dropped $4.3b even though National cancelled tax cuts.

Now let’s look just at GST.

This shows projected GST revenues only. Note how they from 2008 to 2009 they went from $13.5b down to $11.3b. Then they were projected in 2010 to go up to $15.8b with the increase to 15%. Just six months later Treasury revised that down to $14.0b, but then this year revised up to $15.0b.  This is still lower than originally forecast in 2010, but again no greater than other variances from year to year.

So when Labour and Greens say the tax switch cost $2b, they are making it up. What they are saying is that there has been $2b less tax revenue than projected. But if the tax switch had never happened it is quite possible the drop in tax revenue would have been the same or even greater.

And for the paranoid out there, this is all my research, taken from going through the last nine fiscal updates. No one suggested it to me, helped me with it, or even knew about it. I did it because I got sick of the uncontested claims about the impact of the tax switch.

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Len’s Auckland taxes

February 13th, 2012 at 9:41 am by David Farrar

After having failed to get the residents of Oamaru, Christchurch, Wellington and Napier to pay for Auckland’s CBD rail loop, Len Brown has proposed half a dozen new taxes as possible ways to pay for the loop.

The proposed taxes include:

  • Regional income tax – new income tax paid only by Aucklanders.
  • Regional payroll tax – new income tax paid by Auckland employers.
  • Regional GST – raising GST in Auckland.
  • Regional fuel tax – raising petrol and diesel taxes across Auckland.
  • Visitor taxes – nightly charge for hotel and motel rooms.
How novel to have a Mayor who is a member of the Labour Party propose to increase GST (in Auckland). I don’t recall that one being in the manifesto in 2010.
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The case for lowering the top tax rate

August 9th, 2011 at 8:38 am by David Farrar

Richard McGrath blogs at Not PC on how if you want the rich to pay more tax, you should tax them less. Recall that only half of our 100 wealthiest New Zealanders pay the top tax rate. Under the Goofynomics plan to have the top tax rate at 39% and the corporate rate at 28%, I’d say the number paying the top tax rate would drop to under 1/4.

McGrath quotes Keynes:

“[T]axation may be so high as to defeat its object, [and] a reduction of taxation will run a better chance than an increase of balancing the budget.”

And then he goes on to give some examples:

  • UK, 1979: Chancellor Geoffrey Howe cuts marginal tax rate from 83% (!) to 60%. Before the cuts, the top 1% of taxpayers were paying 11% of total income tax received. Nine years later, despite the hefty cuts, they were paying 14% of total income tax.
  • UK, 1980s: Chancellor Nigel Lawson cuts marginal rate further, to 40%. By 1997, the top 1% of taxpayers are paying 21% of income tax received. Thus halving the marginal tax rate doubled the income tax receipts from the wealthiest 1%.
  • US, 1920s: Presidents Coolidge and Harding reduced the top tax rate from 73% to 25%. The share of tax paid by earners making over $100,000 nearly doubled between 1921 and 1925, from 28% to 51%.
  • US, 1961: The top tax rate under Eisenhower had crept up to a staggering 91%. The Democrats supported by Kennedy dropped this to 70%. He stated, a few months before a sniper removed the occipital lobes of his cerebral hemispheres: “[T]ax rates are too high today and tax revenues are too low, and the soundest way to riase revenues in the long run is to cut the tax rates…” As a result of the Kennedy tax cuts, those earning over $50,000 increased the amount of tax paid by 40%, and paid 15% of income tax received in 1966, as opposed to 12% in 1963. Total income tax received went up from $69b in 1964 to $96b in 1968.
  • US, 1981: Under President Reagan, Congress reduced the top tax rate from 70% to 50%. Between 1981 and 1988 the top 1% of tax earners increased their share of tax received from 18 to 28%, while the bottom 50% of taxpayers decreased their contribution to income tax received from 7.5% to 5.7% over this same period.
  • Canada, 1990: Top federal tax rate cut from 45% to 29%; share of tax paid by top 10% of taxpayers increases from 29% to 45%.

Goff should know this. He was one of those who voted to lower the top tax rate to 33% in the 1980s.

If you spend all your after tax income, then those on the top tax rate already pay 43% of their income in tax, when you include GST. We’ll leave ACC out of this for now. I think that’s more than enough.

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UNITE’s taxes

July 27th, 2011 at 7:00 am by David Farrar

Paul McBeth reports:

Inland Revenue is chasing unionist Matt McCarten’s Unite Support Services for $150,750 in unpaid taxes after the department forced the company into liquidation last month.

McCarten’s vehicle, which supplied administrative support services to the youth-orientated union Unite, was put into liquidation by a High Court order last month after the IRD pursued it for “failure to provide for taxation,” according to the first liquidator’s report.

As far as I now this is not just unpaid income tax and/or GST. But it includes unpaid PAYE, which is quite horrific as the employer acts in a trustee capacity for the employee who actually pays the tax. An employer that spent the employees’ PAYE on other activities would be lashed by unions as a bad employer.

You also have the hypocrisy of a union (and its spin off the Mana Party) advocating that people should pay more taxes, when they don’t even pay their own taxes, and effectively stole the PAYE tax from their employees.

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Max the Tax

July 19th, 2011 at 4:30 pm by David Farrar

I asked on Twitter whether Labour were likely to use their “Ax the tax” bus in the election campaign. Lots of humourous feedback, but the best retort came within a few seconds from Revenue Minister Peter Dunne who said they were going to rename the bus to “Max the Tax”.

Whale has provided this new graphic. Thanks to Peter for the slogan, which I suspect we have not have heard the last of.

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New maths

July 18th, 2011 at 3:27 pm by David Farrar

In a desperate attempt to justify whacking the “rich” with higher taxes, Rob Salmond comes up with a new form of maths – when a figure is negative you count it as zero, rather than include it in the calculation.

According to Rob if you had assets and liabilities of (for example):

  1. Term Deposit – $200,000
  2. Shares – $100,000
  3. Loan – $50,000

Then your term deposit is only 67% of your net assets ($200,000/$300,000) rather than 75% 80% ($200,000/$250,000).

Hilarious. And desperate.

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Joyce v Cunliffe’s numbers

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

Labour have said that over 15 years their tax 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. Keith Ng 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.

CGT – 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 CGT model developed in 2011, and Cunliffe uses BERL. Joyce makes the point though (which has not been covered much) that getting a CGT 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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The true numbers for Labour’s plans

July 17th, 2011 at 3:07 pm by David Farrar

Cost of Labour’s Promises

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.

Labour’s own numbers revealed that their tax plans would lead to greater deficits and debt for the next six to seven years. They desperately did not want people to know this, so left this document off their website.

But their own numbers were inflated, such as as imaginary $300m a year from reduced tax avoidance (despite them wanting to have an 11c gap between the top tax rate and the company rate). They also failed to take account of interest costs, and over-estimated revenue from some of their measures. The numbers on the CGT itself were largely accurate, but on the rest of their package were crap.

So what does it mean? It means Labour’s package will result in less tax revenue until 2024! And then when you take account of the interest on the extra borrowing, it will result in an extra $15b of borrowing between now and 2025.

But it does not end there. This assumes that Labour will keep to National’s spending track. That they will not pledge one cent extra in spending than National. That there won’t be one cent extra for early childhood education etc.

So the $15b of extra debt is just on the revenue side. Wait until they release their spending plans and see that number increase exponentially.

The problem is not Labour’s CGT per se. The problem is that their promise to remove income tax on the first $5,000 of income is unaffordable. It has no fiscal credibility and can only be funded by increased borrowing.

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Labour’s Numbers

July 15th, 2011 at 1:39 pm by David Farrar

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.

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Labour’s package

July 14th, 2011 at 2:52 pm by David Farrar

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 :-)

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Do dairy farmers really only pay 3% tax?

May 18th, 2011 at 2:49 pm by David Farrar

Stuff reports:

Inland Revenue Department figures provided to Labour revenue spokesman Stuart Nash show that, in the latest full year for which figures were available, the average tax paid by dairy farms was $1506 a year, despite an average Fonterra payout understood to be well over $500,000.

The 17,244 registered as being in the sector, including companies, trusts and individuals, paid only $26 million in tax.

This is such a bullshit story, I don’t know where to start. Here’s a few vital facts:

  1. The tax data is from 2008/09 and the Fonterra payout figure is from 2011. Epic fail. As I understand it commodity prices in 2008/09 were much lower, and most farmers in that year made a loss.
  2. The $500,000 is a revenue or turnover figure, not a profit figure. This is not comparing apples and oranges. A company can have a $500,000 turnover and a $30,000 profit. Turnover by itself is meaningless for tax purposes.
  3. The $26m in tax paid in 2008/09 only relates to tax entities classified as dairy farmers. Many dairy farmers are in the unclassified category which paid an additional $1.5b in tax.
  4. Labour and the Dom Post divided the $26m by the 17,244 tax entities registered as dairy farming. Many of these are defunct shelf companies etc. The actual number of dairy farms is thought to be around 11,500.

MAF have some data on the average dairy farm. In 2008/09 they found the average farm had $750,000 income, $529,000 expenses, $235,000 interest and depreciation resulting in a loss of $6,300. Their average tax bill was $18,600 so profit after tax was -$25k.

So the story is a total beatup. They commit two cardinal sins. One is comparing revenue from one year against tax of two years earlier. You’d be thrown of of accountancy school for that. Equally bad is comparing turnover to profit. A mistake that only people who have never worked in business would make.

Having said all that, I am a supporter of a land tax (subject to a reduction in income taxes to compensate). A land tax is near impossible to avoid, very simpleto calculate and provides an incentive for land to be out to good economic use.

If Labour are serious about closing tax loopholes, then they should propose a land tax. It would over time boost NZ’s economic growth as it encourages better economic use of land.

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Tomorrow is Tax Freedom Day

May 2nd, 2011 at 10:01 am by David Farrar

Good news. Tomorrow is Tax Freedom Day. This means everything you have earnt up to tomorrow has gone to the Government to fund its spending, and you get to keep everything from tomorrow onwards.

I’d love tax freedom day to be held in March. That won’t happen anytime soon, but what would be realistic is a goal of having government spending no more than 30% of GDP. I’d like the Fiscal Responsibility Act amended so that a Government has to publicly state what its target or limit for government spending will be. This would not be binding, but would give some transparency over Government policy, and allow a more informed choice between parties.

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Labour’s tax policy

January 26th, 2011 at 9:38 am by David Farrar

There is considerable merit in having a tax free threshold as Phil Goff has proposed. I personally think no income should be taxed until a person is earning enough to live on – otherwise you just plough that tax back to them in the form of welfare which leads to inefficient tax churn.

But, and this is crucial, you need to make changes to welfare, WFF, child tax credits etc at the same time as you bring in a tax free threshold. It is worth remembering that many workers do not even pay net income tax until they reach $50,000 income (if they have two kids).

The other issue is affordability. If Labour had proposed a $5,000 tax free threshold when we had massive surpluses in the mid 2000s, then I would have cheered. But the Government is currently borrowing $300 million a week just to finance current spending. And if National had not made changes to Labour’s spending plans, the deficit and debt would be on a track to be ever-increasing – which would require Ireland or Greece type intervention.

The proposed “rich prick” tax on those who dare to earn a six figure income will not raise anywhere near enough money to cover a tax free threshold of $5,000. And frankly there are limits to how much one can clobber the top taxpayers – recall that the Tax Working Group found the top 10% of taxpayers pay 76% of net income tax. The more you try to clobber them, the more they will avoid tax – or leave. Recall also the finding that of the 100 wealthiest NZers, only half I think were actually paying the 38% tax rate.

Phil Goff should know this. He was part of the Government that got rid of Muldoon’s top tax rate and put in a top tax rate of 33%. And if you recall, that actually led to more tax being collected.

Then we have the so called crack down on tax avoidance:

Labour is also promising to crack down on lucrative tax loopholes used by property investors, saying it will set up an Anti-Avoidance Tax Taskforce to close the loopholes.

Billions were estimated to have been lost by people dodging tax, Mr Goff said. He singled out the ability of investors to offset rental properties against their salary to avoid paying tax.

First of all, one thing I guaanatee is that tax avoidance will increase not decrease if you stick the top tax rate up.

Secondly Goff has missed the boat. The current Government in the last Budget clamped down on several tax avoidance loopholes, plus has funded the IRD to be more aggressive here.

But even more critically, the investment property route to making money has been almost killed off by the Government’s changes to depreciation rates, plus the bubble bursting on house prices. Goff is two years too late with his policy.

I’ve just purchased a new apartment (in fact moved into it yesterday) and one of the decisions I’ve had to make is whether I sell the old apartment or keep it and become a property investor (like Phil Goff is). I’ve done the sums and now you can’t claim depreciation, the interest and other costs well outstrip the income you would get from rent – and any tax reduction on a loss, is less then the actual loss. If I was certain that property prices will increase constantly, then it would be worth doing for the capital gain. But I don’t think that is at all certain.

Up until this announcement, Labour had already indicated they wish to borrow an extra $6b a year or so (if you add up all the extra spending they have called for etc). With this policy that becomes over $7b a year.

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Cactus Kate’s 10 tax policies for Labour

January 7th, 2011 at 4:53 pm by David Farrar

Labour have only two tax policies – remove GST off fresh fruit and vegetables, and reintroduce a rich prick tax.

To help them with their policy development, Cactus Kate has proposed ten tax policies for them:

  1. Reduce GST to 10%
  2. Require all trusts in New Zealand to be registered with the IRD with the name of the settlor and beneficiaries
  3. Farmers, the largest of polluters (according the the numbnuts measuring of carbon) should be taxed per head of animal per year with the cost that New Zealand has to pay to the invisible pie in the sky
  4. Anyone with assets or is a beneficiary or settlor of a trust with more than say $500,000 can no longer receive Superannuation.
  5. Reduce the deductible amount to 20% of the total interest expense on real property (land) such that land owned by farmers, property “investors” and the like cannot pay less or even no tax by increasing the interest deductions based on leveraging property.
  6. Reintroduce gift duty
  7. Introduction of a 20% duty for the sale of all property including primary residence and all forms of land.
  8. A new top tax rate of 45% on those rich pricks earning over $120,000 and an increase of the current top tax rate for income between $70,001 to $120,000 from 38 cents up to 40 cents.
  9. Abolish Marshall clauses (which excludes the shortfall in interest as a “gift”) where the loan is repayable on demand
  10. Taxing New Zealand citizens (passport holders) at a 45% deemed disposal rate on expatriating their wealth at the date of departure if they become non-resident and a 15% inbound transaction tax on their assets coming back in even while they are still non-resident.

I’m worried that they may adopt a few of them.

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CTU asks UNITE to explain unpaid PAYE tax

December 3rd, 2010 at 11:00 am by David Farrar

In a follow up to the story I blogged about yesterday, Rebecca Stevenson at the Dom Post reports:

The Council of Trade Unions wants an explanation from Unite on why it failed to pay the IRD more than $36,000 in PAYE on behalf of its employees.

Unite, one of New Zealand’s largest unions, owed IRD over $130,000 for the year ended March 2009 (its most recent filing), including more than $57,000 in unpaid GST. For the same financial year its liabilities outweighed its assets by more than $170,000.

It is the unpaid PAYE that will be causing most concern, as this is in fact money owed by the employees to the IRD, and UNITE has appropriated it for its own purposes. It is the sort of stuff that the newspaper boss Maxwell did – but on a much smaller scale.

Unite head Matt McCarten confirmed yesterday that the union owed money to the IRD but said he had made choices to pay for union campaigns rather than clear the debt. “I don’t shy away from these decisions, I make the calls.”

He said Unite paid $8000 in PAYE each month to the IRD but kept incurring late payment penalties. He claimed not to know exactly how much it owed the IRD.

The late penalties do add up – as many businesses know. But if it was a deliberate decision to keep running campaigns, instead of paying off the debt, then few will have sympathy.

He agreed it was not a good look for a workers’ union to fail to pay its employees’ tax.

I don’t think Matt realises how bad a look it is. The next time UNITE or Matt calls for greater government spending, this issue will arise.

CTU president Helen Kelly said Unite did good work in an area that was difficult and expensive to organise. That required it to juggle its finances. “All unions are always short of resources.”

However, when questioned on Unite’s tax failure, she said: “I need an explanation for that”.

I’m not sure I would say all unions are short of resources. The combined wealth of the union movement puts the Business Roundtable, Business NZ, and the Chambers of Commerce to shame. I did a blog post a couple of years back comparing them.

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A 9% Nga Puhi tax

June 14th, 2010 at 9:00 am by David Farrar

The Herald reports:

A Ngapuhi leader is calling for a nine per cent economic development tax to be levied on everyone living inside the iwi’s boundary as part of its treaty claim.

Matarahurahu hapu chairman David Rankin said the proposed flat tax rate, which would be administered by the Inland Revenue Department, would “pull Ngapuhi out of a depressed state” and ultimately benefit the entire region.

He would like it to fund social and economic development projects such as aquaculture programmes, and make Ngapuhi as prosperous as iwi like Ngai Tahu and Tainui, which benefit from rich resources in their regions, he said.

Before people get too excited over this, I should point out that David Rankin does not speak for Ngapuhi. He has a long history of saying things which range from the stupid to the even more stupid.

However, there had also been “one or two” members of the Ngapuhi Runanga, who administer the claim, who expressed their strong opposition and threatened to bar Mr Rankin from speaking at Waitangi Tribunal hearings.

So this is clearly not a formal position of the Iwi.

I won’t even bother to speak to the fact that such a tax would never be agreed to. I want to point out the economic stupidity of it.

If you have a 9% tax on economic activity in Northland, that will not help the region – it will kill it. People will leave Northland in their droves if the tax rate in Auckland is 17.5% and in Northland it is 26.5%.

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Rudd’s super tax backfires

June 8th, 2010 at 8:04 am by David Farrar

Kevin Rudd is fighting for his political life with his u-turn on an ETS, and his proposed super mining tax both backfiring. A Nielsen poll just out has Labor at 47% on the two party preferred poll and the Coalition at 53%.

The super mining tax appealed to Labor. They thought everyone would support it, as only a dozen companies or so would be paying it. The tax would be a massive 40% of any profits above the risk free rate of return. Yes, how dare a company make a profit greater than what you can get by sticking your money in the bank.

But it has backfired massively. Western Australia especially has seen it as an attack on the entire state, plus (unlike NZ) many Australians know how important the mining sector is to Australia’s prosperity and have rejected the tax.

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Advice from Keating

June 5th, 2010 at 9:00 am by David Farrar

The Herald reports that Paul Keating once tried to teach Tony Blair how to hate his opponents. He also advised:

Keating also had some tips for Blair on economic issues, telling him that if he ever became prime minister he should avoid income tax hikes at all costs.

“Tony, promise me you won’t raise income tax. It’s death.

“Labour parties around the world have enough to contend with without hanging that round their necks. It’s not worth it.”

Luckily in NZ, Labour is suggesting they will campaign in 2011 on a policy to increase income tax for rich pricks.

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