Parliament’s Finance and Expenditure Select Committee has just released its report on the half-yearly Budget Policy Statement. This politely worded document contains some useful nuggets of information that arose from Bill English’s testimony to the committee, and summarises FEC members’ views of what they heard. Some of it was reported at the time, but it is worth reiterating in the context of the broader tax reform debate.
- English reiterated that the tax pacakge will be fiscally neutral.
- Raising GST to 15% is the government’s intention.
- This was not presented as a “revenue raiser on its own” but was needed to help pay for cuts to tax rates.
- The main rate change would be at the top end, with likely alignment with the Trust rate at 33%.
- Although there was talk that middle and lower income earners would be “no worse off”, committee members pointed out the huge inequity of top rate reductions for the few, versus standstill at best for the many. There is no disguising the relative shift of the tax burden.
FEC members pushed on how the government would achieve fiscal neutrality given its stated intentions to compensate for GST – the numbers did not appear to add up. Mr English first disputed the Tax Working Group’s estimates (funny how when he agrees he quotes them) that show full compensation costs almost all the extra revenue increased GST raises; then said rate cuts woul be largely funded from taxes on property.
Having excluded a comprehensive CGT, Land Tax and RFRM, the amount able to be raised from changing building depreciation rules is insufficient (only $0.3 to $1 bn compared to a revenue requirement of $1.2-$1.5bn ). So if the government cuts the top rate as much as they’d like, it doesn’t leave a lot left over for the great majority of taxpayers.
Mr English then wriggled around on what a partial CGT might look like – discussing a bright line test to change the “intent” rules around property speculation. English has also proposed “ring fencing”, a measure that he has ridiculed in the past as a ‘disastrous’ proposal.(http://www.hansard.parliament.govt.nz/Documents/20070621.htm )
It is very debateable whether that would fix the tax inequity between investment classes. It is even more dubious to suggest that the additional property taxes would all be borne by top tax rate individuals – what about retirees and middle income earners with one or two investment proprties who may need to sell up? It looks like the intervention into the property market will really be a revenue gathering exercise to pay for tax cuts to the top rate, rather than a principled approach to addressing distortions as English claims.
And nowhere in the MOF’s presentation was there any talk about closing down the other tax planning rorts. Funny that.
More broadly, the government cannot escape the contradiction that:
- It says it has enough revenue to deliver big top rate tax reductions for the few (but not the many).
- But it will drastically reduce new spending to $1.1 bn in Budget 2010 and onwards - inevitably resulting in real front line service cuts to Health and Education.
- There was no discussion of restoring superannuation pre-funding, Kiwisaver incentives, restoring contributions to the SuperFund, or R and D tax credits, even though Treasury has previously advised all are prudent and necessary.
My impression of Bill English’s presentation was that no matter how it is dressed up, the government’s intentions are stark and predictable: raise taxes for the many and cut them for the few, and cut services for the many to pay for it.
Ultimately the government has only two major policies
1. balance the budget by cutting government spending (ultimately waiting for growth to make this possible).
2. transfer ownership of state assets to those on the top tax bracket (to on-sell on the open-market for an untaxed CG/ profit). They will claim this is about paying off debt, but this will be untrue – for the only debt being paid off would be that resulting from cutting the top rate to 33 cents (a billion dollars a year and selling state assets at the rate of about $3B a term).
So, if there was a deficit of a billion dollars for 6 years after the top rate of tax was cut to 33 cents – the first $6B of state assets would effectively be handed over to the few without improving our debt position at all (and with the loss of $6B of assets to borrow against in any downturn).
When the issue of higher rate tax cuts comes onto the agenda there’s always a huge hoo-haa made about how the ‘rich’ do better than the ‘poor’.
Now everyone knows this is an inevitablility of the way that a progressive tax system works – when taxes go up at the top end the ‘rich’ do significantly worse, when they go down they do better, but only because they’re already contributing a greater amount.
The only way that any government could avoid being accused of helping the ‘rich’ at the expense of the ‘poor’ in such a situation is to never reduce the higher tax rates, or increase the level at which they kick in.
SO : Is this Labour policy? That whatever level direct taxes reach they have to stay there lest the government of the day be attacked for ‘lining the pockets of the “rich”‘?
ALSO – whenever this debate is held someone posts the ‘Taxes Explained By Beer’ analogy. It was posted earlier this week by Rebecca as a comment to the ‘AXING THE TAX PACK’ posting on Red Alert:
http://blog.labour.org.nz/index.php/2010/03/01/axing-the-tax-pack/comment-page-1/#comment-33774
Wherever something similar has been posted I’ve never seen any comment on the validity of the analogy by those who are throwing the ‘tax cuts unfairly help the rich’ mud. I’d be interested to hear their views on the analogy.
George, when there are surpluses many ideas get considered. In 2005, given tax credits to families had not been increased for a decade that option was chosen – as we had high levels of children in poverty.
Should we increase wage levels sufficiently (and with this higher levels of employment) we may be able to reduce child poverty without recourse to further increaes in tax credits, then we may be able to establish a surplus and then disperse it via indexing tax scales.
What about cutting the top rate of tax blinds people to the fact we do not have a budget surplus at the moment and will not for some years.
Two questions David:
1/ Has Mr English also costed the higher accommodation supplements resulting from the need to raise rents to cover the property changes?
2/ Why do you say “It is very debateable whether that would fix the tax inequity between investment classes.” And exactly what distortions do you mean???
Tax free capital gain – Ask Sam Morgan how much he paid when he sold Trade Me? Are share gains taxed? – NO.
LAQC – Is this only available to property or can we use this format for any business? – YES
DEPRECIATION – Is this not also available to businesses, flowing through to shareholders? Of course houses depreciate (I would hope there is a very large deduction to fix a leaky house). Just come to my backyard and see a new 3 bed house for $375 and most older 3 beds are 220-260. I could go on about this, it just bothers me that people who know better keep perpetuating this myth.
$500 Million tax beneficiary (2009). The property sector was net taxpayer for 18 of the last 20 years! But who wants to let facts get in the way? How’s the ratio for agriculture, who gets bails outs when cyclones hit, or frosts bite the cherrys/grapes? Has anyone done comparisons?
The same result as TWG, are we hoping to remove the preference NZers have with direct investment by harming the property sector, (not making the others better) so we can benefit the indirect managed funds industry (with fees & Lobbyists).
Finally (I’ll post details tomorrow) but why did we have the IRD Commissioner state at a select committee a couple of years ago that “there was no preferential tax treatment for the property sector.”
Get some truth into this debate please and you might just see thousands of true blue National supporting aspirational mum & dad investors switch their vote to red!!!
Jeremy, sure Labour opposition to the property tax changes could undermine National’s strategy – but what if Labour wants such a wedge to bring in an all encompassing CGT. Labour has indicated that it might support National on bringing in a CGT. I can only guess, but maybe Labour might campaign in 2011 on accepting a 33 cents top rate – provided there was a CGT as well.
George
“The only way that any government could avoid being accused of helping the ‘rich’ at the expense of the ‘poor’ in such a situation is to never reduce the higher tax rates, or increase the level at which they kick in.”
It is National who are claiming they are not helping the rich at the expense of the poor. It is Key who says no one will be worse off.
I do not have a problem with the highest earners earning high incomes (if you get wha I mean), afterall they also pay alot of tax, many have children art privtae schools so pay again for education (if you see what I mean). national dont help themselves or the debate by fudging it at best or lying about it at worst.
National is shooting itself by pretending/lying about the impact on rich versus poor. They need to be more intelligent in their debating unless it is what it is, that is they are wanting to give a break to the top earners and it has to be at someone’s expense.
Apparently over a stated period of time shares are more profitable than property… yet banks lend for property purchases / investments but not share investments… we want to drive people away from property investment (apparently) and we want them to make plans for their retirement income… but arent all these policies simply driving even more profit to our banks because term deposit is all that’s going to be left.
I was “lucky” enough a couple of years ago to get entry to a “private” banking scheme, even though I did not meet their very high lower threshold. I found an active relationship with my broker, a world apart from my relationship with my “real” world broker. Returns were much higher, advice was of a higher and more active quality. Returns were indeed int he previously thought of as “too good to be true” category.
I think I have a point with all this… we drive people to bank investing, or fund investing, but the returns on those are pitiful. I dont know if it is the motivation (or lack thereof) or the lack of expertise, but behind the curtain that is private banking is the kind of investing advice/offerings that need to be available IF we drive people down the one way street to the bank as their means of securing retirement…
In this respect I say kudos for kiwisaver and the opportunities. I do shudder for those in default schemes however.
@ Tracy – “Apparently over a stated period of time shares are more profitable than property… ” Actually not quite so simple. Property has outperformed shares for many years, but the funds industry has come up with some neat stats to show otherwise. Although managed property companys also have lower returns for Joe public.
The difference is direct vs indirect investment. If you are willing to put in the work and do research you can significantly improve any portfolio (start up business has highest return). This is the key to why NZers DIY nation will prefer property even after CGT/Stamp Duty/GST and Landlord scum 110% Tax.
Thanks Jeremy. Can I ask you to clarify, you are suggesting that no matter what they do around the edges of property, “we” will keep using that as an investment vehicle? If yes, then this Govt must know that, and know that it wont drive people away from property investment, so its purely a revenue generating option?
Yes. However I also believe that Mark Weldon and fund managers like G Morgan and D Brash have convinced cabinet that a sustained attack on property will hurt confidence and drive the money to the MF industry. This misunderstands why kiwis don’t like handing money to some plonk who wont let them in on the good investments, as you described above. As with GST there will be sort term pain, then people will price this into their budgets. This is obvious with property as landlords will calculate this before buying a new property, or charge higher rent, or shift towns to make the figures work.
We Just love our renovate & sell or renovate & rent strategy, hence add value, hence out perform shares, but not businesses (the profitable ones). ie we work for the returns.
SPC Of all the proposals yours seems fairest. As said by Senator Gatling – Tax ‘em all. First I really want to know what behaviors do we want to target? Personally I would look at the shelf companies that developers & their advisers hide behind rather than fixing leaky homes. And the cheats who have not paid tax within the current rules.