Red Alert

Manufacturing in crisis: Why pro-growth tax reform matters

Posted by on November 8th, 2012

During the last two weeks new data has confirmed what we already knew: manufacturing is in crisis. Far more manufacturing businesses are closing than opening and half the manufacturers that started up in 2008 have since gone bust. Iconic Kiwi manufacturer Fisher & Paykel Appliances has been sold offshore and will be delisted from the stock exchange. Advanced crystals manufacturer Rakon has laid off 60 hardworking New Zealanders. Dynamic Controls, a leader in high-tech mobility systems, is moving to close their New Zealand plant.

At the same time the overheated property market in Auckland is rearing its head again.

And just today we learned unemployment has climbed to a horrific 7.3%. Change is clearly needed in New Zealand.

Reform starts with the realisation that the current tax system has a fundamental and inappropriate bias towards speculation and against production and exports. So it is timely to note what a pro-growth tax package should contain, and why it matters to New Zealand’s manufacturing sector economic development.

New Zealand is one of only 3 OECD countries that does not have a capital gains tax and, as my colleague David Parker has noted, both the OECD and the IMF have reminded us this creates real problems.

Why should every dollar that you and I earn in wages or business profits be taxed, while nearly every dollar arising from gains in the value of property or shares or business ownership is tax free?

It’s not fair. And it’s just  not good for the economy either.

Making property speculation tax-free drives money into the property sector, meaning more competition to buy properties, meaning rents go up, and meaning young families are locked out of home ownership.

Making capital gains on business disposals tax-free simply makes an incentive for entrepreneurs to sell their businesses offshore, instead of growing taxable profits and creating jobs in New Zealand. A case in point is the “accountant farmer” who collects farms to realise capital gains, instead of farming to make sustainable profits.

A simple capital gains tax can help move the distortion that currently exists because of our biased tax system.

Without a CGT, the National Government is penalising innovators, meaning the positive spill-overs to our economy of a healthy innovation system are never fully captured by the innovators themselves. Capital is too scarce for young companies trying to commercialise research and development, and too many sell up early and lose their intellectual property to offshore buyers.

That’s why Labour believes a realisation-based, first-home-exempt fair capital gains tax is a no-brainer. All our polling indicates a New Zealanders are coming to agree.

Pro-growth tax reform also means giving our innovators a break; recognising the huge spill-over effects for our economy from a healthy innovation ecosystem.

R&D tax credits create a positive incentive (as opposed to the negative incentive around property). They encourage companies to look forward to future opportunities and help create a more neutral and long sited production environment and create high-value jobs.

Labour is looking seriously at how to bring back R&D tax incentives based on a survey of world best practise. My colleagues David Clark and Megan Woods are working on the link between taxation and innovation.

The bottom line is this: Everyone except the National Government can see the current system is not working. The IMF says we will have the OECD’s largest current account deficit by next year – bigger than Greece! That’s a road to ruin for today’s businesses and tomorrow’s young New Zealanders, so something must change.

Labour, the Greens, NZ First and MANA have launched an inquiry into manufacturing, and we expect submitters will canvass these important issues (along with other crucial issues like the over-valued and over-speculated dollar). Interested people should submit at manufacturinginquiry.org.nz.


10 Responses to “Manufacturing in crisis: Why pro-growth tax reform matters”

  1. Draco T Bastard says:

    Reform starts with the realisation that the current tax system has a fundamental and inappropriate bias towards speculation and against production and exports.

    True but what we need to do with our tax system is throw the whole damned thing out and start again from basic principles. It’s been chopped and changed so much over the decades that it’s just a bloody mess and more chopping and changing won’t fix it. Starting from scratch would probably easier as well – certainly make it a lot easier to ensure that there aren’t any loopholes that the tax dodgers can manipulate.

    Capital is too scarce for young companies trying to commercialise research and development, and too many sell up early and lose their intellectual property to offshore buyers.

    If the government wants to support young companies then change the banking system to one that actually works and the way to stop the latter is to ban foreign ownership.

    My colleagues David Clark and Megan Woods are working on the link between taxation and innovation.

    There isn’t any. People innovate because they see a need and set about looking for ways to address that need. Hell, a lot of innovation probably came about without any expectation of monetary reward.

  2. Richard says:

    Why is the argument for a CGT any less pertinent in respect of first homes? Whatever the asset, surely it’s inequitable not to tax capital gain while taxing income?

    National’s has a point: this exemption renders the CGT barely worth the effort and bureaucracy.

  3. bbfloyd says:

    Don’t be silly ricky…. Taking a deliberately oversimplified approach to what has been comprehensively revealed as policy does no more than expose the raiding parties argument as a nonsense…. Just half witted semantics that wouldn’t fly at all if we had a fourth estate that wasn’t corrupt…

    You discredit any utterence you make by putting such drivel to print, and presenting it as “argument”….

  4. bbfloyd says:

    “Hell, a lot of innovation probably came about without any expectation of monetary reward”… Absolutely right…

    But that’s not to say that smoothing the way for innovators to take the next step towards applying those innovations on a commercial scale shouldn’t be looked at…

    Or that attempts to create an environment that encourages innovation shouldn’t be an important aim….

  5. SJW says:

    Mr Cunliffe,

    It is heartening to see an MP cutting through the batshit and initiating a sane dialogue about an approach toward addressing on of the most pressing problems we are facing (along with the rest of the Western world).

    One doesn’t have to be a rocket scientist to see that while people are gaining more financial advantage by speculating on properties, or on futures markets than investing their money in “productive” activities, such as innovation and business ventures, that this is what they will continue to do.

    It appears to me that this phenomenon is one of the pivotal factors that is choking progress in the Western world.

    Judging by some of the comments on this thread, it appears that you might have some challenges in getting people to understand the very simple concept that is behind the approach you are promoting. I believe most ordinary people are very unaware just how much speculation is choking credit flow for productive and innovative activities, and are similarly in the dark as to how speculation is effecting price discovery; the very mechanism that effects prices of everyday products that we require to sustain our lives.

    http://fex.ennonline.net/34/has.aspx

    I believe that sorting out the details of a system that addresses this issue without creating more problems is not as easy as the general theory is to grasp, however considering the negative consequences that are abundant for all to see (who have eyes) it is clear that this approach you are speaking of is a very promising one to be focussing on.

  6. Draco T Bastard says:

    But that’s not to say that smoothing the way for innovators to take the next step towards applying those innovations on a commercial scale shouldn’t be looked at…

    Government prints money, loans it out at 0% interest to entrepreneurial types. Hell, it doesn’t even have to be a loan as the taxes that the business pays will eventually pay back the investment.

    If we want to make this country innovative then we need to get the present parasitical banking system off of our backs.

  7. MrV says:

    Draco,

    With 0% loans, do you think that provides too much incentive for everyone to suddenly become an ‘entrepreneur’ and get govt money?

  8. Jack Ramaka says:

    Shit houses in Auckland going for BIG MONEY = Shortage of Supply + Leaky Homes + High Council Fees + Development Levies + Expensive Building Material Costs + Land Shortage + Restrictive Council Zoning + GST + Strong Asian Demand = ANSWER

  9. Richard says:

    bbfloyd: You’re wrong in your assumption that I oppose CGT. I’m a big fan of a CGT, for the reasons Cunliffe outlines. My question asks: Why should first homes be excluded?

    Drivel? Really? Your response adds nothing to this discussion – please keep it constructive.

  10. bbfloyd says:

    Sigh.. ricky ricky, ricky…. show me where I said you oppose cgt… I’m waiting…………….

    Lad, if you can’t do more than make up lies to justify yourself, then best to not say anything…And attempting to throw my words back at me shows an alarming lack of thought….

    Do the tories have nothing useful to say… until they are supplied with them by those who do? Scary….

    @DTB…Couldn’t agree more with you regarding the “parasitical banking system”…. And yes, it really doesn’t look like rocket science when the reality of the benefits of utilising innovation are seen in their entirety…

    Why do the “merry prankster” party have so much difficulty with this issue then? One has to wonder….