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.