Case for capital gains tax builds

Written By: - Date published: 2:52 pm, July 2nd, 2011 - 69 comments
Categories: Economy, tax - Tags:

The Herald today has a piece by Mark Lister bemoaning the lack of investment in the productive economy, with too much cash going into housing instead. On Thursday, Brian Fallow wrote how Kiwis are being shut out of home ownership by investors who see capital gain from housing as an easy win while workers are made to pay tax to effectively subsidise property investors who pay none. Is it time for a capital gains tax?

First Lister’s piece:

New Zealand has a well-documented savings problem, with households spending roughly 2 per cent more than they are earning. Clearly this situation would be helped if incomes were higher, with our GDP about 15 per cent below the OECD average, and even further behind Australia.

However, our current tax settings on investments are not helping the situation either. With no capital gains tax or inflation indexing, the existing regime favours borrowing over saving, and capital assets over income assets.

In its final report, released in January, the Savings Working Group (SWG) suggested that households would be more inclined to save if the Government considered a number of changes to the taxation of investments.

Tax settings are an important driver of investor behaviour and there are a number of changes that should be implemented to deliver a less distorted, more investor-friendly and efficient environment for New Zealand investors.

To begin with, let’s focus on what is wrong with our tax rules on investments. Investment capital in New Zealand is essentially taxed three times. The money that is saved has been taxed already, because it comes out of your after-tax income that has seen PAYE deducted.

The income generated by the investments is then taxed again and when you finally spend that income, you are taxed via GST. It makes sense, therefore, to avoid a layer of tax by simply earning it then going straight to the spending phase, rather than earning, saving and then spending.

With no capital gains tax, the system further distorts investment decisions. It makes more sense to borrow (and obtain the interest deduction) and buy capital assets like rental property than it does to save in higher-income investments such as deposits (and higher-yielding shares, for that matter), which incur tax on this income with no adjustment for inflation.

Regardless of its merits, there is no chance of a capital gains tax being introduced in New Zealand.

Really? Why not? If it’s a good idea, and my google search is struggling to come up with any authoritative voices who say it isn’t (even National mouthpiece David Farrar supports it), why can’t a major political party have the courage to grab the bull by the horns? The Greens, who are always at the front of the pack, have been calling for a capital gains tax to fund green investment and/or their idea for a tax-free bracket for years. Labour has also proposed a tax-free bracket, and there is speculation in the media that they have a major announcement coming on how they will fund it. It would be a bold move if they go down this track and it would attract a lot of praise from those who care about the economy.

Fallow points to the housing bubble and how it made some people very rich without paying a cent in tax:

How much has the demand side of the market been stoked by tax policy, or by unrealistic expectation about the returns from housing relative to other investments?

Although expectations eventually adjust to market reality, the commission says, the adjustment can be very disruptive and take a long time, with long-lasting effects.

It has been argued that the surge in house prices in the middle years of the last decade cannot have been driven by population growth. If it had been, there should have been much more pressure on rents than was observed.

During the five years to the end of 2007 when house prices doubled, rents increased by an average 3 per cent a year according to the consumers price index.

Data from tenancy agreements, which cover new rental agreements, show swifter growth, about 6 per cent a year, but still less than the double-digit increases in house prices.

A survey of landlords in 2003 – still in the foothills of the housing boom – found capital gains the most commonly cited benefit of investing in property.

And those gains are untaxed.

For some reason our political leaders don’t trust us to be able to grasp the proposition that it makes little sense to tax people if they increase their wealth by the sweat of their brow but not if they increase their wealth by holding the right asset over the right period.

So a capital gains tax would fix an equity issue, as well as an allocation of investment capital issue. Why should a dollar earned by holding an asset (that is, arguably, deferring consumption) not be taxed when a dollar earned by working is? Doesn’t that mean that everyone paying PAYE is subsidising those who are making a living from untaxed capital gains? Is that fair?

It’s not even just a rich vs poor thing – although the wealthy are obviously those who make the most income from capital gains – it’s also people with similar incomes but one faces no tax when their income comes from capital gain and the other faces a tax of up to 33 cents in the dollar (plus ACC). A capital gains tax doesn’t have to be about raising more revenue, it could be about reducing the tax on work and rebalancing investment incentives.

If we want to be a wealthier country we’ve got to change the incentives that see a small portion of the population soak up huge amounts of capital running around paying each other more and more for the same properties (and the best time to start doing that is before the next bubble forms), at the same time, we need to increase the attractiveness of investment in productive capital and working. A capital gains tax would allow all that to happen.

Nearly every other developed country taxes capital gains because it makes sense. So why can’t we?

– Bright Red

69 comments on “Case for capital gains tax builds”

  1. RedLogix 1

    Realised or unrealised capital gains?

    A realised CGT (ie taxed on sale) merely creates incentives to never sell.

    An unrealised CGT (ie taxed annually on imputed capital gain) will push up rents to cover the cash flow and be massively unpopular.

    Real capital gain or nominal?

    Because assets that are held for many decades are subject to substantial changes in nominal price, while the real price (ie the cost to buy an equivalent asset elsewhere in the market) is essentially unchanged. If a business wants to sell it’s existing premise that it has been in for say 20 years and move to something different down the road, there is likely to be a substantial tax bill, creating a big shortfall. How is that fair?

    Or the same business sells the property (it’s main liquid asset) to pay down bank debt… again a big shortfall. Given that many banks only lend to businesses on the back of some property based collateral.. the introduction of tax on sale would create a problem for both parties.

    If you are going to tax a capital gain, are you going to permit a refund on a capital loss?

    Because if you don’t you allow a refund on a loss, it creates an enormously asymmetry, where cyclic changes in asset prices can pump money out of the market in the short-term.. even when there has been little change long-term.

    A survey of landlords in 2003 – still in the foothills of the housing boom – found capital gains the most commonly cited benefit of investing in property.

    Because the cash flow was so poor the only sane preference was to look for capital gain. Obviously they ticked that answer… but I can assure you ALL landlords would far sooner have better cash flow flow from rents if it were possible.

    For many property investors there is no intention to sell in the medium-term; the only merit of an increase in asset value was to be able to leverage it in order to borrow more from the bank. Therefore the existence of a CGT can have no impact on their behaviour.

    At the same time I have no quibble with the root problem. Because banks were willing to lend on this class of asset above all others, and because investors in this country have been burned repeatedly by all other investment forms… then naturally we got misallocation of capital.

    The solution however does NOT lie in a CGT. As your last para states nearly every other developed country with a CGT has exactly the same misallocation of capital into housing assets as does NZ. Why would it work here when it doesn’t pretty much anywhere else?

    • “A realised CGT (ie taxed on sale) merely creates incentives to never sell.” I would add 100%.
      Exactly, and therefore an incentive never to buy for the purpose of rent farming, since property becomes no longer open to speculative pressures. Property may as well then be nationalised, and stolen Maori land returned on the same basis, and the value accruing to property would then be from the value of production on that property. With one swift kick, the whole unproductive, speculative rent farming of property as a mounting cost of production would be eliminated. Of course no government would dream of doing this as the vast majority of NZs think that capital gains from property is a god given right.

    • Draco T Bastard 1.2

      Well, if you’re not going to tax some incomes then you shouldn’t tax any incomes. Fair’s fair.

      Because if you don’t you allow a refund on a loss, it creates an enormously asymmetry…

      Other income taxes don’t get a refund from a loss so why should CGT?

      • RedLogix 1.2.1

        Actually I’ve long agreed with the basic idea Dave.

        It’s not actually the building or chattels that the banks speculate in.. it’s the land value. I’ve frequently advocated making ALL residential and commercial land (ie non-farming) leasehold… with the Crown being the owner and the local TA being administering rent instead of rates.

        In one stroke you eliminate all speculation in land value because it can no longer appear as an asset for bank collateral.tB

        @DtB

        Other income taxes don’t get a refund from a loss so why should CGT?

        Well an employee cannot earn a ‘loss’ (ie receive negative pay) so the issue never arises, but businesses can and do frequently run at a loss for a period and receive tax credits for that reason.

        • Adele 1.2.1.1

          GST is a negative pay loss to an employee as they cannot claim a refund, as a GST registered business could, and perhaps, like CGT it is a necessary evil – or is it?

          • RedLogix 1.2.1.1.1

            Now you’ve made my head hurt!

          • uke 1.2.1.1.2

            Some other employee losses which cannot be written off against income include:
             
            Transport costs to get to and from the workplace
            Workplace clothing & accessories

            • RedLogix 1.2.1.1.2.1

              Which they should be. This creates all sorts of stupid distortions where contractors working alongside employees doing exactly the same work are treated differently for tax purposes.

              I understand that NZ is fairly unusual in not permitting these deductions that are common in other countries, eg Australia.

          • Drakula 1.2.1.1.3

            A very good point that I have often pushed on Frogblog, employees should be refunded on transportation to work, work uniform and lunches.

            Capital Gains Tax is not at all evil I think it makes common sense if a government want GST CGT to check the next property bubble then they could use the revenue collected to provide state housing so that by the time the next bubble comes a fair portion of the working population have affordable acommodation.

            A further measure to check housing bubbles is to charge overseas investors double the rate.

            The system is 100% for the employers and people can be forgiven for thinking that this could be a conspiracy to introduce a slave state by stealth!!!!!!!

            • Drakula 1.2.1.1.3.1

              Sorry I made a mistake in the above post , it should be ‘if a government wants CGT’ not GST.

              [lprent: fixed. ]

  2. Peter 2

    My second house currently has a capital loss of $90000 so I would be hoping for a tax refund when I sell. I’m sure this is not an uncommon story. A big issue is how do you measure the gain?

    Maybe its easier if all property is taxed at a percentage of its rateable value on an annual basis.

  3. gingercrush 3

    A capital gains tax should be about raising government revenue. Either its implemented to increase government revenue or its implemented to allow other areas of taxation to be reduced. If you want a CGT implemented to solve any other issue then you’re unlikely to solve it. You’re far better looking at other ways to solve the problem.

    Since we’re talking about housing. Far more useful to explore funding ratios. Remove the ability to run property costs against PAYE. Actually getting IRD to use the capital gains tax that exists already and is already abused. Lift people’s income so they can buy housing. Stop foreigners having the ability to buy land/housing in this country (I disagree with that but it would undoubtedly help the matter), remove taxation or provide incentives in other areas of investment. Bring in stronger rules to encourage capital markets to prosper.

    Not to mention a CGT being implemented would undoubtedly hurt the small investor in residential property. Would push up rents because emphasis would be on regular income from housing rather than the capital gains on sale of that housing. Many people’s retirement income would be damaged as they now find themselves having to pay tax. You’ll still find people unlikely to invest elsewhere.

    • RedLogix 3.1

      For once we are on the same page gc.

      All that is really needed is to ensure that the existing rules around the differences between traders and investors is properly defined and enforced and most of the problem goes away.

  4. Alice 4

    I have bought a solid silver wolf ring, it symbolises that you are mine, and I will support you with revealing the hidden ‘truths’ to the world.

    My wolf is ready to attack, mouth open.

    He is beautiful.

  5. MrSmith 5

    The underlying problem is that Young people need access to cheap money so they can purchase there first home, “I can here the moans from here” Another property boom you just what we need.
     
    I would like to see the new government making low interest loans avalible to people so they can buy a house, people will argue that this will start another property boom, well it has been done before, I think it was called government advance? someone here might be able to enlighten me on the name and if it started a boom at the time? there would be set rules to the scheme. yes there may be rip offs and people that milk the system but very few if it is well thought through.
     
    Two problems at the moment, this lazy government couldn’t think there way out of a paper bag unless in involved filling there own pockets and they won’t interfere in the market will they.
     

    • KJT 5.1

      The best way to do this is to return to building a reasonable amount of State housing. With rent to buy available.

      Increasing the present inadequate supply of housing and putting more of a ceiling on pricing.

      Prices are not going to drop, with present policies, given a shortage of houses, land and tradespeople along with the price gouging on building materials.

      Capital gains should be taxed the same as work income, but an FTT would be more effective in capturing and reducing speculation.

    • Drakula 5.2

      Mr. Smith I think that the scheme you are talking about was the New Zealand State Housing scheme which was started by PM. Joseph Savage. the first welfare state in Britain did the same during the 1930’s depression.

      And it was working as a lot of tradesmen, laborours and apprentices were employed and trained.

      Money is made to be circulated among the community not locked in investment funds that very few control.

      I hope this is helpfull.

  6. queenstfarmer 6

    Should definitely be considered, as with a land tax (noting that rates are already a quasi-land tax). The only bottom line is that it should exclude first homes and family dwellings.

  7. prism 7

    Rates seem much more tied to direct services than a land tax would be. A small land tax each year would seem a good revenue raiser and there would be no deductions or write-offs so a fairly flat tax. Capital gains tax, not very high, on sale of other than personal housing of last three years would not result in breakdown of life as we know it surely. The market would adjust to it I’m sure.

  8. prism 8

    Further to previous I think that I have have read that there is a CGT on houses sold within so many years but not many people get to pay it. RL discusses business premises but it is housing that has been the bubble maker. So it needs to be targeted at quietening housing doesn’t it.

  9. Alice 9

    Thinking of suicide, why?

    When you have so much to look forward too. Open your eyes darling the whole world is waiting for you.

    It’s all in the mind- focus!

    Anyway I am here, and you don’t have to worry about a thing, you are mine, so stop worrying.

  10. Jenny 10

    Europe Taking the Lead on Speculations Tax

    Sarah Anderson

    Remember when New Zealand used to lead the world.

    • RedLogix 10.1

      Exactly Jenny… an FTT is a far better tool to catch the real tax cheats. Vast sums of money shunt around the world totally untaxed in any fashion whatsoever. Bear in mind the total financial sector is many, many times larger than the real economy.. hundreds of trillions of dollars.

      By contrast CGT’s are complex and expensive to administer and really don’t achieve what their promoters hope for. Nor do they actually raise all that much tax revenue…

      • ZeeBop 10.1.1

        Our economy isn’t working for the people, unlike economies with a CGT, GST off food, where there are skilled citizens who can handle complexity. Many regulations of government do not raise much tax but are very effective in creating economic efficiency, which we do not get here. Because of jerks like you who think they’re smart, but really your scared, because when NZ has proper world standard tax system all those kiwis who do know about complexity, are capable of learning about complexity, will come home and take your job. Don’t worry you’ll find other work say selling second hand cars.

        • RedLogix 10.1.1.1

          I suggest that you are reading too much into one very short comment.

          All I have said is that is CGT’s are not effective at eliminating asset price bubbles. While they are a legitimate part of a tax system, they are also complex and expensive to administer… and do not achieve the economic efficiency you are claiming for them. Does NZ really need one?

          The reasoning is simple. Most other countries in the world have a CGT regime of some kind… but all of them have equally experienced the same asset price bubbles as we have experienced.

          I have personally outlined in other comments a number of alternate approaches that I think would be more effective. Address the issue. Name calling goes nowhere.

          • ZeeBop 10.1.1.1.1

            I never talked about asset bubbles, but let’s, the asset bubble was caused by exasperated by printing of money, yet still UK, OZ, have manufacturing bases, a wide diverse economy. We have both asset bubble and a single sector mentality, capital growth.

            The problem is capital growth, most countries deal with this with a CGT, the law and the practitioners are well established, the notion that CGT is too complex has nothing to do with the need to immediately introduce some kind of solution to the capital growth problem.

            Going it alone with a decade of ‘new’ schemes, when we should of had a CGT for decades already is such supine and dull headed.

            Introduce a CGT, and then discuss alternatives, the countries elites have already failed us, why would we want them to dither any longer, why woule we trust them to build a spanking new system when they failed to perceive the need all these years.

            Its a slam dunk, CGT is easy to get up and running, easy to keep the complexity down because we can see how it was implemented elsewhere and avoid the snarls, and the ‘thinking classes’ like yourself using oh its too complex, your to dumb to understand it, is not a justification for anything more than we should not listen to you. Clearly you have no alternative and you just like to heckle with how stupid you are to undertstand a tax scheme that runs in many countries globally.

            Can I say it again, when did your ignorance (oh, the complexity) become a fact for consideration?

            • RedLogix 10.1.1.1.1.1

              So if you are not ‘talking about asset bubbles’… what’s your point again? What you seem to have is a solution called “CGT” that you are dead keen to implement… but what’s the problem that you are trying to solve here?

              No-one said a CGT was ‘too complex’ to set up. Sure we can copy one from overseas… but that still does not mean that it is not complex (read: makes lots of money for tax accountants) to operate.

              The root problem everywhere is that there is no simple working definition of a ‘capital gain’, which creates rafts of rules to try and cover the various cirmcumstances. And whenenever you have lots of rules, there will be lots of highly paid accountants working hard to dodge them. The lack of a CGT is one of the contributing reasons why NZ is frequently cited as one of the easiest countries in the world to do business in.

              And the common experience form all these other countries that already have a CGT is that they do not prevent asset bubbles, the missallocation of capital, or improve economic efficiency in any obvious way. With much of the Western world’s economies on the verge of collapse, I’d say it was a slam dunk NOT to slavishly copy them.

              After all the most dramatically successful economy in the world right now is China…why not look to them with their highly centralised, state controlled banking and finance sector for some lessons?

              • ZeeBop

                RedLogix … but what’s the problem that you are trying to solve here?

                Answer. The capital gain problem that distorts our economy, do keep up.

                RedLogix:- No-one said a CGT was ‘too complex’ to set up.

                YOU did! You brought it up as an issue. Why would I have, I’m for a CGT.

                Thr ‘root’ problem is your low standards, your own ignorance, your forgetting what the debate is about, and your forgetting your own stated position.

                • RedLogix

                  The capital gain problem that distorts our economy, do keep up.

                  Fine. It’s good to see what you are getting at. Now produce some evidence that CGT’s which are so common elsewhere in the world have suceeded in achieving this. In particular you might want to show how CGT’s have prevented highly inflated property prices bubbles in say Australia, USA, UK, Spain… etc

                  No-one said a CGT was ‘too complex’ to set up. YOU did! You brought it up as an issue.

                  My words were: “By contrast CGT’s are complex and expensive to administer and really don’t achieve what their promoters hope for.”

                  In this context; ‘administer = to operate’. If I had intended to reference the setup process I would have probably used the word ‘implement’. Does that make it clear?

                  • Colonial Viper

                    If the aim is to prevent asset bubbles then one cannot escape the fact that asset reform is necessary. A CGT, as useful as it is, does not do this. (As for the complexity, a straight old asset tax is definitely easier to administer).

                    Steve Keen (http://www.debtdeflation.com/blogs/) favours limiting the amount that banks can lend and collateralise against a property. The limit would be set to a multiple of a typical rental income for that property.

                    If the rental income for a house was $20,000 p.a. the bank may only lend say 10x that amount against the house = $200,000.

                    If banks were unable/unwilling to lend any more against that house, there would be no debt fuel for an asset bubble and investors would have to run their investment properties more for income, not capital appreciation.

    • Drakula 10.2

      Yes Jenny I remember, that was the time when Rodney Hide was a lawyer defending all those poor victims being viciously persecuted by the Inland Revenue Department.

      These poor souls were the life blood of our nation they took risks, quirked all hours of the day and held our whole society together like Atlas holds the world !!!!!!!

      We should give thanks on our bended knees for people like these!!!!!

      They are now running this country !!!!!!

      Think about it !!!

  11. Alice 11

    Yes I know what you are saying. I believe when we are both ‘in sync/ in togetherness’ it’s, well to me, the most happiest feeling I have ever had.

    I love how you can deal with anything, I will be forever happy and immensely satisfied watching you grow and tackle issues that only you can do.

    You are my other half; believe me when I say this, I want what is best for you- and what is best for you, is best for everyone, I know.

    You will do the right thing and it will be something so brilliant, and I will love you for it, always, I promise.

  12. Alice 12

    You will solve the case because you you you you you you YOU you you you you YOU YOU you………………………love me.

    This I know, and as it happens, I love you too.

  13. Alice 13

    Ian, you don’t need to threaten people, you need to focus on the case. Threatening people isn’t good for ‘your’ health. Focus on the case and looking after yourself, being nasty all the time cannot be a good thing, especially for you, who has a massive task ahead, be sensible, be mature in your actions and clear out any bad thoughts. You have to look after yourself otherwise you will not exude that ‘magnificence’ that comes with being ‘special’ and ‘important’.

    You can tell when someone isn’t healthy and doesn’t love himself because it shows by the negativity they project.

    Now, you have no reason not to love yourself anymore- you have a case to focus on (a purpose), you have me here to lean on, you have a new start, fresh beginnings. If people ask how you have gone from ‘this’ to ‘that’ how you can be one way and then another, you just say “I’ve seen the light” and that is all you need to say.

    As soon as you relax a little and stop being so nasty, you will sleep more, eat more and start laughing more, I promise.

    And even though I am coming and going with our relationship, you have to understand that you haven’t always been so nice to me, as I haven’t always been so nice to you either but hand on my heart I truly truly undeniably want to stay here, with you, supporting you for as long as possible, for both of us to reach heights that no one as ever reached before.

    You and I are a team that is unbeatable. I will be beside you all the way, when you do what is right.

    We have to stick together, this is it- we will change the world for the better, you and me together, and you will be the best investigative journalist the world has ever seen.

    Just how it is supposed to be.

    x

  14. Alice 14

    And you don’t need to be scared; you are not alone anymore, are you?

    I’m here.

    If you need help – I’m here- no problem.

    If people rubbish you in the media, if you want me to step in- don’t worry I will, I can be professional and I can talk sense, so don’t worry about anything.

    I will back you up publically- I see good in you and a tremendous amount of talent, so therefore I can back you up.

    Don’t worry about the criminals, if you don’t want to take them on, head on, in the media, you just send the media to my door, I will do it.

    You just write a fucking brilliant masterpiece, so it is all down on paper, the whole lot, for the world to see.

    And from there – Victory!

  15. Gareth 15

    I would agree with a CGT, Every last penny of my income goes to pay the mortgage on my 2 bedroom place. I would rather stuggle than pack my daughter off to ece full time so i’m stuck for the for next few years…
    I am envious of some of the older guys who bought their first place in the same area for $100,000 @ 15 years ago. And now due to investment buyers they are valued at @ 300,000.
    Anything that would potentially drop house prices would hurt me but someones going to suffer at some stage so may as well be people like me to stop things getting worse.

    It will also be of a major social benefit as it’s well documented that kids with a parent at home do better. I couldn’t believe the number of mothers from the neo natal classes my wife and I went to that had to head back to work at between 6 weeks a 6 months so they could keep servicing the mortgage… It’s just wrong.

    • RedLogix 15.1

      And now due to investment buyers they are valued at @ 300,000.

      Actually real investors avoid driving the market if at all possible. They are looking for undervalued properties that they can add some value to and will buy on the numbers… not emotion. And while a significant portion of the market, home-owners were still by far the dominant driver of prices.

      There are basically two things drive house prices:

      1. Net immigration and population growth. This determines underlying demand in the short-term, but is usually balanced out by increased supply within a few years. This factor causes short-term spikes, but cannot drive a sustained bubble.

      2. Bank credit. In particular the LVR (Loan to Value Ratio) and equity policies of the banks.

      In the last decade banks were competing with each other for for the hugely lucrative mortgage business. The primary way they do this is not with interest rates, low interest rates would destroy the value of the business… but by lending policy.

      If you and I both have $100k of cash, and we are both bidding on the same house with a QV of say $500k… who wins?

      Well my bank will lend me an equity of 90% while your bank limits you to 80%. You can only bid to $500k and then you are out of the game. In principle I could bid to $1m, but I only have to bid $505k and I win the house… and my bank gets the business.

      The only difference between us (and our banks who were also competing, not for the house, but for the mortgage) was lending policy. And this is what drive prices.

      Want proof of this statement? The moment the GFC crisis happened, lending policies tightened everywhere… and prices stabilised.

      • Draco T Bastard 15.1.1

        Competition – making things more expensive since forever.

        BTW, the main driving factor behind financial bubbles is expectations. If people see that they can buy a house and flick it on in a few months and make 15% profit then they will do so. The banks policies tend to feed those expectations as they see their own profits soar because of it.

        • RedLogix 15.1.1.1

          If people see that they can buy a house and flick it on in a few months and make 15% profit then they will do so.

          Do it once… you get away with it. Do it several times in a few years and you are a trader. At that point any capital gain is treated as income and will be taxed.

          That has been the current tax law for a very long time now. The trouble is that the National govt in the 90’s more or less directed IRD to ignore enforcing these rules.

          If it is your intent to capture this situation, why introduce a whole new raft of tax rules… when you are not even enforcing the current ones?

          BTW: One of the first things this National govt did when they got into power was disband the investigation teams IRD had set up under Labour to catch exactly this kind of tax dodging.

          • Draco T Bastard 15.1.1.1.1

            So the necessary laws are already there – just not enforced at the will of the current government.

            • Dan 15.1.1.1.1.1

              Draco;

              There’s also a raft of exemptions for many land taxes that can either be removed or modified. But enforcement as it stands is largely limited to commercial property – rather zealously I might add. For the better part of a decade, residential property was largely ignored. But modifying the exemptions is the easiest way, plus it wouldn’t so much be adding a capital gain tax as just broadening the base of the one we already have.

      • Gareth 15.1.2

        Or I have a deposit and the banks will give 80%, i’m up against someone with a few properties with enough equity in them that the bank was more than happy to offer them 100%.
        A first home buyer will stuggle in this situation and prices will push up.
        People have been buying multiple houses as they are seen as a good way to get a return or create wealth. Through a combination of tax right offs, rent payments and capital gains you can end up owning property (or have alot of equity) that has cost you in real terms very little.
        If you suddenly make this unattractive as an investment option demand drops and prices will follow….

  16. Alice 16

    xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

    Money talks, yes but do you know what truly inspires- SUCCESS AND CONFIDENCE.

    That is the true inspiration here.

    Triumphing against the odds, “EVERYONE” admires STRENGTH.

  17. deservingpoor 17

    Those people who buy houses with the intention of selling them at a profit and don’t pay tax on that are breaking the law. It is their taxable activity and as such is taxable.
    The problem comes from proving the person’s intention. Its relatively easy in the case of real estate agents buying and selling large numbers at a time for very short periods. It becomes a lot more difficult in the case of smaller scale investors holding the properties for longer periods.

    A capital gains tax gets around this by making everything that is bought and sold liable for tax, regardless of whether it is your taxable activity or not. That creates its own problems in people simply selling the family home after 20 years.

    Perhaps rather than a capital gains tax, the current law should be changed so that you are assumed to have bought and sold property as your taxable activity and its up to you to prove otherwise. This would be relatively easy in the case of someone who had owned and lived in a property for 20 years and not so easy for someone who has a portfolio of 10 highly leveraged properties that they renovate and then sell.

  18. RedLogix 18

    Those people who buy houses with the intention of selling them at a profit and don’t pay tax on that were breaking the law. It is their taxable activity and as such is taxable.

    Exactly. And I have it from an excellent source that it was the 90’s National govt that quietly directed IRD to ‘look the other way’ and not pursue enforcing the intent of the law.. that allowed this problem to become so entrenched. To the point where many people still to this day do not realise how traders are liable for income tax on a capital gains.

    A capital gains tax gets around this by making everything that is bought and sold liable for tax, regardless of whether it is your taxable activity or not

    What.. if I buy a cabbage in the morning for $1 and sell it in the afternoon for $2? I don’t think so…

    In general current practise defines an capital asset (as distinct from the stock asset) as something held for more than 1 year, so aas you say there are other rules to capture the property traders who flick properties around within months or even weeks.

    It becomes a lot more difficult in the case of smaller scale investors holding the properties for longer periods.

    True.. but then again why bother? There are so many variations on intent and circumstance that writing rules to capture them all fairly is extremely difficult. Which is one reason why IRD has never been keen on implementing a CGT… they see a lot of expense and difficulty for not a lot of return in our small economy.

    Perhaps one simple way to eliminate the perceived ‘tax advantage’ of property investment would be to make ALL mortgage interest tax deductable… ie even on the family home. In other words put home owners on the same tax footing as businesses. The most of the arguments would go away.

    At the same time you would also need the Reserve Bank to use it’s regulatory powers to limit LVR’s and Loan to Imputed Value Ratios. That would be the simplest and most direct way to prevent property bubbles without a complete re-build of the entire system.

  19. Jenny 19

    .
    “Stop Corporate Greed”

    To get an inkling of our future under the Nacts, just replace the words – US with NZ. The names -Reagan with Key – Brash with Bush – Roosevelt with Savage – Republican with National and Fonterra with Dean Foods

    From the Article, “How Greed Destroys America”

    consortiumnews.com

    Reagan’s continued popularity also makes it easier for today’s “no-tax-increase” crowd to demand only spending cuts as a route to reducing the federal debt, an ocean of red ink largely created by the tax cuts of Ronald Reagan…..

    When a majority of Americans voted for Republicans in Election 2010 – and with early polls pointing toward a likely Republican victory in the presidential race of 2012 – it’s obvious that large swaths of the population have no sense of what’s in store for them as they position their own necks under the boots of corporate masters.

    In his first inaugural address, Reagan declared that “government is the problem” – and many middle-class whites cheered.

    However, what Reagan’s policies meant in practice was a sustained assault on the middle class: the busting of unions, the export of millions of decent-paying jobs, and the transfer of enormous wealth to the already rich. The tax rates for the wealthiest were slashed about in half. Greed was incentivized.

    Ironically, the Reagan era came just as technology – much of it created by government-funded research – was on the cusp of creating extraordinary wealth that could have been shared with average Americans. Those benefits instead accrued to the top one or two percent.

    The rich also benefited from the off-shoring of jobs, exploiting cheap foreign labor and maximizing profits. The only viable way for the super-profits of “free trade” to be shared with the broader U.S. population was through taxes on the rich. However, Reagan and his anti-government true-believers made sure that those taxes were kept at historically low levels…….

    …….Whenever the political descendants of Theodore and Franklin Roosevelt tried to steer the nation back toward programs that would benefit the middle class and demand greater sacrifice from the super-rich, the wheel was grabbed again by politicians and pundits shouting the epithet, “tax-and-spend.”

    The article cites a U.S. dairy company CEO from the 1970s, Kenneth J. Douglas, who earned the equivalent of about $1 million a year. He lived comfortably but not ostentatiously. Douglas had an office on the second floor of a milk distribution center, and he turned down raises because he felt it would hurt morale at the plant, Whoriskey reported.
    However, just a few decades later, Gregg L. Engles, the current CEO of the same company, Dean Foods, averages about 10 times what Douglas made. Engles works in a glittering high-rise office building in Dallas; owns a vacation estate in Vail, Colorado; belongs to four golf clubs; and travels in a $10 million corporate jet. He apparently has little concern about what his workers think.

    • RedLogix 19.1

      The article cites a U.S. dairy company CEO from the 1970s, Kenneth J. Douglas, who earned the equivalent of about $1 million a year.

      It wouldn’t be too hard to use the Companies Act to limit top incomes to no more than say five times the median income of the entire organisation. (Including shares and bonuses from the corporate.)

      Or use the tax system, ie any income over the same five times limit is taxed at say 70%. Not too difficult as there would be relatively few people involved.

  20. sean maitland 20

    If a CGT was implemented it is going to instantly drive up rents across the board. The mid term effect would be that people simply won’t sell any more.

    It is a typical socialist approach to trying to “fix” things. You want people to invest in productive capital, businesses and shares – so you try and force them into it by crippling other forms of investment. Kind of akin to holding a gun to someone’s head to get them to do something…….

    Its all quite hypocritical coming from the left, when under your watch, Cullen and co completely destroyed the share price of AIA and Telecom…….and in doing so cost many kiwi investors tens of millions of dollars

  21. Nick K 21

    Believe me when I say if we had a CGT it would force house prices up due to supply being restricted as investors just hang onto stock. It would also force rents up as Sean says. Think very very carefully about this if you are “caring” leftie.

    • dave brown 21.1

      Its not ‘left’ to let speculators determine housing prices. That’s what ‘uncaring’. I think a CGT may have a short term effect as you say, on the other hand many speculators will quit before a tax comes in having the opposite effect. Probably not a hell of a lot of different, except that instead of housing policy being set by greedy bastards, it will be set by the decent goal of a roof over the families head that isnt subject to profiteering. And that’s not even socialism yet. Ideally there should be no private market in things which merely extract monopoly rents on finite resources that should be socialised.

    • Descendant Of Smith 21.2

      I continue to think house prices will drop as the baby boomers die off anyway – bye to their own home and bye to all the rental properties they have inflated the prices on competing against each other.

      Many of our skilled young people will be working overseas and who will be left here to buy them? The low paid, the unemployed.

      Not everyone wants the hassle of being a landlord and I know quite a few children of baby boomers who have inherited a couple of properties as their parents died (their own and a rental) – first thing they did was sell them and get the money.

      Forecast that trend out over the next twenty years.

  22. Draco T Bastard 22

    Want to can speculation in housing?

    Then build a lot of publicly owned apartment buildings with accommodations suitable for ranges of people from individuals to families. Set rent to 10% or 20% of household income. Although anybody can rent this accommodation priority would be set for those most needy.

    Unfortunately, no government actually wants to can the speculation because, since the neo-liberal revolution in the 1980s, it’s pretty much become the driver of the whole economy.

    • Gareth 22.1

      I don’t think large apartment blocks are the way forward… they seem to degenerate very quickly. You only need to look as far as the estates in parts of London or the apartment blocks that are rapidly falling into disrepair in countries like Bulgaria. Much better to create suburbs with houses of differing size and design to attract a range of people represtenative of society.

      • Draco T Bastard 22.1.1

        You can also look in London and other parts of Europe and find apartments that have been there for centuries. I’d say that if apartment blocks are falling apart quickly it probably has more to do with quality of construction and materials.

        Much better to create suburbs with houses of differing size and design to attract a range of people represtenative of society.

        Nope, because we can’t afford them. Spread out suburbs cost far more to build and maintain than compact suburbs based around high-rise apartments. As I commented the other day.

        • ZeeBop 22.1.1.1

          Cheap oil made sprawl possible, because too stimulus is now shown to worse than too little.

          Scarcity drives innovation, but we had decade on decade cheapening energy supplies and it shows in the distorted unsustainable and near disastrous world economy.

          The right claimed it was their genius and now we all get a hard lesson, they were lying to us, themselves, and selling us all short.

          The Donkey and the Elephant, you’d think people would work out why. Bulls and Bears.
          The Donkey is a hard worker, the Elephant however has to be over fed and under delivers most of the time, if not destroying the land, water, trees.

          We have too many elephants and not enough donkeys.

          • Colonial Viper 22.1.1.1.1

            Hey don’t wail on the elephants, they have the wisdom and memory of the ages and a very gentle caring nature 🙂

      • Colonial Viper 22.1.2

        I don’t think large apartment blocks are the way forward… they seem to degenerate very quickly.

        How is it that a large hotel can hold together for 20, 30 or 40 years with only the occasional update and bit of maintenance?

        You only need to look as far as the estates in parts of London or the apartment blocks that are rapidly falling into disrepair in countries like Bulgaria.

        Why don’t you look at Singapore and Hong Kong where high rise apartments built in the 1960’s and 1970’s are (on the whole) doing just fine.

        • rosy 22.1.2.1

          How is it that a large hotel can hold together for 20, 30 or 40 years with only the occasional update and bit of maintenance?

          40 years? our apartment block is a hundred years old, and that is certainly not ancient in the context of the city I’m in. Apart from the addition of a lift the outside of 5-storey building is pretty much as it was built. All apartment blocks of this size have a central courtyard and with long term rental contracts are well-maintained and renovated at the end of each 5-10 year lease. Parks and gardens are within 5 mins walk (and cycle lanes are everywhere). I’ve not lived in a better city – for kids, for ease of use and safety. As far as I’m concerned this is the way to grow a city.

          • Colonial Viper 22.1.2.1.1

            Heh I’ve never actually lived in an apartment block for longer than a few months at a time so you have way more experience than me 🙂

  23. Descendant Of Smith 23

    Including as a priority building homes for people with disabilities, including space for their care givers.

    Houses with wet areas, ramps, hallways wide enough for a wheelchair, close to shopping areas to minimise additional transport costs, incorporated into other housing areas – not ghettoised – so people with disabilties are part of our community – not segregated/

    It’s ridiculous that state housing doesn’t build homes like this now – they build a house and then it gets modified through Enable funding.

    This by itself would be a good start – particularly as we have an aging disabled population as well as an aging general population.

    If we can’t even ensure that some of our most obviously vulnerable people can’t have decent housing there seems to be little hope for anyone else.

    Even if private enterprise could provide this sort of housing the rent to our least likely to have a steady income people would be prohibitive even without the additional cost such housing entails.

  24. Herodotus 24

    Ther ehas been little mentioned re if there is a desire for savings, I ask why should someone put there money in a bank. Currently the best rate from a bank is 4.5% for 9 months, from the interest earned withholding tax is deducted. So we end up with a position that in real terms in 9 months time the money has reduced in its value (once inflation is taken into account). This is with the highest return from a traditioanl bank. The shorter term deposit rates float around 3-3.5% p.a.. So why would anyone deposit money in a bank ?

    And to RL & DtB
    @DtB
    Other income taxes don’t get a refund from a loss so why should CGT?
    Well an employee cannot earn a ‘loss’ (ie receive negative pay) so the issue never arises, but businesses can and do frequently run at a loss for a period and receive tax credits for that reason.
    The tax applicable to any loss is only able to be claimed once the entity is back in profit mode. The IRD does not payout/refund on tax from losses. With the exception if the loss is able to be offset with profits from a linked entity as was the case in LAC’s.

    Descendant Of Smith 14.2
    3 July 2011 at 1:57 pm
    I continue to think house prices will drop as the baby boomers die off anyway – bye to their own home and bye to all the rental properties they have inflated the prices on competing against each other.
    How can that be when existing spec houses are selling below cost (in Auckland at least) ??? Many here should note that Most houses are sold at below replacement value.

    • Descendant Of Smith 24.1

      Well if you compare the number of 40 to 60 year olds in NZ they are greater than the 20 to 40 year olds by a significant margin.

      That in itself will reduce demand for housing.

      Secondly many 40 to 60 year olds ( and 65+) are in three and four bedroom houses and there will be an increasing need for one and two bedroom units as the population ages.

      Thirdly as families are more widely spread much of the inherited and accumulated wealth of the baby boomers will go to residential care costs as it should.

      That doesn’t mean there won’t be skews and Auckland may well be one of those – or at least parts of it.

      Lastly most people with rentals haven’t bought new properties – they have bought existing so replacement isn’t an issue. Decreasing value may be – particularly if they have borrowed at inflated prices.

      Now I could be wrong but the one thing that is totally foreseeable is that we have an aging population with a bulge.

      People can pontificate about economic conditions as much as you like but it is the one thing that is pretty much immovable.

      Running side by side with this will be the increasing non-European population which will bring it’s own issues. I already note the white flight parents don’t have too many places to run to any more.

  25. Alice 25

    NO the ‘root’ problem is YOUR low standards and YOUR childish ignorance.

    ALSO- I do not have low standards I have perverts with low standards staring at me- there is a difference.

  26. Alice 26

    People always have to fight for what is morally right, people always have to follow their hearts, if this were to stop- the human spirit would die.

    Government’s are necessary, but governments never achieve great changes that inspire the people, sadly the opposite- they deplete the human spirit! The greatest changes to the mindsets of human beings usually come’s from outside government and that is how the human spirit survives.

    People learn more from inspiration more than anything else- and governments are anything but.

    The true leader is one that inspires.

  27. gareth 27

    In the case of Bulgaria, It has more to do with the fact that the inhabitants don’t have the money to maintain them so small issues become large ones and the goverment isn’t really interested.
    Maintenance was carried out during the communist era without fail and it’s amazing to look at before and after pictures which show how far a building can go down hill in 25 years if it doesn’t get regular maintenance.

    It may surprise people the amount of work that goes into keeping a building in good shape. It’s only basic things like painting, cleaning and weed control in the crevices but left undone plants get a foothold, gutters / drains block and the whole thing can go down hill fast.

    It’s easy to say that this work will be carried out but if a government pulls the pin on funding in the future it will be a disaster.

    Must say I do quite like the new places they are putting in around Naenae.

  28. BR 28

    Any tax that is introduced for the express purpose of discouraging behaviour that the government disapproves of, is essentially a fine imposed on an activity that is legal.

    Bill

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