Labour needs to be firm on tax

Written By: - Date published: 12:48 pm, January 25th, 2010 - 33 comments
Categories: tax - Tags:

Marty did some really excellent work last week on the Tax Working Group’s proposed tax reforms last week, which Zetetic summed up as ‘tax cuts for tax cheats’. I think Marty convincingly showed that slashing the top tax rates with all the benefits going to the rich and paying for it by putting the cost on poor and middle class is bad policy. I want to talk about why it would be awful politics.

Let’s check out that graphic Marty made again:

Count that up: 3.2 million taxpayers definitely lose out. 250,000 probably benefit. They say that in politics you can fool most of the people some of the time but I find it hard to believe that you can fool 93% of them into paying for tax cuts for the richest 7%.

Worse, the mechanism of imposing the costs on the poor and middle class is very visible – higher rents, higher prices at the shops – while experience shows that people don’t tend to notice changes in net income because of lower income tax unless the cuts are very large (how many of you noticed Labour or National’s cuts?).

That’s a recipe for major voter discontent. All they need is some way to express it. And that’s where Labour comes in.

Labour needs to come out and say what it would do, and that is:

  • drop the idea of increasing GST – its regressive and, after the compensation to beneficiaries and superannuitants, it raises just $200 million in extra revenue.
  • keep the proposed changes to property tax – a combination of measures on property would raise $2 billion. It would lower house prices, discourage housing over-investment, and would lift rents.
  • use the $2 billion to cut income tax at the bottom end – you could make a tax-free bracket of $5,000, which comes out at a $625 a year tax cut for everyone.

Now, which are people going to support? A wealth grab for the top 7% or an equal tax cut for everybody while easing the investor pressure on house prices that has driven them out of the reach of many Kiwi families?

At the end of the day, I don’t think National is going to be going through with any large reforms. Any changes announced in the May Budget won’t come in till October 1 at the earliest or, more likely, April 1 next year. And, say what you will about John Key, he’s got a good enough sense of self-preservation not to put up GST and rents in election year. But, either way, Labour can make good ground by laying out an alternative set of reforms that benefit everyone and aren’t just ‘tax cuts for tax cheats’.

33 comments on “Labour needs to be firm on tax”

  1. RedLogix 1

    while easing the investor pressure on house prices that has driven them out of the reach of many Kiwi families?

    Oh right.. crash the property market and take a chunk out of the equity of tens of thousands of ordinary people…. you know the 70% odd who own their own home, the 35% who have a mortgage on it. And wipe out the retirement plan for the vast majority of mum and dad investors who have one or two other houses.. another 15-20% of the population pissed off. Way to win elections Eddie.

    Far too many lefties unable to tell the difference between a small number of high flying speculators who really have ripped the system off (whom IRD should deal to using existing trader rules)… and the tens of thousands of very ordinary middle class folk who scrimp, save and work rather hard to make their property investment work for them in retirement.

    Far too many lefties with chips on their shoulders about landlords.

    • Mr Magoo 1.1

      I believe the leftist view has always been to protect the family home. (Such as the greens stance on this regarding cap gains)

      Having multiple houses is an INVESTMENT and there is pretty much no case to be made for people avoiding the tax that every other form of investment has to pay.

      I have seen multiple posts in various media from people with multiple properties moaning and complaining. Basically this form of investment has had an unfair advantage and people have naturally taken advantage to the detriment of the economy. This does not mean you should be able to continue to do this or that this is any sort of “right”.

      Your statement about “crashing the housing market” is a complete straw man. Everyone is aware of that danger and has plans to mitigate it and avoid a crash. Currently the housing market is moving in the opposite direction and making things worse so this argument cannot hold water.
      A drop in value is a necessary and inevitable outcome regardless of what happens. Housing affordability and debt ratios cannot continue in this vein.

      As to IRD cleaning up the industry I read recently they have already started by ripping into the worst offenders. (top 1000 or something) Maybe someone has the link on this?

      The numbers in unpaid tax are obscene. There is nothing “small” about it and that only covers the WORST offenders.

      • RedLogix 1.1.1

        Everyone is aware of that danger and has plans to mitigate it and avoid a crash.

        Bollocks, everyone is talking things up… the recession is ‘over’ according to most of the talking heads.

        Basically this form of investment has had an unfair advantage

        Complete ignorance.

        Property investment is treated for tax purposes exactly the same as any other business. I defy you to find a tax ‘advantage’ that property investment has… not applicable to any other business.

        People forget that 70% or so of the cash flow in this industry goes straight into the pockets of the banks in the form of mortgage interest… and that is where the tax is (or should be) paid.

        People are almost universally ignorant of the fact that depreciation claimed has to be repaid if the property is resold for a profit.

        and people have naturally taken advantage to the detriment of the economy.

        What detriment? We provided homes for people… what the hell is wrong with that?

        Or are you suggesting that we should have been putting our money into the NZX…, you have to be kidding me, right?

        • Mr Magoo 1.1.1.1

          Bollocks, everyone is talking things up the recession is ‘over’ according to most of the talking heads.
          You missed the point. I was talking about political parties and advisors discussing CHANGE to property taxation are. Not about the general economy.
          There is not a bollock to be found in my argument. I cannot vouch for anyone else of course…

          Property investment is treated for tax purposes exactly the same as any other business.

          No. The investment is structured like a company for the purposes of tax avoidance yes – but that is hardly the point. It is not a company. It is an investment (property) in name and intent.
          I am not a tax lawyer and I don’t care to be. We are talking government policy changes not legal semantics here.
          And the fact that people are claiming depreciation on an asset that is appreciating in value is a great example of how terribly wrong the system actually is.

          What detriment? We provided homes for people what the hell is wrong with that?
          I see you are one of those multiple home owners by the use of ‘we’. What is is wrong with that in the majority is that housing affordability is way below what it should be.
          Also that these overvalued houses are being propped up by overseas debt and thus it is an UNPRODUCTIVE sector of the economy. This is an unsustainable cycle that must end one way or another.
          Also the that main reason for this is that tax loop holes over a long period of time have made housing a more attractive investment than it should actually be.

          In the majority people don’t WANT to rent your house, they want to buy their own.

          you have to be kidding me, right?

          I would suggest what every investment advisor would. That your money should be wisely diversified across a number of investments both local and international. If all you currently have is property then that would be foolish given the current climate.

          • RedLogix 1.1.1.1.1

            The investment is structured like a company for the purposes of tax avoidance yes

            It’s a company that has costs (mortgages, rates, insurance, labour, repairs, accountancy, etc), pays it’s full whack of GST on all inputs… land, building, labour and materials.

            It also demands a whole bunch of time and effort… and not a little risk from dud tenants.

            If you think that’s the same as investing in shares you really have no idea what you are talking about.

            And the fact that people are claiming depreciation on an asset that is appreciating in value

            Again total ignorance. It is the land that appreciates in value, the building over it’s lifetime gradually looses value.

            What is is wrong with that in the majority is that housing affordability is way below what it should be.

            Again not nearly as much to do with investors as you would like to think. I’m no more of a fan of high property prices than you are. They make the returns utter crap… and it certainly wasn’t me who bid prices up on anything. I built new everything I own.

            Also that these overvalued houses are being propped up by overseas debt and thus it is an UNPRODUCTIVE sector of the economy.

            Try getting your family to live in a tent and get back to us about how productive that is. Besides, the largest portion of the total mortgage debt was racked up by home owners…. not investors.

            In the majority people don’t WANT to rent your house, they want to buy their own.

            But a minority do. There are plenty of people at a stage of life when they have no interest or need to buy a home. Maybe they are just too transient, moving from job to job, moving onto new relationships, new towns. Maybe they have just come out of a relationship breakup and it’s going to take them a few years to get back on their feet. Maybe they just prefer to rent, and spend the cash they are saving on something else. Whatever.. we serve a legitimate market.

            If all you currently have is property then that would be foolish given the current climate.

            Ah right… diversified exactly where? No mention of the trillions of dollars of shareholder value destroyed last year, or the fact that most people hold the NZX in about the same regard as they do the scum build-up behind the refrigerator.

            • Mr Magoo 1.1.1.1.1.1

              So you build and develop houses? So that would not be the pure investment property companies I was referring to? (Not that I was talking about your case specifically anyway)

              That is a completely different kettle of fish and is an actual company and not an investment vehicle.

              So I would agree with you that your situation is not the one I was talking about and actually provides a service that is worthwhile. Of course it has little to do with what I was talking about. 🙂

              • RedLogix

                As much as she’s an windblown beach at times, our prickly friend Cactus Kate more or less nails all the essential points in her latest blog. Worth a read, as she actually knows what she’s talking about in this case.

              • Mr Magoo

                Her stating of the arguments of why the panel and the public don’t “like” housing investment are a very weak straw man summed up as being solely because people think all landlords are like Ebenezer Scrooge .
                Absolute Rubbish.

                She then goes on with a comparison to Hong Kong in which the property market is chaotic because it is a true free market and that the problems we face would be solved by this situation….of course that is a useless comparison because we cannot engineer this and would not want to. Hong King has a land tax also….

                See seems to be seeking some sort of inspirational and out of the box thinking in the tax recommendations? Typically this would mean radical and untried also!
                Perhaps she should visit the art museum for such things as they are less dangerous…

                She then rounds it all up as “be like hong kong” as her personal recommendation for how we should. I am not an expert in this area, but I think hong kong and the rest of asia would seriously object to NZ attempting to force its way into becoming the investment conduit for china!?!?
                Yes, hong kong is about the worst comparison for NZ you could use…

                Enlightened it is not, although I think I know what about the lengthy line of reasoning was so appealing…

              • RedLogix

                I should have been clearer. While I totally disagree with her conclusions (she’s an Actoid after all), she still accurately identifies what is wrong with a lot of the TWG’s proposed solutions.

                She makes honourable mention of Gareth Morgan’s excellent proposals, but sadly dismisses them without too much thought.

              • Mr Magoo

                I think the only, and highly appropriate, answer to accepting Morgan’s view of the world is…

                riiiiiiiiiggghhhttt…..

                It is nice to see you quote someone as backup because they happened to mention something you agree with. Someone who you admit you don’t think has much of a clue.

                Not sure what that proves in any context….???!

        • burt 1.1.1.2

          The landlord argues there is no special tax advantage in rental property – sorry RedLogix, $500m clawed back from the tax base to subsidise landlords says you are wrong.

          I have rental property too, but I’m not so myopic that I can’t admit the pitch is not level compared to other classes of investment.

          Why do you persist with telling lies ? Is it because having the tax payers subsidy removed from your own investments will reduce your own net worth ?

          • RedLogix 1.1.1.2.1

            OK burt… you tell me exactly what you are talking about. Exactly what aspect of the tax system applies only to property investment.. and not to anything else?

            Go on. Bet you can’t.

          • burt 1.1.1.2.2

            How many mum and dad investors run their rental property through a separate company rather than claim loses against other completely unrelated income?

            And how many of these people pay tax on the capital growth ?

            If you are running your rental property completely separately via a company that is not including other income sources (and you are not claiming unrealistic depreciation because you can ) then rental property is similar to any other business. The business owns the assets and pays tax on the profit from sale, this is not the norm for most people just creaming their share of the $500m tax payer subsidy though.

            • Mr Magoo 1.1.1.2.2.1

              Holy crap burt….I find myself agreeing with you.

              What the hell??? 🙂

            • RedLogix 1.1.1.2.2.2

              How many mum and dad investors run their rental property through a separate company rather than claim loses against other completely unrelated income?

              That would be a large majority, especially those that had taken some professional advice.

              A majority also probably have another employment liable for PAYE, what you termed ‘unrelated income’. It’s important to note that the owner of the rental company and the PAYE taxpayer are likely to one and the same person. The company is technically called ‘tightly held’.

              In the normal course of events any losses in the rental company would be claimed back as a large rebate by the company owner at the end of the fiscal year, while the same person is paying PAYE each pay period over the course of the year. Which is a silly situation for both the taxpayer and IRD who are both faced with large undesirable lumps of cash flow at the end of the year… for no good reason.

              What you are probably thinking about is LAQC’s. All they are is a cash flow smoothing mechanism which allow the predicted rebate in the rental company to be compensated for by reduced PAYE payments. There is little to no tax advantage, just a better smoother cash flow for both parties.

              this is not the norm for most people just creaming their share of the $500m tax payer subsidy though.

              In the first years most of that ‘subsidy’ goes straight back to servicing the mortgage. With time the depreciation reduces and with most mortgages the claimable interest portion reduces also, so the tax losses go down, while rents have gradually increased.

              After some years (and this can be anywhere from 5-15 yrs) the business becomes cash flow positive and begins to pay tax in the normal way.

    • mike 1.2

      For once RL I totally agree with you.
      Also, if National introduce a substantial land tax they will lose the next election its as simple as that – even talking about one is making me think twice about my membership..

  2. RedLogix 2

    The problem as I see it is that using the tax system to try and fix property speculation bubbles hasn’t worked anywhere in the world, because it hits at the symptom not the cause.

    I’ve said it over and over, investors are not the people who drive the market. Sure we buy up some of the supply, but also a lot of us build new as well… adding to the supply. Nor do real investors ever pay top dollar for anything. We are always on the hunt for undervalued assets or land that we can add value to … it is ordinary homeowners who get all emo about a property and will pay top dollar for it, and they are the huge majority in the market who drive it up.

    And they are enabled to pay over the odds because their bank (in pursuit of its own profits) will lend them the money to do it. It is the banks pumping money into the system that creates the bubble.

    Back in the 60’s and 70’s everyone got all panicky about powerful unions getting uppity, holding essential services to ransom and driving up wages. In response unions were regulated to within an inch of their lives and we haven’t seen wage driven inflation for 40 years. (What we didn’t do was raise income tax rates in the vain hope that it would dampen down wage rises.) Yet when out of control banks create massive asset price inflation… no-one blinked.

    The solution is the same… regulate the banks to within an inch of their lives, return them back to the small, albeit essential, service role they do have in an economy.

  3. Lew 3

    Too many numbers. Numbers don’t win elections or build trust and engagement, except with policy geeks and utility accountants.

    The thrust is right, but try making the argument without numbers. It’s important that they’re there to prove the case, but they shouldn’t be front and centre; they get in the way of a good story.

    L

    • Eddie 3.1

      Of course you don’t make the actual argument with numbers, Lew. I’m giving the basis of why the policy works politically with numbers but basically, what you say is:

      ‘we want to give a fair tax cut to everyone, National wants it only to go to a wealthy few’

      Bring out the fact that you get nothing unless you earn more than $48K under National’s plan and that the CEO of Telecom gets $400K

      • Lew 3.1.1

        Eddie, the trouble is that they do try to make the bloody argument with the numbers. What Labour desperately needs spelt out to them in small words is the narrative — they have the rationale down better than anyone. And yet it counts for nothing.

        L

  4. Mr Magoo 4

    I don’t necessarily disagree totally with what you have said but from a purely cynical and political vote winning viewpoint how about this argument:

    Premises:
    – Labour can do nothing about the policy about to be passed apart from be outspoken
    – National is between a rock and a hard place on this and are set to upset people via action or not enough action
    – An obvious “silver bullet” alternative that makes everyone happy currently does not exist and perhaps never will
    – Their base/promise/inclination/retoric are all about giving more to their rich mates and this will leave the way open for mass attack regardless of what it finally is

    In this case labour have two options:
    1) Do as you say and develop a position sufficiently different to national to be a point of discussion. The problem here is that they are now trying to slip into the same rock and hard place before public opinion is known. They probably wont get the mass media attention to make it worth it anyway. Later when they attempt to attack national for their policy it could come back to bite them as an unpopular alternative.

    2) Hold off as they have done. Wait until National shows their hand and the public reaction is judged. Expose their obvious weaknesses. After all, the majority of the “herd” (aka: swing voters) will only vote national or labour anyway. Its not like you have to work hard to pull them to your side specifically.
    All this will take place closer to the election when it counts.

    Just a thought anyway…

  5. * drop the idea of increasing GST
    * keep the proposed changes to property tax
    * use the $2 billion to cut income tax at the bottom end

    I’m fairly confident you’ll get 2/3 here – I don’t think National will raise GST, I think they’ll make SOME changes to property tax, and I think they’ll go for across the board tax cuts, rather than just lowering the top rate.

    I’m also confident that if/when National do pretty much what you’ve asked them to do, you guys will be screaming bloody murder about it.

    • Eddie 5.1

      mate, I was proposing that as Labour policy.

      If National were to give across the board income tax cuts by shifting the burden of taxation on to land and property investment, I would be all for it. I doubt they will do it because it is their stated aim to reduce the top rats to 30% and the only tax cuts they gave applied almost solely to the wealthiest taxpayers.

      I’ve been reading some of your stuff on our coverage of this issue, Danyl. You really are letting yourself down, you’re not reading what we’re writing, you’re just constructing your own fantasy and applying it to us. Bit like the Herald on Goff at Ratana, actually.

      • The Baron 5.1.1

        I love it how you lefties basically rip each other’s throat out whenever one of you strays from the sanctioned ideology. God, it certainly appears that the nasty side of the NZ left is alive and well.

        At least Danyl’s fantasies are sometimes entertaining; as opposed to your constant state of hysteria/outrage at every possible decision that the Government makes.

        I guess that’s the difference between a mindless partisan hack and a independently minded labour voter. I’ll let you both work out who’s who.

  6. Cactus Kate 6

    Redlogix – I have already covered Morgan’s proposals elsewhere – there’s only so much one person can write on it!

    Mr Magoo – I have no idea what you are talking about based on that comment. You did though get one thing right when you stated – “I am not an expert in this area” so credit where it is due.

    Hong Kong has a land tax, yes, but it has VERY low personal taxes and not many people are subject to the top published rate due to various credits and deductions allowed. That is the government actually leaves plenty of money in the pockets of its people to pay the tax. Hong Kong also has very high rents, cripplingly high. The rents are caused by the cost of land tax, rates and body corporate fees all passed on to tenants.

    I hope I made the point very clear in my post that ANY tinkering with property taxation (CGT’s been thrown out if you read the report) will simply smash your low-incomed electorate as landlords can pass the costs on in higher rent.

    Land tax will be passed on (not to mention due to the lump sum hit for National it is politically unsalable) to tenants as will any risk free method tax (which is flawed anyway as tax wise there are products to structure debt into an asset).

    All and all the TWG report spells doom for welfare for families which plenty of people have missed as the thrust of the report (probably because most haven’t bothered to pick it up and actually read it). Have a look at the numerous references to it in the report which is more pertinent as reviewing it wasn’t even in the scope of the report to begin with.

    • RedLogix 6.1

      I guess that we will always be at opposite ends of the spectrum in most respects, but I’m happy to credit informed and clear analysis.

      Argh.. you are right. There is only so much one dude can read…. I’ll have another look… but I still like Morgan a lot. The UBI idea has a long and very respectable intellectual history, and Morgan is no fool.

      I hope I made the point very clear in my post that ANY tinkering with property taxation (CGT’s been thrown out if you read the report) will simply smash your low-incomed electorate as landlords can pass the costs on in higher rent.

      Absolutely. As a bastard landlord myself I fully intend passing any increased costs 100% onto my tenants. I actually don’t want to (I think the rents I charge are fair value at present)… but it’s what I will do to stay in business.

      Another point missed by everyone over the RFRM model, is that in order to work out the equity, you have to value each property annually. (Using QV is neither accurate nor timely enough as many Councils only get them done on a 3 or 5 yearly basis). This needs a professional valuer to do it… and that’s another cost in the order of $800-1000.

    • Mr Magoo 6.2

      Hong Kong’s rents are a symptom of overpopulation and lack of land. That is a REAL lack of land and not the “everybody live here” mentality of NZ.

      Your comparison with hong kong is still horrendously flawed.

      From what I just read, even the guy posting your link doesn’t think much of it.

      Such is the way of opinion.

  7. Cactus Kate 7

    Mr Magoo – what guy posting my link?

    Pinko Kiwis are terrified of Hong Kong and Singapore. And for good reasons, here poor people are inspired to work harder and blludge less. They don’t want the model to catch on.

    My rent in Hong Kong is so high not because of a shortage of rental property because there are plenty of flats available at any one time for someone with my income, it is because landlords pass on ALL land taxes, rates, stamp duty and costs to the tenant. And because my net salary is higher than it would be in NZ, the landlord judges he can charge me more.

    The best Tax Working Group for NZ would consist of a panel of overseas experts from Hong Kong, Singapore and Ireland. Not a bunch of professional head-nodders with bias towards stocks and government contracts.

    RedLogix gets it.

    Landlords will simply pass on the taxes and costs to their tenants. There is a reason they are called lords after all. As for the analysis of the RFRM model, again correct a valuation model is required, more work for valuers/tax accountants and consultants. Not to mention my point – housing shouldn’t be seen as a risk free investment as it has to have a cycle to ensure people make rational decisions when investing in it.

    Labour need to come up with an alternative tax proposal. So far Cunliffe’s been silent again and not just the (t). The alternative has to appeal to your electorate – “tax cuts for bludgers” or similar. With the top 10% paying 76% of the actual tax, you can hardly cry “tax cuts for tax cheats” now can you?

    • RedLogix 7.1

      Not to mention my point housing shouldn’t be seen as a risk free investment

      I don’t think anyone should see it as ‘risk free’. I see a huge potential downside risk in the market right now (see Steven Keen’s latest), and as much as I would like to get on with my next planned development… my chequebook is firmly shut.

      The main reason why I prefer property to anything else is that if I screw up, it’s my screw up… not some smarmy insider pricks in suits smiling while they rape me.

      • Zaphod Beeblebrox 7.1.1

        Maybe you should start a business that does property valuations. If we have a Land Tax, every property in NZ will need to be valued.

        Melbourne, Brisbane, Adelaide, Perth and Sydney are looking good for inner city properties. The way this government is actively pursuing policies to depress wages, reduce our higher education sector to rubble and now push up rents there might be a few Kiwis heading to those places you could rent to.
        They have CGT over there but they would never dream of a loony RFRM scheme like the one Key is considereng.

    • Mr Magoo 7.2

      Look for red’s post near the top? Or do you just share the same name??

      The best Tax Working Group for NZ would consist of a panel of overseas experts from Hong Kong

      I am just going to have to beg to differ here and stop here. Your infatuation with hong kong and your insistence that NZ is similar enough to make this comparison anything more than laughable is bordering on fetish now…

      PS: Redlogix “gets it” because he is up to the elbows in property investment. There is nothing wrong with that, it is a perfectly natural reaction. However the circular referencing between the two of you does not make you more right or even right at all. Just right winged of course.

  8. Jenny 8

    The real test for the Labour Party, will be where they stand on the Maori Party private members bill to exempt food from GST as is done in most countries that have this tax?

    Will the Labour Party back the Maori Party’s private members bill when it is drawn from the ballot?

    Will Labour vote with National and Act, or with the Maori Party and the Greens?

    Can anyone enlighten me?

  9. Omar Hamed from Socialist Aotearoa argues for tax reforms that help workers and the poor- http://socialistaotearoa.blogspot.com/2010/01/tax-reform-should-be-pro-worker-pro.html

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