National: we’ll borrow for tax cuts for the rich

Written By: - Date published: 12:30 pm, May 19th, 2008 - 77 comments
Categories: kremlinology, national, tax - Tags: ,

Discovering National’s policy is a bit like the old art of Kremlinology, when Western intelligence agencies would attempt to discover the inner workings of Soviet politics by looking at who stood next to whom in pictures, and what hand politburo members carried their briefcases in. The latest subtle signs from National regarding its tax policy are: they will average ‘north of $50‘ a week and will focus on the 14% of people with incomes over $60,000 a year. The only way to achieve those parameters (without a tax-free bracket or cut to GST both of which National oppose) is to create a flat tax of 16%. The average cut would be $50 a week, but it would be spread very unevenly: on $250,000 a year you would get $920 a week; on the median income of $27,000 you would get $12.50, half of New Zealand taxpayers, 1.6 million people, would get less than that.

$50 a week x 52 weeks x 3.2 million taxpayers means National’s tax cuts would cost over $8.6 billion a year, that would create a huge cash deficit of around $5 billion a year. The money can’t be found by silly little measures like capping the core public service that will deliver only $166 million a year by National’s own estimate. In fact, the only part of government spending to which National has not ruled out major cuts and is sufficiently large for cuts to fund such enormous tax cuts is superannuation. And even if it slashed superannuation, National would still need to borrow to fund the tax cuts. National has previously said it is prepared to increase gross government debt 50% (from 17% of GDP to 25%); it is now clear it would use that debt to fund tax cuts for the wealthy few.

A realistic projection of National’s tax cut plan sees most people worse off: they would get little or nothing from tax cuts, with most of the money going to the wealthy few. They would face a diminished social wage from less Government spending, and have to spend more of their income buying things that are now provided by the Government. And they would face skyrocketing inflation and interest rates resulting from National borrowing billions of dollars to fund irresponsible cuts. But, as we already know, Key and National will promise anything, anything, to win.

77 comments on “National: we’ll borrow for tax cuts for the rich ”

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  1. Robinsod 1
    19 May 2008 at 1:07 pm

    Yay! I’m gonna get me one big taxcut! In fact by Steve’s calculations it’ll be worth a very comfortable long holiday in Hawaii every year! Or perhaps I’ll upgrade to a European car or increase my shareholdings, or buy some investment property, or start a coke habit…

  2. Brett Dale 2
    19 May 2008 at 1:11 pm

    Robinsod:

    Very good idea to spend your tax cut on the sharemarket, like most ordinarily New Zealanders, you seem to want to get ahead and if you have cash to spare, instead of buying booze or cigarettes or gambling it on pokie machines, why not invest in a company?

  3. Billy 3
    19 May 2008 at 1:12 pm

    Well, certainly, Brett, the idea of a coke habit for ‘sod in particular is a very bad one. God knows how he’d behave with any more self-confidence.

  4. erikter 4
    19 May 2008 at 1:17 pm

    robinsond: with your tax cuts play some Russian roulette.
    The readers here may get lucky.

    [uncalled for. Go to Kiwiblog if you want to behave like that. SP]
    [lprent: Well it wasn’t the canned line I was talking about earlier. Maybe it is reading the notes. As SP says – still unacceptable]

  5. Robinsod 5
    19 May 2008 at 1:24 pm

    Brett – Nowadays I’m pretty well ahead as it is. To be honest I’m not sure why National thinks I need a tax cut at all. Especially when they’ll probably be offing sweet fu*k all to some of my mates who work their rings out for half of what I earn.

  6. T-rex 6
    19 May 2008 at 1:26 pm

    ‘People get the governments they deserve’ – I saw a survey result over the weekend that said most people favoured tax cuts even if they lead to inflation and sustained high interest rates.

    Some people might get the governments they deserve, but it really bugs me that I might end up with the government that someone who’s bad at maths deserves.

    Deserves is probably unfair too. I don’t think people deserve a crap future just because they fall for a fantasy that’s carefully engineered to seduce them. Nationals message is “Life’s tough, fix it by borrowing, and worry about tomorrow tomorrow”. Well, today is yesterdays tomorrow, and unsustainable borrowing is the reason life is tough now. I can’t think of a stupider solution than borrowing even more. Except maybe selling off all our assets again.

  7. Tane 7
    19 May 2008 at 1:27 pm

    Sod, agreed. The people who really need help are my family members who flip burgers and scrape shit off old people for $12 an hour. They’re the ones struggling with rising food and petrol prices. Why John Key thinks the likes of you and I need the money is a mystery.

  8. Billy 8
    19 May 2008 at 1:28 pm

    See what I mean.

  9. Robinsod 9
    19 May 2008 at 1:28 pm

    But Billy – I thought you liked my swagger!

    erikter – bite me wee man. I’ll think about you when I’m getting off the plane in Honolulu…

  10. rjs131 10
    19 May 2008 at 1:31 pm

    If this is true, then isnt this electoral suicide for the Nats? Or are you suggesting that they think the NZ public are such big morons that they wont notice that those benefting under the tax cut proposals (as alleged) are a small minority and will vote for the Nats anyway?

  11. Brett Dale 11
    19 May 2008 at 1:33 pm

    Robinsod:

    Your post seemed to be anti people who invest in the share market? Surly you will agree if you invest wisely, its a good idea to build a little nest egg for yourself.

    If ya dont want a big tax break, why not give the money away to a charity that needs it?

  12. Robinsod 12
    19 May 2008 at 1:36 pm

    Brett – I don’t mind if people invest ethically but bro, you put money in you can afford to lose. Not many people in NZ have much of that kinda money.

    Good point about the charity though – I’m thinking shining path – do you think I could get an NZ branch up and running?

  13. Tane 13
    19 May 2008 at 1:36 pm

    No idea whether it’s true rjs – I doubt National would be this stupid. My suspicion is Key just saw the Fairfax poll that said people wanted tax cuts of at least $50 a week and thought he’d promise it to them before actually checking how much it’d cost.

    I honestly think Key’s not at all concerned about how he’s going to make good on his promises. The goal is purely to win at all costs, then worry about the day after the election when it comes.

  14. Phil 14
    19 May 2008 at 1:37 pm

    … and he’ll be thinking of you when the gun is stuffed in his mouth

  15. Steve Pierson 15
    19 May 2008 at 1:37 pm

    rjs131. I’m trying to be part of the process of informing the public what National’s tax cuts would look like. I don’t think the people are stupid, I think they are smart, hence why I think there is a point in providing this information.

  16. T-rex 16
    19 May 2008 at 1:40 pm

    John Key: “I think if you look out over the next 18 months to two years almost anyone would agree that with the downturn in the economy, inflationary impacts of tax cuts are unlikely to be a big problem.”

    A quote from the dom post article.

    Don’t worry everyone, good old John ‘Big Picture’ Key is on the case and looking out for our best interests – extrapolating the consequences of his actions as much as TWO YEARS into the future!!!

  17. Billy 17
    19 May 2008 at 1:45 pm

    Especially when they’ll probably be offing sweet fu*k all to some of my mates who work their rings out for half of what I earn.

    Well if you gave them your tax cut instead of going on this selfish cocaine-fuelled trip to Hawaii, everyone would be happy.

  18. Phil 18
    19 May 2008 at 1:49 pm

    “I’m trying to be part of the process of informing the public what National’s tax cuts would look like”

    While we’re at it, lets also inform the public that first $10,000 tax free gets you pretty close to “North of $50 on average” – that’s $37.50 a week, just from that component, for EVEYONE.

    From there, it’s not a stretch at all to get an average of $50 if you fiddle with the brackets and tick down the top rate by even one point.

    I dont think people are stupid … but your spin makes me think you think they might be.

  19. Pascal's bookie 19
    19 May 2008 at 2:02 pm

    Phil, you missed this bit, from the post:

    (without a tax-free bracket or cut to GST both of which National oppose)

    Maybe key does want to introduce a tax free bracket at the bottom end to spread the love. I haven’t heard so, though I could well have missed it. A link would be nice if you have the time.

  20. Brett Dale 20
    19 May 2008 at 2:02 pm

    Robinsod:

    Im not sure what shining path is???

    Secondly, you should invest money in the sharemarket to make money, Im guessing by the word ethically, you mean a Greenie base company.

    I would think medical research companies on the Australian market is pretty ethical.

    For people who cant afford to lose a lot of money, well you can always invest small amounts, maybe stop buying cigarettes/booze/lottotickets and invest that money into shares, there are plenty penny dreadfuls out there.

  21. Steve Pierson 21
    19 May 2008 at 2:03 pm

    Key has never proposed a tax-free bracket and says the bulk of benefits should go to those on more than $60,000. All their focus is on the 39 cent threshold and, to a lesser extent, on the 33 cent threshold.

  23. Steve Pierson 23
    19 May 2008 at 2:11 pm

    And Phil. That still doens’t address the ‘where the hell woudl the money come from?’ and ‘what’s that going to do for inflation and hence interest rates’ problems.

    it’s not just the way National is likely to spread tax cuts that is a problem, it is also the macroeconommic effects of cuts on that magnitude.

  24. Brett Dale 24
    19 May 2008 at 2:11 pm

    I think I will give it a miss. But it seems to be right up Keith Lockes and Marion Hobbes alley.

  25. Lew 25
    19 May 2008 at 2:20 pm

    This post is almost pure speculation. “North of $50” is a direct quote, but the linked article makes no mention of to whom this would apply, and the introduction of “focus on the 14% of people with incomes over $60,000 a year” appears to be entirely of Steve’s invention.

    This would indeed be an amazingly stupid tax cut to implement, but so far I see no concrete evidence it’s planned, much less promised.

    L

    [In the eariler article, the one on the front of today’s Dompost, Key says it will average north of $50 which the Dom fairly takes to mean ” tax cuts worth at least $50 a week to the average worker”. And “Mr English made it clear that them priority would be workers earning $60,000-plus – in particular those pushed into the top 39 per cent tax bracket by wage rises.‘‘We need to keep faith with those people, that’s our top priority,”. SP]

  26. James Kearney 26
    19 May 2008 at 2:26 pm

    the introduction of “focus on the 14% of people with incomes over $60,000 a year’ appears to be entirely of Steve’s invention.

    Meanwhile on Stuff:

    Mr English made it clear that them priority would be workers earning $60,000-plus – in particular those pushed into the top 39 per cent tax bracket by wage rises.

    http://stuff.co.nz/4552716a6160.html

    Steve’s simply working with what National has put forward. Like he says it’s an exercise in Kremlinology and if National aren’t going to release their policies then we’ll have to work them out for ourselves. As far as things go he’s done a bloody good job.

  27. James Kearney 27
    19 May 2008 at 2:28 pm

    btw- “clear that them priority” ????

    Appears they need some more subs at Fairfax Digital.

  28. higherstandard 28
    19 May 2008 at 2:28 pm

    Lew

    As a political scientist you must know that National will wait for the budget and then firm up what they will or won’t offer based on the public reaction to the budgeted Tax Cuts and other policy releases.

  29. Tane 29
    19 May 2008 at 2:31 pm

    Lew:

    the introduction of “focus on the 14% of people with incomes over $60,000 a year’ appears to be entirely of Steve’s invention.

    I’ve added a link to the source into the post.

  30. TomS 30
    19 May 2008 at 2:31 pm

    14% of New Zealanders earn above $60,000. Unfortunately, this group has convinced itself it is “struggling middle New Zealand”, and as it also controls most of the levers of power this is the group that frames the debate.

  31. Lew 31
    19 May 2008 at 2:38 pm

    SP/Tane: Ok, not speculative, then. Thanks for the link to the article.

    HS: Yeah, I know that. But I also believe people ought to be held to things they say, and if they’re saying things too early, they deserve to pay some political price for that.

    L

  32. barnsleybill 32
    19 May 2008 at 2:39 pm

    It never ceases to amaze me the way you brilliantly dog whistle up a response with a ridiculous assertion.
    For balance why not actual detail the amount of tax people are paying on the different income levels you used.
    How much tax does a rich prick on 60, 70, 80 or 90 k actually pay Steve.
    How much personal tax is enough or even too much?
    People earning the top amounts structure themselves out of it anyway.
    As usual it is the middle that is getting spit roasted by labour and National. And the enormous levels of efforts that many thousands of us go to avoidance is despite the doubling of the staff roll in IRD.
    I am heartily sick of hearing the greedy and selfish tag being applied to anybody who disagrees with Cullen. The opposite is true, get your hands of our money. Go and earn your own.

  33. higherstandard 33
    19 May 2008 at 2:42 pm

    Lew

    Politicians held to things they say …….. sadly wishful thinking, maybe if we increased the electoral cycle to five years and introduced some sort of stocks and public humiliation for them if they played up?

  34. darryl p 34
    19 May 2008 at 2:49 pm

    Brett Dale, I wish I hadn’t invested in RAU 🙂 although MNM has been good to me.

  35. Steve Pierson 35
    19 May 2008 at 2:54 pm

    barnsley. We’re talking the real world here, we already live in a world with a progressive tax ssytem system and while I’m happy to defend that system, that’s not what this debate is about, it’s about a change form what we ahve have now to something else.

    A tax cut is a change from the status quo and I’m looking at what that change would mean for people at different income levels.

    the kinds of tax cuts National is looking at mean bugger all for most people and piles for those who already have the most

    (and don’t give me the ‘you can be rich if you want to be bull’, this is the real world not some Rynd fantasy)

    [lprent: Huh – I provide all of editing toolkit, and a poster doesn’t use it 🙂
    You now get 5 minutes to fix the editing and punctuation errors]

  36. Brett Dale 36
    19 May 2008 at 2:58 pm

    darryl P:

    I wish I hadn’t invested in RAU either!!! Glad MNM has been good to you.

    STX and NSL is earning me some nice extra cash!

  37. Lew 37
    19 May 2008 at 3:04 pm

    HS: I don’t know. I think Labour have been held pretty well to the things they’ve said (and some things they’ve not said) in the past decade.

    Five years is too long for NZ, unless we move to a bicameral system. But that’s by the by 🙂

    L

  38. Aj 38
    19 May 2008 at 3:21 pm

    “Mr English made it clear that their priority would be workers earning $60,000-plus – in particular those pushed into the top 39 per cent tax bracket by wage rises.”

    On Agenda, Sunday morning, Mr English gave no such qualification when suggesting it would be $50 at least per taxpayer

  39. Policy Parrot 39
    19 May 2008 at 3:30 pm

    “While we’re at it, lets also inform the public that first $10,000 tax free gets you pretty close to “North of $50 on average’ – that’s $37.50 a week, just from that component, for EVEYONE.”

    Phil, how do you get a $37.50 tax cut, if implementing a tax-free threshold on the first $10,000, when people only are only taxed 15% on all income below $9,500?

    I come up $29.42 p.w. Less than $30 is far less than $50, I think that would be obvious.

    Re: Other tax-haters. Piss off to Estonia for a fact-finding mission, live off their minimum wage, and then return and tell us how it went.

  40. Joker 40
    19 May 2008 at 4:18 pm

    Policy parrot:

    “Re: Other tax-haters. Piss off to Estonia for a fact-finding mission, live off their minimum wage, and then return and tell us how it went”

    You sound like my Mum when she had dished up a crap tasting dinner “you should be thankful, some people in the world don’t have anything”.

    The thing is this is not Estonia this is New Zealand a first world country where a working class family should be able to buy a block of cheese without having to send out one of their daughters to work as a prostitute.

  41. Robinsod 41
    19 May 2008 at 4:24 pm

    Joker – you don’t get it. There ain’t gonna be anything in the Nats tax-cuts for a working class family. On the other hand I’ve always got cheese in the fridge (and some bloody nice cheese too – mmmm stilton) and now I’m gonna make out like a bandit if John gets in. Yay me!

  42. James Kearney 42
    19 May 2008 at 4:29 pm

    If John Key gets in fuck eating Tasty or Colby. That’s peasant cheese. It’s camembert and blue vein all the way for me, and that’s on top of my coke habit.

    Man it rocks being on $60k plus with tax cuts on the way. I just feel sorry for all the poor suckers who have to pay for it.

  43. Steve Pierson 43
    19 May 2008 at 4:32 pm

    Joker. Working class families are better off because they’ve had increases to the minimum wage for 9 successive years, working for families, subsidised doctors’ visits, record low unemployment. Massive cuts to a wealthy few are not going to help.

    Policy Parrot cites Estonia because it’s one of the countries with flat tax that ACT says we should be emulating – it also has massive budget deficits, a yawning chasm between rich and poor, big EU subsidies, the advantage of having a cheap, well-educated workforce and cousins in the Finns who have high-tech products they can’t afford to make in their own country, and some of the prettiest ladies you ever did see.

  44. Joker 44
    19 May 2008 at 4:38 pm

    Sod,

    I have a French wife so also have a good supply of cheese in the fridge. Really enjoying the Port Salut’s and goats cheeses at the moment.

    I was just trying out the compasionate tory thing for size but who am I kidding…screw the poor.

  45. erikter 45
    19 May 2008 at 4:48 pm

    “Man it rocks being on $60k plus with tax cuts on the way. I just feel sorry for all the poor suckers who have to pay for it.”

    I don’t. Life is never a rose garden.

  46. Steve Pierson 46
    19 May 2008 at 4:49 pm

    You’re a wonderful human being, erikter.

    Eat the poor, eh?

  47. James Kearney 47
    19 May 2008 at 4:56 pm

    Then shit them out and blame them for the mess.

  48. Phil 48
    19 May 2008 at 5:07 pm

    “(and some bloody nice cheese too – mmmm stilton)”

    Stilton is the cheese you get when you mix english cooking and french engineering.

    However, there was some orgasmicly brilliant cheese at the Wellington Wine and Food show over the weekend.

  49. Phil 49
    19 May 2008 at 5:16 pm

    PP,
    I worked off 19.5%… Doh!
    My mistake.

  50. National disgrace 50
    19 May 2008 at 6:33 pm

    In our household we’re both in the top 1% of earners, and looks like we’ll be rolling in it even more if JK gets in. My overseas income will also rocket when the dollar plunges under his cluelessness (if he does pull off this giant con) The extra money won’t make up for the shame and embarrassment of being governed by those eejits though. Who would have thought someone could make me cringe more than Shipley?
    Got to feel sorry for those 86% of punters making less than 60k though… well, not those that are going to vote National (my maths tells me some of them must be??), they deserve everything coming their way.

  51. randal 51
    19 May 2008 at 6:57 pm

    cut to the chase…key can promise anything and dah da dah dah…he will!!! he will promise anything and everything because he wants a go. johnny wants his go. dont think so. the crunch is coming and nobody wants any weird social ideological experiment in progress if everything gets weird. whatever it is so called thinking men in pubs and clubs are saying give john key a go and its all a load of crap. just sharp talk. you bettah believe it.

  52. Fred 52
    19 May 2008 at 8:08 pm

    Neither party’s tax cut has been announced and when it is, will it really just be a matter of my tax cut is bigger than your tax cut? At what point does Cullen’s tax cut which presumably will be OK becomes Key’s unaffordable, inflationary, damaging etc etc. We’ve had a housing bubble which was unnecessary and avoidable, credit funded consumption, and we can expect an impact as the exchange rate drops and credit tightens up, so the real question is what is the best way to weather the storm.

    Tax cuts will be irrelevant to those joining the dole queue (as a result of Labour’s policies). (No point in arguing that Cullen is only giving a tax cat because Key will)

  53. Draco TB 53
    19 May 2008 at 8:25 pm

    I am heartily sick of hearing the greedy and selfish tag being applied to anybody who disagrees with Cullen. The opposite is true, get your hands of our money. Go and earn your own.

    You’re the one being greedy barnsleybill. Taxes are the agreed upon amount you pay for services rendered (Silly little things like police, defense forces etc) but it appears you don’t want to pay for them even though you use them.

    How do I know you agreed to pay them? Because you’re living in NZ.

  54. AncientGeek 54
    19 May 2008 at 8:33 pm

    Fred: It kind of got lost in the mix during the weekend. But somewhere there higherstandard raised the idea of a Capital Gains Tax. I meant to get back to it – but I had others things to do.

    Now the bubble in the housing market has burst. This is the right time to start talking about bringing on in so we don’t have this stupid avoidable problem yet again in another decade.

    Now that is a policy that I could really sink my teeth into arguing.

    The tax-cut stuff is going to happen, and logically it should go across the whole of society. But it isn’t a systemic problem, that the bloody housing market bubbles and the skewed investment patterns it causes, are.

  55. RedLogix 55
    19 May 2008 at 8:44 pm

    Randal is kind of right in a weird way… it’s all sharp talk.

    All this crud from Key today is just pre-positioning for Thursday’s budget. What he has done is talked up an expectation that any tax cut ‘averaging’ less than $50 pw will not be good enough.

    He know perfectly well that the Cullen would not, could not be so insanely reckless. He also knows perfectly well that even if he did, the 50% of people on less than the MEDIAN income would be very dissapointed by their tax cut anyhow. In other words all he is doing is playing mind games. At least I hope that is what he is doing.

    The other possibility is that he really does intend to cut taxes by $40-50pw (pick a figure, he’s slipped around all day on this one). There is only one way to fund the resulting $4-6b cash deficit…either printing it (directly driving inflation) or borrowing it (indirectly driving inflation by massively increasing NZ’s current account deficit, dropping the value of the NZ dollar, and/or upping interest rates.)

    Lets assume he will borrow to fund the deficit to the tune of about $5b pa, rising to say $10b pa after say two terms in govt. Thats another $40-50b of govt debt, that will come with an interest bill of about $3b pa. This is not only nice business for John’s REAL employers, but crucially sets up the necessary fiscal crisis that will require JK to regretfully announce that major and urgent asset disposal (at fire sale prices of course) have become essential in order to bail us out of the mess we are in because “we have been spending more than we earn” and NZ is broke again.

    It’s bog standard stuff from the money party playbook.

  56. RedLogix 56
    19 May 2008 at 8:52 pm

    AG
    It was here:

    http://www.thestandard.org.nz/?p=1936

    At the time I made the following response, excuse me if I requote myself, but it’ll save me some typing.:

    Overseas markets with CGT’s have experienced the same explosive growth over the last property cycle as those without. This link details the huge range of diverse tax arrangements that exist in different countries:

    http://www.globalpropertyguide.com/guide-taxes

    Besides as the Australians know, CGT’s are very easy to avoid, by simply rearranging the nature of the investment. And in a falling market do you get a tax credit?

    If the CGT is applied to undrealised gains it hugely impacts on the cash flow with a whole range of perverse effects on all sorts of perfectly legitimate investors. We tried this for a while under Muldoon and it was a disaster. And if you make the CGT applicable to realised gains only, you simply create an even bigger incentive for investors to NEVER sell, thereby reducing market supply and driving prices up even further.

    Besides where do you draw the line? Do you apply a CGT to commercial or industrial property for instance? How do you distinguish between these types in the very common case of where the tenant both runs their business and lives on the same premises? CGT’s are VERY complex (read expensive) to administer, the current system has the great merit of treating residential property investment EXACTLY the same as most other business investment. The IRD studied this issue a few years ago and recommended doing nothing.

    In other words AG, CGT’s really only attempt to treat the symptoms of land speculation, and in practise they are only a short-term palliative, or have entirely perverse effects.

  57. Fred 57
    19 May 2008 at 9:16 pm

    Ancient, we already have a capital gains tax, and of course the IRD are only now trying to apply the rules (too late) and as Catcus Kate points out (see her 10th May post), the law as written is toothless so possibly a small change is all that is required. Generally it’s a good thing that we, as a country, were seen as creditworthy, I think the issue has been that been that the banking system has been too focussed on the residential mortgage market (because it’s easy) (count the number of mortgage brokers in your area) rather than business (risky and more difficult) so that credit ended up in the wrong place. Check out Bruce Sheppard’s blog on stuff as well.

  58. Fred 58
    19 May 2008 at 9:26 pm

    Redlogix, a level playing field for all types of investment is important, and property developers perform a vital role. No point in picking on them.

  59. RedLogix 59
    19 May 2008 at 9:43 pm

    Fred,

    You are partially right. The Income Tax Act has always contained a provision that people who reguarly buy and sell property should declare capital gains on that property as part of their income.

    http://www.ird.govt.nz/toii/property/check/property-check-pay-tax.html

    Under the 90’s National govt these rules were very vague and laxly enforced. Hardly anyone paid them, mainly because the kind of people usually involved in this sort of activity in that decade were often fine upstanding National Pary supporters.

    In the last few years IRD has been directed to look a lot more closely at the rules. They have been considerably tightened, and a special team has been very active enforcing them.

    However there is also a completely different class of residential property investor, whose primary business purpose revolves around providing residential rentals. Typically these investors have NOT been charged CGT because usually they sell property quite rarely. Their purpose in purchasing the property was to derive a rental income from it, not to make a profit by reselling it. Usually if the property has been owned for at least 10 years IRD will not count any profit as taxable.

    What this investor WILL be liable for however, is that at the time of any sale, they will have to pay back any depreciation that they have claimed on the building and assets (but not land value). By contrast land speculators, developers and builders rarely hold a building long enough to claim significant depreciation.

  60. AncientGeek 60
    19 May 2008 at 9:45 pm

    I’m aware of the rather toothless cgt that we do have – it was a populist pallative the Muldoon put in. They finally got around to enforcing some of it about 25 years later. Expect to see it go through a court near you soon.

    Yeah I was reading Keith Ng’s piece in OnPoint Media beat-off

    But one conclusion can be clearly drawn from the analysis: Mortgage, mortgage, mortgage. The biggest change in the four years is the cost of servicing the mortgage.

    In 2004, spending on food was 15.6% of after-tax income. In 2008, spending on food was 15.4%. Expenditure on food has not grown faster than income. Petrol has, but remains small: from 4.4% in 2004 to 6.1% in 2008.

    Mortgage costs, on the other hand, has risen from 24.7% of after-tax income in 2004 to 29.8% in 2008, according to Hickey’s figures.

    The upshot is that, before we start going on about food prices, GST and so on, let’s keep our eye on the ball here: Housing cost is the biggest and has risen the fastest. So let’s talk about interest rates, not bloody cheese.

    The rise in interest rates is a question of demand. A large part of that demand comes from buying more expensive houses on what is effectively a speculative boom.

    Part of the problem is that people are used to using property as an investment system. They rely on rising property prices rather than rental income. Therefor they trigger periodic bubbles before the inevitable crunch.

    It simply isn’t that rational now that the local stock market has been cleaned up and is functional. Besides you can always use the overseas markets.

    Part of the problem is the rising population in NZ as part of the global population problem. You have to live somewhere.

    But it is a clear distortion in the market, which amongst other things means that investment money is funneled into something non-productive for the country, and away from things that earn us income as a country.

    I agree with redlogix that a cgt will cause distortions. I’m unconvinced that it will more of a distortion than what we have now.

    [lprent: I think I fixed the quotes – tell me if it is incorrect]

  61. AncientGeek 61
    19 May 2008 at 9:49 pm

    oopps – the quoting is fouled in the above comment.

    red: In Auckland where I live, most property owners with rentals don’t recover their mortgage costs (let alone any others) from the rents. Typically they top it up themselves. Thats because most of those properties are leveraged to the hilt.

    Therefore they are virtually all speculators when you consider alternative investments. The only way that they can make money compared to alternative investments is to have a rise in prices.

    It is a daft pattern – but very traditional. I’m interested in anything that would break the tradition and stop these damn bubbles.

  62. Jon 62
    19 May 2008 at 9:58 pm

    Heck $900 per week. That’s 10 times what every credible media has indicated it’s likely to be
    “Back then, they ranged from $10 a week for lower income earners up to $90 a week for those at the top’, inflation adjusted you’d be at most $103 max.
    How on earth did you come up with $900 per week for the top earners?

    You’re not telling porkpies are you??

    I seem to recall someone on Kiwiblog recently saying of the Standard

    “But I care about behaviour a great deal, because constructive and informed comments are often the most interesting part of a blog. It is an area that the rubbish comments can drive out the interesting very easily.’

    Please tell me what’s ‘informed’ about that post?

    [lprent: Thats what the comment area is for. You can dispute the opinions of the poster and other comments. People take more notice if there are links to supporting material.]

  63. RedLogix 63
    19 May 2008 at 10:07 pm

    In Auckland where I live, most property owners with rentals don’t recover their mortgage costs (let alone any others) from the rents. Typically they top it up themselves.

    It’s pretty much the same everywhere. Most rentals are running at between 3-5% returns. With mortgages around 9-10% this is unsustainable. Essentially they are kept afloat because the landlord is able to claim costs such as mortgage interest, rates, insurance and repairs as well as depreciation against their OTHER income. This is perfectly valid because such business are usually very “tightly held” by one person or small family group, meaning that it is neither simple, nor reasonable to seperate out (or “ring fence”) the tax position of their rental business from any other income they may have.

    The only way that they can make money compared to alternative investments is to have a rise in prices.

    Yes in the long run property can be counted on to rise at about 4-5% pa, bubbles included, aand that is all that is needed for the business to be profitable. That is why such investors rarely sell.

    The other aspect is that rents are WAY behind where they should be, and will be rising somewhat over the next 3-5 years to match rising costs. Most landlords (unless they are over leveraged) will simply hold onto their properties as long as they can sustain the nett cash flow (which is why the LAQC cash flow smoothing mechanism is helpful).

    But if the rules are changed to attempt to ring fence losses, abolish the LAQC or charge an unrealised CGT, then the already tight cash flow will simply be restored by hiking rents. The effect is simple but brutal…. change the rules and you will hit ALL landlords pretty much the same, and they will ALL react pretty much in unison. A few tenants will be lucky to have a landlord who is cash flow positive, and they will stay put… but the rest will have no choice to pay. Watch the political backlash from that.

  64. James Kearney 64
    19 May 2008 at 10:18 pm

    Tax cuts will be irrelevant to those joining the dole queue (as a result of Labour’s policies).

    Unemployment is at record lows and is half of what it was under National. Is that also a result of Labour’s polices and was the high unemployment under National a result of theirs?

    Jon- look at the graph. If you reduce the top tax bracket the gains continue the more you earn – there is no cap on the tax cut for high income earners. Why don’t you do some basic logic before accusing people of lying? Taking your talking points from somewhere other than Kiwiblog might also be a good start.

  65. RedLogix 65
    19 May 2008 at 10:55 pm

    How on earth did you come up with $900 per week for the top earners?

    Lets do a simplified estimate of the income tax for a person on say $250,000.

    About $190,000 of this will be taxed at the 39% rate, ie about $74,100 of PAYE tax pa.

    If we assume that JK introduced a flat 16% tax rate (which was the premise of the original post) this amount reduces to $30,400 pa.

    The tax reduction on this portion of their income is $43,700 pa or about $840 per week.

    If we then include the aproximately $30,000 portion of their income that drops from the 25% tax rate to the proposed 16%, the remaining $60 per week, totalling $900 pw, is similarly accounted for.

  66. Jon 66
    20 May 2008 at 12:03 am

    but he’s not so why bother?

  67. Fred 67
    20 May 2008 at 6:17 am

    JK – I said joining! Remember it happened during Labour’s watch. (The analysis of median wages, employment etc taking the exact period of each party being in power, carried out here, is incorrect in that it takes many years for the effect of policies to be felt) I see it as reforms of the 80’s followed by pain of the 90’s and gains of the new century. Will the verdict be “good times wasted”? It will take time to confirm this but we shall see.

    AG & RL – so we agree that more should have been done to manage the housing bubble. Raising interest rates has finally kicked in but it’s a slam dunk and we are out on a limb. What would you do now to avoid seeing all our tradespeople head off to Aus as developers/builders close down? Tax cuts is one, Act’s 20 point plan looks very good (in general, not necessarily specific to the interest rate/exchange rate issue).

    No reply to my question on how to work out at what point tax cuts go bad.

  68. Robinsod 68
    20 May 2008 at 7:52 am

    I see Key’s now talking about something like National’s 2005 taxcut package. My co-blogger Policy Parrot wrote a very good post about that particular package:

    does national know what hardworking means

    [lprent: cleaned up link]

  69. vto 69
    20 May 2008 at 8:35 am

    “Borrow for tax cuts for the rich”. Ha ha great spin there Mr Pierson.

  70. AncientGeek 70
    20 May 2008 at 10:11 am

    Fred: One thing that is usually forgotten in the debate about people moving to aussie is that there is effectively a common labour market.

    I’ve seen the movement of people both to and from aussie several times over the decades. They move to where the work is or for family reasons. People in my extended family have been doing it since the 60’s.

    This particular round doesn’t look much different. We do need to raise wages here as there is too high an imbalance. But that is going to happen now that we’ve hit effective full employment again. This time it is based on real economics. There aren’t hidden employment schemes that there were under Muldoon.

    Taxcuts will make bugger all difference. There is no way that a 30% difference in wage rates is going to even touched unless we went to go to a 0% tax. Anyone who thinks that it makes any difference needs to get some exercise on a calculator.

    red: Ok I think you’ve convinced me about the effects of a CGT in the short-term. That still leaves the original problem – the boom + bust in the housing market. Any ideas on how to limit the effects of that.

  71. Fred 71
    20 May 2008 at 8:12 pm

    AG. And long may the common market last given family ties over there for most, there is also a danger that we take it for granted or are seen as a back door. The reason I mentioned builders was a news article, about 2 months ago, about the Aussie’s approach to housing affordability, 100,000 houses in one state alone and that they were looking for 16,000 builders. I have been keeping an eye out for more details but nothing since. Tax cuts – agreed wrt relativity, I think the marginal rate is the most important thing.

    Higher wages will be the result of education, skills and productivity. Our best and brightest achieve this already overseas, what could they do here and get paid the same?

  72. Ari 72
    20 May 2008 at 11:40 pm

    You know, tax cuts as a policy really annoy me- they tend to frame ridiculously irresponsible policy in a positive light. If you asked people if we wanted to start unsustainable borrowing that decimates the national accounts balance to mitigate a recession, do you think they’d say yes? How about if we asked them if they wanted cuts to the health system, or its necessary support staff? Yet if you tell people you’re going to cut back on paper-pushers and give them tax cuts, you’re viewed as some sort of folk hero. =/

    vto: Spin? How so? John Key has publicly acknowledged that he wants to give out significant tax cuts, which are one of two major expenses I can recall him announcing. (the other is his no-obligations subsidy for broadband providers to build their infrastructure) He also publicly acknowledged that he will be looking to increase our national level of debt.

    The only area in which it is even possible to contest that statement is that the tax cuts are for the rich. Comparing Key’s tax cuts to the current system, it is highly likely that they will be relatively favourable to the rich- probably a linear reduction of tax rates. Whether you think that is appropriate or not, you can hardly deny then that Key wants to borrow for tax cuts that are much more beneficial to the rich than to the working-class.

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