Well, There Goes My Vote

Well, now that Todd McClay has announced that we’re going to try and start charging GST on overseas digital transactions, I think I’ve had enough. I made a submission to IRD on this and specifically warned about the geo-unblocking considerations and the need to provide a means of voluntary compliance (otherwise people will get hit with potential ‘knowledge offences’ for having US Netflix, Hulu, or Prime). Then there’s the issue of ‘collection’ by unscrupulous sellers, who can now raise prices by 15% and never get around to actually paying IRD.

Now, I am not arrogant enough to think they’ll have given my wee submission any real thought (the purpose of consultation tends to be appearance, rather than any actual desire to engage – hence why it’s called consultation, rather than engagement, I suppose). But I’d have thought there were enough people who might think this that someone at IRD would have gone, ‘Hold on a minute…’ Apparently, that didn’t happen.

The effect is that, regardless of the tax compliance and technical considerations (enforcing this will be…interesting), National is giving in to a special interest group (retailers) (after all, they’re creating a ‘level playing field’ – not sure with whom). This doesn’t mean I don’t sympathise, but the actual group affected here will be digital service consumers and not even importers / retailers. So the real beneficiaries are going to be NZ suppliers of digital services who can now, legally, gouge and who may end up yielding lower access for us.

So I guess National has lost the plot and they really don’t need my family’s votes, apparently. Great job guys.

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Military Action Against ISIS (et al)

While I am not (ordinarily) a proponent of military action (in my youth I was, often for its own sake, but cannot justify that any more), I must say I am warming to it more recently. I find attacks on civilian targets, and civilised targets, to be abhorrent. The fact that two people wish to fight and kill each other is lamentable, but not generally our (in this case New Zealand’s) problem. However, that does not mean we are exempt from the need or capability of expeditionary warfare (if anything, it’s probably the only sort of war we will ever fight).

My reservations are as follows:

(1) We have no direct interest in the situation (NZ, itself, is an unlikely target and, even if we are attacked, the perpetrators are unlikely to escape – something the French themselves identified when they bombed us);

(2) The justification that we need to intervene, on humanitarian grounds, will lead us to a perpetual war against all uncivilised nations, organisations, and people’s (as a logical extension). I am not sure our role is international policeman and there are plenty of circumstance that will have just as much cause as the current to warrant direct action; and

(3) There will, inevitably, be consequences to our actions. It’s very easy to sit back and go, ‘Let’s pound them back to the stone age’ (not that they seem much further advanced), but we are actually discussing the deaths (a great many) of New Zealanders, our allies, foreign civilians, and our damnable enemy. This is not a decision to be taken lightly.

However, at the same time, I have no sympathy for the barbarians and I fail to see why we should let other civilised people die simply because it does not effect us directly. Instead, I would say that smashing the barbarians to smithereens’ would be both justifiable and probably very relieving. I don’t think it will be a short or easy task, but I note that we’ve been willing to send troops to fight other morons.

Now, how do we go about that fight? Well, here I’m a bit more conflicted. The Regular Force is likely to take the brunt of any immediate requirements, but I am tempted to say that we should do what New Zealand has done in the past and call up a Volunteer Force to deal with this specific challenge. This could involve raising troops for a specific Middle Eastern campaign (or anything else necessary to hunt and kill ISIS off), with the people relieved once that has been accomplished. Once returned, they could then transfer to the Regular or Territorial forces (I know, I know, it’s now the ‘Army Reserve’), or simply be mustered out and returned to civilian life.

This would thus set an objective and we could call up volunteer contingents based on actual requirements and to meet operational necessities. I am not specifically recommending an all ground force here, this could be in the form of logistical support, we could provide technical services, or whatever else is required (both at the New Zealand contingent level and as part of an allied coalition). I am sure many would like to fight directly, but it doesn’t have to be our sole contribution (and the Regular Army is far better suited to that task, as they already have the significant training involved).

Whatever the case, at the very least, expanding the size of our available reserves would be advisable at this point. New Zealand has allowed itself to become very happy in peace and long may it return, but as the world becomes more dangerous, and we find that the barbarians are coming out of the woodwork, we need to have sufficient trained people to handle any threat we may face or need to respond to. The current arrangements are limited and do not enable a large reserve force to be maintained (on a standing basis, let alone expanding it during emergencies).

A Capital Gains Tax vs. A Property Tax

As the new ‘bright line test’ on residential property sales below 2-years of ownership has taken effect, we are yet again reminded of the potential ‘benefits’ of a Capital Gains Tax (for which the bright line test is not – it’s intended to provide some clarification around what’s the difference between trading in property – an income activity – and what’s investing with the potential for a capital gain). Kiwiblog has gotten involved* (Farrar is an honest proponent of a CGT) and I thought it important to deal with some of the matters, particularly providing a comparison to the alternative of a property tax to reduce housing market distortions (the main justification which tends to be employed – along with ‘fairness’ – which I find far less persuasive).

CAPITAL GAINS TAX

A couple of points upfront:

  1. A CGT, in any form proposed in NZ, is based on realised gains (actual disposals) and not on unrealised gains (a simple appreciation in value);
  1. No proposal seems to take into account the potential distortions caused (which happen whether you have a ‘simple’ or ‘complex’ system) – so even if $40bn of net gains occur a year (worth $10bn in tax at 25%), that doesn’t mean you will continue this once a CGT is introduced; and
  1. The actual complexity of even a ‘simple’ tax is beyond what most people realise (there are a myriad of problems, along with the need to keep records which currently we do not even need to think about – unless we wish to).

Now, to the meat of it: a CGT which does not exempt the primary residence will either need to be a ‘flat’ tax or it will likely cause people to automatically jump into the maximum tax bracket whenever they move. Farrar’s estimate, lacking any exemptions, is that this could allow us to lower the maximum tax rate to 25% (for incomes currently caught in the 30% and 33% rates). So if I sell my house today, and I make a $400,000 gain, we’re talking about this being hit with a $100,000 tax charge. How this would be administered is already problematic (in my case, it would go onto my income tax return, but for most people, how would they comply? How do we know how much they paid? Will this be a new service of the government?) The same problem arises if you own $10,000 worth of shares and now want to sell them. How much is your gain? When you bought them, obviously you kept detailed records and these have been passed between your old broker and new broker. What about bonds? This is supposed to be a simple system, yet there is quite a bit of additional administration, and unlike most employment income, it isn’t ‘simply’ a by-product of paying your staff and PAYE at the same time (and I bet employers, even as a by-product, would be happy to see that requirement go).

What is worse: you are not obliged to take your gain. If I ‘defer’ income from employment (let’s say I agree to a ‘bonus’ at the end of the year rather than taking an ordinary stream of income during the year) the taxman will happily advise me that a bonus is still income for the purposes of the Income Tax. If I keep the money, as a shareholder employee, in my company, he’ll advise me that it counts towards my ordinary income (and if I’m not, that it’s still subject to the company rate of income tax). By comparison, if I don’t like my potential for CGT, I can simply avoid disposing of the asset (potentially indefinitely). This could mean the ex-family home becomes a rental and families gradually accumulate ever more properties (through trusts or companies), as they will face significant tax penalties otherwise, and there is little reason to do so. That will, inevitably, lead to demands for an inheritance tax.

The problems with a CGT are simple (unlike the tax itself): it is inevitably complex and it does not create a stable source of revenue (as it can lead to changed behaviour, in some cases quite significantly, which is also economically distortionary). It does not mean that it’s ‘fair’ – not taxing capital gains means that the rich can keep growing their capital stock without facing tax on any eventual gain (if there is any). But what lacking a CGT does do is encourage that if there is a gain, it is likely to be realised and the capital stock made available for others to purchase (which means home, shares, and so forth being actually purchasable by others – who may not have any at the time of acquisition).

PROPERTY TAX

The question that seems to elude the debate is: what are we actually trying to achieve? People don’t seem to mind that someone makes a gain of buying shares and, at a much later time, sells it (we already have provisions for trading in shares, rather than for investment). If anything, we want to encourage more ownership of assets through higher savings. But we don’t seem to want everyone piling squillions into residential property (that is, both physical structures and land zoned to residential property). The Reserve Bank’s data** indicates that residential property (excluding zoned land) was worth $821.3bn at the end of June 2015. Even if unutilized land is only worth 50% of a property and 5% of existing stock, that’s another $20.5bn in the land-bank so we’re closing in on $850bn (I’ll round up for simplicity).

That means a 1% property tax (on the value of residential property and zoned land) would be worth around $8.5bn per annum. It would have no impact on businesses or farmland (there would be some interesting discussions around mixed use properties, but the RV of a flat should suffice, without needing complex separate valuations). The tax would be far harder to avoid, beyond actual property prices reducing, as while an individual can change their behaviour (I can live in a smaller / cheaper house), the reality is that the total quantity of residential property won’t shrink by my own personal choices.

What would the effect of this be? To begin with, it would allow $8.5bn of other tax cuts to be achieved (Kiwiblog has already outlined an example of the potential scope*) and it would have an interesting effect on people: there would now be a disincentive to have your property’s capital value increase. For every $10,000 of ‘gain’ you’ll face an annual levy of $100 (with no corresponding increase in income or ability to actually realise the gain). That happens whether you’re an owner-occupier or a tenant (in fact, for the first time, tenants might be encouraged to vote in favour of policies to expand housing and land supply, as they’ll be directly impacted by property value increases with no direct benefit to themselves).

As a caveat, house prices will probably drop as a consequence of this policy (even a 20% price drop would still yield $6.8bn in tax take). People will start to demand sufficient housing be consented to keep prices from rising, otherwise they’ll face an ever higher tax burden (although relieving them of income tax, assuming the amounts are net-neutral, which is always a problem). Equally, every time you look at a house, the taxable value will become a consideration. That will, hopefully, supress some demand, or at least willingness to big up, in the market, and thus add another tool to keeping house prices subdued (if the market starts overheating, the Government could simply increase the property tax rate, which should provide reasonably linear suppression).

This is not a silver bullet for the housing market, but it will encourage greater economic use of residential property (rather than people sitting in houses which are actually larger than they need) and will encourage people to use land more efficiently (why do I need to live in the centre of the city, where property is expensive per sqm, compared with cheaper somewhere else). The same applies to ‘regional development’ (the Waikato and Northland are going to start looking even more tempting to Aucklanders). The effect could be kept neutral and the reduction in income tax would encourage people to earn more and not save it into property.

SOURCES

(*) http://www.kiwiblog.co.nz/2015/11/capital_gains_tax_for_property_now_law.html

(**) http://www.rbnz.govt.nz/statistics/tables/m10/

Moving sites

Well, I’ve moved from redqueen.blog.co.nz. This was primarily due to constant Bad Gateway errors (which made posting, or even checking anything, impossible for extended periods of time). I’m hoping WordPress will be better for this. I’m thinking of bringing over my old posts, if possible, but I’ll need to see how that actually works here.