TOP1 - Frequently Asked Questions

TOP1 - Frequently Asked Questions

Navigating this tax policy can be complicated stuff here is a bunch of FAQ's. If you can't find an answer here we encourage you to ask a question

Ask a question here - but have a read below first please

1. What will happen to property prices?

 

Answer

Their escalation will end; this will give us time to lift real incomes so that the ratio of the average house price to the median income will drop from 9 times in Auckland and 6 nationwide back closer to historical norms. 

2. How do you stop house prices falling?

Answer

By phasing in the tax, not bringing it in overnight. Start the process, manage policy change responsibly, and give folks time to adjust. 

3. How do I find the cash to pay this new tax?

Answer

From the income tax cuts for most. Otherwise, the same place you get the cash to pay your rates – by phasing this in we have an orderly adjustment. 

4. How are people affected?

Answer

Our work suggests you can design the tax cuts so that around 80% of people are better off . But it will depend on the deal we negotiate with whoever the anti-change, Establishment party in power is. 

5. Isn’t it just a capital gains tax?

Answer

It’s nothing like a capital gains tax; they are totally ineffectual at halting speculation as we have seen overseas. This is an annual levy (like rates) and what it’s doing is making income tax fair. Without it, one section of society – the property owners – win at the expense of everyone else. 

In the US it’s called the Trump Loophole, here we could call it the Bob Jones Loophole – after all he’s the guy that paved the way for Douglas and Richardson & of course wrote a book on how property prices are a free ride to riches so let’s all gear up big time. 

Now look where we are – retiring baby boomers still loading up with debt at their age, to make themselves rich. They can’t all
sell at once.

6. Are there other loopholes?

Answer

Yes there is one that pertains to foreign companies who are ripping us off through transfer pricing and thin capitalisation. The UK & Australia have already moved on this. We need to as well and I’ll be pushing the Establishment Party government hard on this. I have written & published papers on it.

7. What about the UBI (Unconditional Basic Income – giving all citizens a regular modest payment, no strings attached)?

Answer

Our work there suggests that once we have closed the loopholes in the tax system then we have the ability to start to phase in a modest UBI, and reduce our reliance on targeted welfare benefits which are dehumanising and evidence tells us, makes poverty worse. 

But we must plug the major loopholes in our tax regime first. As you can see, this policy needs to be phased in over time, and the same will be needed for the UBI.  

As part of this package we will ask the Government of the day to have a holistic review of the tax and welfare system to develop possible pathways to implement the UBI. I am a huge fan of a UBI because it acknowledges the contribution to society from the 1 million people who work but don’t get paid. Without those folk caring for children, the elderly and our communities our society would collapse. The UBI is modest recognition of their existence. 

8. What happens to the elderly and those that own houses but don’t have an income?

Answer

That’s all about transition and as per my speech, the subject of negotiation with the government. Our preference is to allow home owners over 65 to pay the tax via a mortgage to the IRD, payable on change of ownership of their house, hence avoiding any cashflow issues. 

9. What do you see as the major barrier to making the tax regime fair?

Answer

As well as the top 20% who will take a hit, myself included, I suspect there is an ambitious cohort that haven’t yet commandeered wealth through property speculation but aspire to. I don’t blame them – everyone is just doing what makes sense – what we’ve always done and what our tax system tells them to do. Of course some won’t like the change, but I’m confident that 80% of people would be better off and the rest of us can easily afford to fund that. 

10. Do these taxes exist overseas? How do other countries deal with this problem?

Answer

In Europe they address it via a range of taxes, the most common one being wealth taxes. These are inefficient because they are a double tax and invariably countries use a multiple of exemptions to try and get around that issue. The end result is that not all the tax gets collected. In the US (which has a 40% estate duty for wealth over $5.4m) indicating a desire to act against concentration of wealth. Other ways to try and deal to it include capital gains tax, property taxes, stamp duty, estate duty and inheritance taxes. All of these solutions are poor cousins to simply plugging the hole as we propose.

11. What does this mean for shares and bank accounts?

Answer

Financial assets aren’t included as they’re already taxed.

12. What does this mean for businesses?

Answer

Any business that is not declaring a minimum return on its assets will need to pay more tax. This forces a greater efficiency of capital (productivity) and disincentivises low-earning businesses. Those businesses facing a temporary or cyclical earnings downturn could defer their minimum income tax for a period of up to 3 years (use of money interest to be charged).

13. How would farms be treated?

Answer

Well they’re just another business so if the taxable earnings exceed the minimum required rate then the change doesn’t affect them. If it’s under they would be required to top up. Farms typically have cyclical swings in earnings so they’d be able to take advantage of any smoothing mechanisms the minimum required declared earnings regime might offer.

14. Why don’t you exempt the family home?

Answer

The centre of the unfairness in our income tax regime is owner-occupied property. To exempt it would, in effect, not deal with the issue. Both Establishment parties have proposed remedies that exempt the family home and of course they have never been effective for that reason.

15. Why don’t you put a levy on foreign buyers?

Answer

That would just be dealing with a symptom of the disease rather than its cause. To the extent foreigners are also using the tax loophole as a repository for their savings, then of course they are adding fuel to the fire. But what we’re focused on is dealing with the fire, not merely one source of the fuel.

16. Why do you want to tax the family home?

Answer

We’re not. We’re taxing the income you receive from providing that roof to the occupants each year.
If you are an owner-occupier you just happen to be the occupant as well as the landlord. That is no reason for tax not to be paid on the transaction. 

The benefit you receive each year from owning the house is every bit as real that you receive from owning a bank deposit or from rent paid by a tenant. Why should you be tax exempt when tenants have to pay rent from their income
after tax and their landlord pay tax on that income received?

17. How will taxing housing make it more affordable?

Answer

You mean taxing rental services. Because the demand for housing will now be driven by the demand for accommodation or for a nicer house, not by the desire to make a profit from institutionalised and endemic property inflation. With lower demand, incomes will catch up with property prices over time and restore the normal relationship.

18. We have a housing shortage. How will taxing housing get more houses built?

Answer

Land is included as an asset – any land owner would have to ensure their land generates a minimum taxable return. This change would remove the incentive for “land banking” – sitting on unproductive land waiting for capital gain. That in turn would incentivise more houses to be built in areas where demand is high. 

19. Won’t this result in rents rising?

Answer

No, rents stabilising along with the price of houses, and falling in real terms as incomes rise. Rents can’t just be jacked up by landlords at will or because their costs go up, demand falls away. Otherwise it would already have happened. 

So if landlords face an increased cost – as some but not all by any means will, they could seek to recover by ramping rents but to the extent that tenants are already paying as much as they can, demand will simply drop. 

I would expect the price of those properties to suffer to the extent that the landlord is then making at least the minimum deemed yield.

20. Haven’t I already paid tax on the money I used to buy the house?

Answer

You’ve paid tax on the income you’ve then saved to own the asset much the same as you do when you accumulate funds in a bank deposit. You haven’t paid tax for the services it provides you each year. A tenant pays their rent out of tax paid income, and then the landlord pays tax again when he receives that rent. What we’re doing here is ensuring owners face the same tax impost as tenants.

21. So you want to tax me on fictional rent?

Answer

It is an income tax, income is the benefit you receive, whether that came in the form of money or services rendered. Your house rendered you a rental service. You need to pay its owner rent, that owner needs to pay tax on that income. Where’s the fiction?

22. So I will have to pay tax on the deemed income from the whole of my house?

Answer

No, the owner is only up for a deemed minimum income on the equity you own in the asset. So if you own a $1m house, but have a $600k mortgage, you’d be deemed to have a minimum taxable annual income worked out on the $400k equity you have. Some people have responded to that saying they’d increase their debt but that wouldn’t be rational. It’s likely that mortgage rates would be higher than the deemed minimum income rate.

23. Why don’t you charge tax on all non-cash transactions – for example when I cook and eat a meal myself?

Answer

This question goes to the heart of the dilemma with tax. There is no such thing as a perfectly neutral tax regime, it always distorts, the key is to minimise the distortions. The answer to your question is that we should in theory pay tax on all those DIY transactions. But issues of practicality and materiality mean we don’t. 

So there’s a test to apply really – is the potentially taxable transaction making a material difference to the operation of the economy, and does the cost of tax collection outweigh the revenue gathered? In the case of intra-household transactions it’s pretty clear that assessment issues preclude any serious consideration of inclusion in the tax net, and secondly there is no evidence that the DIY economy impairs the operation of the overall economy in terms of maximising national well-being. 

Freedom of choice underpins much of the DIY economy and freedom is a fundamental value of a society like ours. The anomaly when it comes to owner-occupied housing is patently evident now, because it is so large. Because housing is a capital item, the cumulative impact of the tax break is a lot more powerful than simply not taxing a current transaction like cooking your own meal. The sheer magnitude of the impact requires a response.

24. What about tradies and sole contractors that generate self employed income?

Answer

The business has to provide declared income as per the minimum required for the productive assets deployed. Any surplus over and above that is either profits or income for the contractor and tax is liable as normal.

25. Is foreign investment liable for this tax?

Answer

For sure all productive assets are subject to this minimal tax threshold, irrespective of ownership. 

26. How do I calculate how I'm effected

Answer

Not hard to do - add up the value of all your assets, take off your debt. That’s your equity. Of course the government might say don’t include anything worth less than $10,000, or $20,000 - who knows?

Now you need to guess an effective tax rate that will be charged every year. I’d guess anywhere between 0.5% and 1.5%. But remember that will be ultimately. Who knows how many years a government would choose to phase in this change in the tax base? They don’t want to collapse house prices, the aim is to take the sting out of house price inflation. And who knows whether they grant an exemption - that could be anything from no exemptions (like GST) to a minimum value of say $200,000 - or even the value of an average house. These are all choices for the government to make.

Thirdly you need to estimate what happens to your tax rates - remember all revenue raised is returned through tax cuts. Also remember the more exemptions they  grant, the less tax is collected, the smaller any cuts must be. And of course a government might decide to spend all the proceeds cutting the top tax rate, another government might decide to cut the bottom rate only, a third government might just cut all rates equally.

Hopefully by now you can see that how it effects you in particular is impossible to know unless all these factors are known. These are political choices. If they do it properly as I would - and remember we have no aspiration to be the actual government - then they’d collect enough to cut tax rates by a third. So it is a fundamental change in the way tax is collected - wage earners at long last get the tax relief that is only fair, and asset owners are flushed out from the bushes. But hey, that’s your choice.

I always ask people whether they think this enormous rise in inequality that has occurred since Ruth Richardson did her thing is in any way fair? If they don’t care we don’t need to talk on this any further. But if they think its unfair then I’m suggesting what the best (in terms of both economics and fairness) way to address is as I’ve outlined. Do it with no exceptions, cut income tax rates by 1/3rd and 80% of people will be better off. It’s a no brainer. The only issue is how many of the 20% (or those who aspire to be) care enough to support it. Your call.

I have to say it does amuse me to see people saying they’ll only support making NZ fair again if they are directly better off themselves. Makes them sort of prostitutes doesn’t it?

27. Will every home owner have to file a tax return?

Answer

Not really - its very easy to get your house value from the local council, your insured value from an insurance company, and your mortgage from a bank. The IRD has many rights. You don’t need to do anything if it’s just the home that’s involved. If there are other assets you might need to fill an online form, sign a statutory declaration. Very simple really, no accountants needed that’s for sure.

28. How are multiple owners treated?

Answer

if the owner is a trust or company then the tax rate is at the trust or company rate. If there’s say 5 owners then the liability is split proportionally. Any more than that and the liability per owner is calculated on the basis of their value portion times the average tax rate faced by the 5 highest tax-rated owners. Of course one day I dream of having a single tax rate (and a UBI). Then it doesn’t matter how many owners there are. But one step at a time.

29. How’d you work out 80% of people would be better off?

Answer

We have models of the distribution of income and wealth in NZ - how many people earn what, and own what. They are of course proximate because the wealth data collected in NZ is very poor. But there are a number of ways we can get reasonable distributions and then run sensitivity experiments to see what difference if any it makes if we chose alternative income/wealth distributions. Then we specify how the tax would work, and for any one simulation you have to pick an income tax scale, decide what exemptions if any you’re going to allow, decide what rates you’re going to apply to this deemed capital income, what rate of capital income you’re going to deem, etc etc. And finally of course the whole package must be tax neutral. Now that just gives you an impact effect. From there you have to assess what if any behavioural changes you’re going to allow for, especially say with business investment and growth because business is a big beneficiary of this as its supply of capital changes now the property gravy train has been halted.

At the end of all that you get a feel for the numbers, you certainly have a range of reasonable outcomes. We found the number better off under various assumptions varied between 75% and 95%, dependent mainly on how we set the new income tax scale. generally though the more that benefited, the lower the benefit for those most of those who do. 

Of course they’re models, not reality so nobody is going to say definitively this is what will happen. Economics just isn’t like that, predicting behaviour change is especially tricky. And working out 

30. How would this policy affect the amount of tax foreign companies operating in New Zealand pay?

Answer

It wouldn’t directly. We have a special tax policy coming out to help those companies pay their fair share of tax here.

31. Forestry and this tax

Answer

The concern here is that forestry takes 28 years before the cash comes in and so the investor has no cash to pay the tax until then. I’m sure there’ll be lots of special cases like this, particularly in biological businesses and as has been the practice historically, each may require tweaking of the conventional model to accommodate it. There will no doubt need to be costs and liabilities that get apportioned when investors change their rights to harvest. In other words the tax liability just builds up each year together with the cost of money charge, and then if you sell out before harvest you pay your portion of the tax liability then. I’m not about to sit down and tune up a special model for forestry but no doubt that would be done at the time as it always has been with past tax regimes or changes.

32. Shouldn’t the interest on loans be deductible?

Answer

There are two ways you could apply the tax - tax the whole value of the asset and make interest deductible, or tax the equity only and don’t. The second is simpler. Further, for the purposes of tax, the equity it is calculated as the value of the asset less any debt secured against that asset - so long as the debt is on commercial terms. This proviso is necessary to shut down the possibility of people shifting assets between taxable entities for the purposes of tax avoidance. A non- or low-interest bearing debt for example would not reduce your equity - it must be at market rates.

33. How would the value of an asset be determined?

Answer

It’s the depreciated value so for businesses that’s easy - the same way as they do it now. For households the main asset is the house - we have market values, RVs and insured values. So long as councils get their act together then RVs will become more tractable and so between the 3 alternatives you can triangulate to get a value. Or you could just opt for the RV which I’m sure will have overs and unders over time compared to realised sales figures.

34. Aren’t Small Businesses taxed enough?

Answer

There is no additional tax collected. Whether you are taxed too much compared to the taxpayer standing next to you who knows, I’m sure that’s a matter of personal opinion and not much else. There is certainly a lot of evidence that tradies do cashies to avoid tax altogether, that simply is fact. Expanding the tax base as proposed squeezes the ability to do that a bit but certainly doesn’t stop cheats totally. In the second phase of our tax reform - that will not see the light of day unless this does - we have that dealt to through a combination of  single tax rate, tax deductibility of home repairs and far better reconciliation of GST receipts. But that’s for the future. I think the important point here is that loopholes and tax cheating simply puts the burden on someone else. By hitting those really hard society is way better off.

35. Is this an envy tax?

Answer

Well Paul Henry I’m sure you see it that way as you don’t care that your tax load is lower by virtue as opposed to any thing you can claim merit for. It is not a tax designed to “tax the rich”. I know many rich who pay an enormous amount of tax even relative to the asset base they control. What it is though is a closing of a major loophole in NZ’s income tax regime. That hole has seen a burgeoning class of property-owning elite who buy houses not because they need them, not even because they want to be landlords, but because they know this loophole is making more and more people want to get the same tax advantage and that’s what’s driving the excessive demand for housing. They will want to change where they invest their money. 

In regards to paying more tax on a Mercedes rather than on a Corolla, the benefit one receives from an asset is directly proportional to the value of the asset. That’s what markets do - they price assets as per what the next person is prepared to pay for them. That benefit of course is a form of income (not cash, but income) and we’re talking here about income tax. the more income you have the more tax you pay.

 

36. Won’t it take away the incentive to invest in improvements in your house?

Answer

Depends what you’re doing the improvements for. If they’re for you to enjoy then that’s a benefit or income and should be taxed. If you’re doing it because you dressing it up to sell well yes there’s not much point if house prices aren’t rising (in real terms) which is the whole objective here - to let the price of housing reflect whatever those who wish to own their own home simply to enjoy it. Not to let the price of housing reflect the vale of the tax loophole.

37. Asset heavy, income light people are not necessarily "rich"

Answer

Totally correct. However to the extent that someone has chosen to invest in assets that earn no cash but provide some other service to them, that is their choice. Along comes this closing of the income tax loophole and those folk suddenly find they have too many assets relative to their ability to pay what amounts to an increased rates bill. Now we’ve already dealt with oldies by ring-fencing them and making it in effect an estate duty. But for others there are choices to make - get more cash-generating assets and have less in cash-lite ones. But because we’re phasing this in there is time, the tax liabilities will not just leap overnight but be staged in a way that doesn’t collapse house prices for example. So that enables you to reposition.

38. Are you attacking the drive of people to leave stuff for their kids?

Answer

Possibly given that this loophole has been here so long now we have people investing inordinate amounts to accumulate the unearned gains from merely holding a particular asset type - housing. With that incentive removed those folk will need to put their money to work elsehwere. investing in businesses that grow and employ and make profits and pay higher wages would be a fine thing don’t you think?

39. Is this policy to address fairness or address the housing market problem?

Answer

Well it actually addresses both and better than that it also addresses (c) the shortage of capital flowing into our business sector (d) the problem around lacklustre productivity in NZ that is constraining our ability to lift GDP per capita (e) this obscene race to the bottom advocated by our Treasury to just keep cutting tax rates on corporates until we’re the same as tax havens - this is a craven position that arises because of our morbid dependency on foreigners' savings because we’re too bloody stupid to direct our own savings into productive endeavour rather than property speculation.

 

OK having got that off my chest, here’s your answer. Inequality in New Zealand has increased enormously since Ruth Richardson’s Mother of all Budgets where she pulled the rug out from under the lower paid. The Trickle Down never eventuated and under John key’s regime rampant house price inflation has made it even worse. Now if you don’t care about fairness then such events don’t interest you, otherwise you should be disgusted. What the closing of the income tax loophole I propose achieves is it takes away the reason for rampant house price inflation and it gives tax cuts to lower incomes. So it does both of the things you asked about. More details here.

 

40. Why not just narrow the target to residential property call it a tax on imputed rent?

Answer

The reason is because a major objective of the closing of the loophole in our income tax regime is to target the way businesses deploy their capital, namely to increase productivity. If you have a business that year after year makes lacklustre returns on the capital it owns, then that capital needs to put to work more productively - either by the existing owner utilising it better or by it being sold to someone who can. Productive capital is a scarce resource, this policy will raise the supply to those who can get a return on it.

41. How long for the closing of the tax loophole to take effect and how do we know a future government won’t rescind any tax cuts?

Answer

There’s never any guarantees with tax. A government could raise them tomorrow and not tell you they’re going to. The closing of the loophole will not be fully achieved for some time. This is on purpose because we don’t want to collapse house prices, we want to have them tread water so incomes can catch up. The way to do that is to make the deemed taxable income on capital only small to begin with and wind it up over time until fairness is restored. How long would that take? Depends on the reaction of house prices.

42. What’s the evidence this is the best option?

Answer

Many governments try other tactics to close this loophole like estate duties, inheritance tax, wealth tax, land taxes, capital gains taxes etc. They are all aimed at the same thing - the untaxed return owners of capital make over time. Most of the taxes above impact as a one-off hit, often at the end of life. This is a political choice but the consequence of it is that capital is mis-allocated (ie; allocated according to tax impact rather than economic return) right through the life of the owner. You can think of the approach we propose as aimed at the same thing by impact in an as-you-go basis. That’s the logic.There are a number of very successful economies who have not had the runaway house price inflation for example that we have facilitated. What they have in common is that unlike New Zealand they all try to address the issue rather than ignore it. Is pay-as-you-go tax on income than an end-of-life, or event-triggered one-off tax? If you don’t want to distort markets along the way it’s just logic.

43. Who are the top 20% who end up paying for restoring fairness, what wealth level do you change from getting to paying?

Answer

They will more then likely be the 20% who are the most wealthy, indeed the tax cuts can be designed to ensure that. What wealth level does that cut in at? Who knows, wealth data in New Zealand is pretty sparse to be polite. It doesn’t matter in terms of policy design, you can implement the package so that the 20% point happens no matter what the actual wealth numbers turn out to be. If you think about it logically you could take all the revenue of one person and distribute a fraction of it to each and every other person. We each wouldn’t get much of course. So the question is a bit futile. It does amuse me however when I come across people who love the idea so long as they benefit - tells you a lot doesn’t it? The question is pretty simple with this tax reform - do you want a fairer New Zealand or not? Closing the loophole will achieve that.

44. How do you measure fairness?

Answer

There are a wide number of measures - ranging from income, wealth, discrimination, etc etc. The Graph Pack we published at the launch of Policy #1 on tax reform gives a pictorial summary.

45. How will this win an election?

Answer

All 7 of our policy priorities are about much needed reforms that will make New Zealand a better place for us all to live in. We haven’t formulated them with the purpose of offering election bribes or handouts to people just so they vote for us. In fact as I have said from Day One, The Opportunities Party is about making New Zealand a better place, giving more opportunities to more people because we don’t believe you can build sustainable prosperity on an unfair society. 

 

What’s more I have said that I have a strong belief that when most people get full information they make totally rational, as opposed to purely self-interested, decisions. With the first policy on tax reform 80% of people will be better off so it would be against even pure self-interest for us not to be supported by 80% of people on that policy. For the other 20% I simply ask the question - do you care about the rise in inequality that has occurred over the last 25 years, does it concern  you at all that the way we’re going,  your children won’t be able to afford the rent let alone buy a house. There will be some in that 20% - like Paul Henry say - who reply they don’t give a toss. That’s fine they have one vote, just like everybody else.