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TOP tax policy - brief critique

TOP tax policy - brief critique

Complicated, vague and unclear. Thought we were about evidence based policy - this policy is as aspirational as my own Tax suggestion. We already have an asset tax on property - rates. Good example of knowing the price of everything and the value of nothing. To some of us a house is not a financial asset but a home for our family. This policy will encourage a spend society: if I have the option of spending on a holiday (which will be mentally enriching) or making my home more comfortable (increasing the value and the amount of asset tax) I'll be more likely to take the holiday. We may end up with run down housing stock and consequent housing standards. We have always viewed home ownershipas a symbol of financial freedom: if this the the cultural change being advocated I for one don't want it.

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    • Matt Walkington
      commented 2016-12-16 17:43:28 +1300
      Erratum: I guess “adjustment down of the income tax rates or their thresholds” ought actually to be “adjustment of rates down or thresholds UP”.
    • Matt Walkington
      commented 2016-12-16 17:01:05 +1300
      Responding to James:

      Essential idea the calculator.

      As I said below though, the tax itself is pretty easy to state in a sentence (if I’ve grasped the fundamentals): Redefine income from assets to be the larger of the actual income generated by the asset or a minimum defined by the amount the asset would realise at a defined minimum rate.

      If you know the $ value of your assets, the income they generate and the defined minimum rate, you can work out the taxable income. Then you work out your tax to pay in the normal manner of income tax.

      The policy includes measures to soften the introduction the tax:

      “a. stepping the required minimum taxable earnings rate up over a few years so asset owners have time to adjust;
      b. allow home owners over 65 to pay the tax via a mortgage to the IRD, payable on change of ownership, hence avoiding
      any cashflow issues; [CLEVER. Better than reverse annuity mortgages with banks, I reckon.]
      c. allow those businesses facing a temporary or cyclical earnings downturn to defer their minimum income tax for
      a period of up this to 3 years (use of money interest to be charged); and
      d. follow the lead of Britain and Australia and unilaterally deal to the tax avoidance by foreign corporations immediately; we’ll provide more detail on this aspect of the policy in the lead up to Christmas.”

      Given the statement about fiscal neutrality, introduction of this tax by itself would imply adjustment down of the income tax rates or their thresholds.

      However, who knows that further policies will want to simplify the income tax structure and/or introduce a UBI (with a welfare rethink), “Big Kahuna” fashion.

      It’s clever to present the tax and UBI as separate policies (if that’s the intention).
    • Cimino Cole
      commented 2016-12-15 23:14:42 +1300
      As a struggling late-blooming boomer, sharing a yet-to-be paid off property, I still totally applaud this approach to levelling the accommodation playing field for New Zealanders, young and old.
    • Brendan Clarke
      commented 2016-12-14 20:11:44 +1300
      Interesting discussion below.
      Whilst I agree with the philosophy of this policy, the reality is that it is extremely complex – it really needs to be broken down so that everyday kiwis can see how it hits them, especially the way the media portray this. It is easy to spin this as a tax on the family home, which really strikes to the heart of most kiwis.
      As James has said there needs to be a real push to give details and examples, not just before the election but starting now. I hate to say it but this policy needs to be spoken about politically as well as economically!
    • James Maclaurin
      commented 2016-12-14 09:45:31 +1300
      I think what this discussion thread (so far) demonstrates is that saying that 80% of people will be better off is unlikely to convince many voters unless they can work out whether they (their kids, their parents etc.) will be better or worse of and by how much. People in this thread are all interested in tax and prepared to sit down and read the policy. Most voters won’t. Long before the election we need a well publicised and broad set of examples of how people’s income will change or, even better, a simple-to-use calculator. Something that leaves 80% of voters better off should be a huge vote winner but it won’t be unless we make it much more concrete than it is at present. Trust us, it’s going to be good once we get into power and do the numbers sounds like something Boris Johnson might have said, and we know how that worked out…
    • Matt Walkington
      commented 2016-12-13 19:33:13 +1300
      Further to my post just below:

      The essential discussion about what constitutes fair and affordable tax would need to include welfare (reverse taxation) as well.
    • Matt Walkington
      commented 2016-12-13 16:05:16 +1300
      Responding to Graeme, Robert:

      On the use of the terms “advantaged” and “disadvantaged”. Both terms require some assumption about the reference point. Usually by implication the reference point is the status quo. However, when talking about tax, there’s surely no moral reason for assuming the status quo as the reference point. (They may be a pragmatic one.) Much better to take the reference point as a fair and affordable tax burden.

      So, to my mind, we can’t discuss or analyse a tax proposal without having a parallel and essential discussion about what is fair and affordable tax. Just assuming the status quo as the reference, inevitably leads to a nonsensical don’t-disturb-the-voters or ideology based discussion about winners and losers.
    • Robert Murray
      commented 2016-12-12 10:30:09 +1300
      Graeme – continuing your attack metaphor: it seems unreasonable to devise a 7 sided defence with the strongest side having obvious flaws without drawing attention to those flaws.
      I consider myself a reasonable being willing to listen to most ideas but to believe in them they have to be coherent and complete. This one ranks as religious – “trust us, it will work.” I have difficulty with that.
      The branding of non supporters as being the disadvantaged 20% is another indicator of ideology. Especially when there is too little detail to assess who will be disadvantaged.
    • Graeme Kiyoto-Ward
      commented 2016-12-12 07:21:03 +1300
      Robert. I get that you don’t like the policy. It’s party policy now and we need to back it. If there are specific tweaks that you can see each or specific holes that need to be plugged, that’s great. Get them out there. Otherwise, we jumped into the party early and took a risk. You don’t like the entire first policy is a bad sign for alignment to the party. Find ways to make it better. It’s going to get attacked (if we are lucky) by the other parties.
    • Tim O'Donnell
      commented 2016-12-10 23:09:12 +1300
      How about this as an option. It doesn’t help the housing crisis much but it has many other benefits.

      http://www.top.org.nz/63114/a_simple_transactional_tax_that_can_t_be_avoided_or_claimed_back
    • Robert Murray
      commented 2016-12-09 22:44:29 +1300
      My problem with grand generalizations like 80/20 is that it makes no provision for unusual cases. These are classified as outliers and ignored despite the personal tragedies they entail: all for the potential good of the many. When the good of the many doesn’t eventuate (usually because of human perversity ) there are more tragedies. I submit the Russian Revolution as an example. Also a policy should be sufficiently developed (especially after the decade this one has been breing) that various scenarios have been addressed. There is no sign of this. The most likely explanation is that these scenarios are even more unpalatable than the policy.
    • Matt Walkington
      commented 2016-12-09 21:24:29 +1300
      Responding to Robert:

      One thing to remember is that we will want this policy to sit alongside major housebuilding initiatives given the present market. Until we get prices to incomes under control.
    • Matt Walkington
      commented 2016-12-09 21:16:05 +1300
      Responding to Robert:

      Yes, if you own half an asset you own half its value. Simple. No accountant needed.
    • Matt Walkington
      commented 2016-12-09 21:07:29 +1300
      Responding to Robert:

      There are as many scenarios as there are people. I’m prepared to trust the Morgan Foundation analysis at present that the split is 80 percent winners 20 percent losers.

      In other words, you can play the game of describing losing scenarios but it amounts to cherry picking, until we know the percentages reflected by that scenario.
    • Robert Murray
      commented 2016-12-09 19:37:49 +1300
      Matt – apologies for the PS – I finally got to that FAQ.
    • Robert Murray
      commented 2016-12-09 19:06:28 +1300
      Matt, you don’t address the cultural/philosophic objections or the variability of the Govt bond rate and there’s a huge hole in your reasoning. I presume the unannounced UBI replaces the current benefit system. If so, then the people most disadvantaged are beneficiaries: they pay minimal tax so the asset tax will be a direct additional burden on them (with minimal relief) and will drive them out of home ownership. Even without the UBI the poor are disadvantaged re home ownership. This will create a larger demand for rental housing and a lesser ability to purchase the houses that current landlords will be inclined to sell. If the house price falls so does the asset tax on it reducing the incentive/necessity for landlords to sell.
      Its no use telling me the idea is really good – that’s just advertising – you need to be able to demonstrate it!
      PS If I only own half a house, ie mortgage, do I only pay half the asset tax? We’ll all need accountants to figure that tax return out.
    • Matt Walkington
      commented 2016-12-09 18:21:34 +1300
      Responding to myself:

      It’s obviously wrong to say that it’s worse off to have ownership in a trust or company. The point is it doesn’t provide protection or advantage from the tax.
    • Matt Walkington
      commented 2016-12-09 18:11:13 +1300
      Responding to Robert:

      Ok, so I freehold my only house. This tax by itself hits me directly as an extra outgoing but a UBI (not yet announced, I assume) would cancel with plenty to spare (at 10K). Note: a guaranteed minimum income (as Roger Douglas wanted) wouldn’t have this compensation.

      People who own more (investment) houses start to feel the pain. Even more so if ownership is in a trust or company. There’s the great trick of the policy and why it works as a cure for investment driven house price inflation.

      If the policy is poorly written, don’t fret. The idea is really good, if challenging to digest for some.
    • Matt Walkington
      commented 2016-12-09 18:11:12 +1300
      Responding to Robert:

      Ok, so I freehold my only house. This tax by itself hits me directly as an extra outgoing but a UBI (not yet announced, I assume) would cancel with plenty to spare (at 10K). Note: a guaranteed minimum income (as Roger Douglas wanted) wouldn’t have this compensation.

      People who own more (investment) houses start to feel the pain. Even more so if ownership is in a trust or company. There’s the great trick of the policy and why it works as a cure for investment driven house price inflation.

      If the policy is poorly written, don’t fret. The idea is really good, if challenging to digest for some.
    • Robert Murray
      commented 2016-12-09 17:19:07 +1300
      Matt, sorry. The policy is poorly written – the only rate mentioned is the govt bond rate so I assumed this would be the Asset Tax rate. I see now, that the Govt Bond rate will be used as the base to calculate the Asset Tax due – so it would be between 10 – 33% of the calculated bond rate. While this changes the numbers I don’t think it affects my objections. A $400k home will only attract perhaps $1500 asset tax. Together with the rates ($2,500) and insurance ($1500) this will mean that housing will cost ~$5.500. If the UBI is set at $10,000 it will only absorb 55% of my income.
      Its still not right!
    • Robert Murray
      commented 2016-12-09 16:39:56 +1300
      Matt, While I have no love for provisional tax, and am personally responsible for the IRD introducing the ratio option, Provisional tax is only advance taxation if you do not earn your income regularly throughout the year.
      A working man, if he’s lucky, works 40 years to buy a house, a new car and raise a family. The equity in the house, traditionally left to the children, provides the impetus for the next generation to have slightly more and enables the transition from working class to middle class. This has been the kiwi way. Alternately, the house equity is used to guarantee the next generation’s house purchase. If you remove that equity by reverse mortgage to pay this asset tax in your dotage, you leave the generations financially separate and bereft of that ability to increase their wealth.
      Also, remember the govt bond rate is at a historical low: in 1986 it was at 17% and most of the 90s hovered around 8%.
      Upon retirement, at 8%, I might be lucky if the reverse mortgage to pay this asset tax lasted more than 12 years – after which (ie at age 77) I will be homeless and assetless.
      Rents will also be based on the govt bond rate. If I was a landlord I would need to charge the govt bond rate (2%) and my costs and return on investment (5%): for a mortgage free $400k property this would be ~ $700 per week. Currently it might be $500 /week (except perhaps in Auckland.)
      The more classes of assets taxed, the more rules and difficulty in applying the tax.
      I would welcome an explanation of why I’m wrong.
    • Matt Walkington
      commented 2016-12-09 14:28:59 +1300
      Responding to Robert:

      “Taxing people on money they haven’t received yet is immoral and will cause hardship.”

      We already have such advance taxes in the form of provisional tax. It’s predictably unpopular.

      http://i.stuff.co.nz/business/industries/78861353/tax-overhaul-will-be-very-popular-with-small-businesses

      There are all kinds of ways owners of assets can use them to generate income sufficient to cover the comprehensive capital income tax. Reverse annuity loans for example.

      Theres no problem having as many classes of assets assessed for tax as are practicable. Wider tax base. Remember “fiscal neutrality”. The whole tax take won’t increase.

      All the sort of objections you raise will be gone from people’s minds once the housing bubble bursts.
    • Robert Murray
      commented 2016-12-08 00:30:09 +1300
      Matt, so what classifies as an asset, a Rolls Royce, a caravan, a rental property. If a caravan is not an asset perhaps extravagant mobile homes on leased land will be the future. Will there be two categories of rental property: one for the poor and one for rich people to rent their own homes from trusts at the minimum return. How are you going to deal with those who cant afford an extra tax or are you proposing this will be the only tax – in which case it will promote ownership by foreign based companies with huge debt to offset any profits. This tax is more likely to reduce the number of home owners than increase them. Taxing people on money they haven’t received yet is immoral and will cause hardship. How will you collect it? How will you make sure people declare all their assets. The release blurb spent more time talking about what wonderful things it might fix than detailing how it would work: they didn’t even name it which gives detractors a chance to pejoratively call it the home tax. It should have started off as ASSET TAX. There was no logical chain of problem, aim then solution – they were all just mish-mashed together. This was a sloppy piece of thinking and writing which might have passed NCEA1 but I doubt it.
    • Matt Walkington
      commented 2016-12-07 23:21:36 +1300
      Responding to Robert:

      It’s none of complicated, vague or unclear. It’s simple. Redefine income from assets to be the larger of the actual income generated by the asset or a minimum defined by the amount the asset would realise at a defined minium rate.

      You objections illustrate exactly why the tax is badly needed and why would succeed.

      Tell the generation being locked out of home ownership that it’s a symbol of freedom.
    • Matt Walkington
      followed this page 2016-12-07 22:37:03 +1300
    • Robert Murray
      published this page in Suggestions 2016-12-07 12:08:42 +1300