Closing Tax loopholes

TOP’s policy to make New Zealand fair again; Some numbers

Take 8% of your gross income, and that’s your tax cut. Take 1.5% of the equity in your house and that’s the additional tax to pay. This gives you roughly (and I mean rough) the order of magnitude of how closing the loophole in the income tax regime affects you.


Feedback from the beach BBQs so far this summer tells me people want some idea of how TOP’s flagship policy – making New Zealand fair again – affects them. While I’ve said 80% of people will be either better off or insignificantly affected, self-interest is hard for many to resist.

There are very good reasons for why I don’t want to be precise. The final shape of any package depends on so many variables – will we have minimum thresholds for asset values included or not (I favour none, I love the fact GST is so clean)? Will the income tax cuts apply across-the-board or be skewed towards those on lower incomes (my preference)? What minimum taxable income on assets will be imposed? What does the time profile of the transition to full implementation look like (remember there is no intention to “collapse” house prices)? And so on – the questions are endless. And well they might be until the final form is known. And that has to be negotiated with the government of the day.

The above are some very crude rules of thumb to work out what such a closing of the tax loophole might mean for you. This is how I can simplify it.

Most people have an average income tax rate of about 24%. For those people you can expect a cut in your average tax rate of about one third – around 8% of your declared income. As I’ve said I’d prefer the poor to receive larger tax cuts, but for now lets assume it is proportional across the spectrum. Meanwhile, we can assume the tax collect on your assets is maximum 1.5%.

We’ll start by looking at the median household; which earns $76k and has just under $300k in assets ($264k is in housing). They are saving $6k in income tax and paying $4k more. So under our tax plan the median household would be $2,000 better off each and every year; that is $40 a week. This should be no surprise, because like I said, 80% are better off.

Now lets look at the top 20%. The top 20% of households earn over $135k and have assets over $815k ($710 of which is in housing). Now wealthy households may not have a high income and vice versa but on average they do. So for households at this 80th percentile of society, their income tax falls by $11k, which is about the same as the extra tax they will pay. Assets tend to become much more significant after this point, so we’d expect the wealthiest 20% to pay more tax, and I’d argue they can afford it.

Final example – to ensure you’ve got the principle here, even if the numbers are crude. You earn $100k and you have net equity in the house of $200k. The tax cut is 8% of $100k or $8k and the effect of closing the loophole is to raise tax by 1.5% of $200k or $3k. You are $5k better off each year.

Now please, appreciate that these numbers are indicative only but should give you a feel for the nature of this revolt against tax unfairness.

If I have no declared income but own a $2m house without debt then my tax rises by $30k. If I’m a pensioner, that could be paid by a rising mortgage to the IRD (an amount that falls each year because your equity in the house drops). If not – well yes – it’s time for me to “rearrange my portfolio”. Now the reason I’d phase in the closing of the loophole, is precisely to give these people – who let’s face it are in the business of investing for capital gains – time to reposition, without house prices collapsing on them.

The way I evaluated the package is by simulating a whole lot of various combinations of rates and thresholds. The range of outcomes showed that anywhere between 75% and 90% of people would be left insignificantly affected or better off – so that’s why I talk about 80% in that category, and 20% being caught by the closing of this loophole.

So there’s a really rough set of numbers that you can use to think about this. It’s all about fairness and bringing to an end the vast dollops of wealth that people are accumulating through no effort – while merrily shutting more and more people out of the housing market.

To me it’s a no-brainer and overdue. You might say – bugger that, I like making money for no effort. Your call of course – but let’s not forget why this is necessary.

The tax loophole sees owners of assets (like me) escaping a lot of income tax that would not be possible if all forms of income (as income is identified in the GDP accounts) were taxed equally. The consequence of decades of allowing that anomaly to persist includes

(a) Housing is stupidly unaffordable now, rents chew way too much of family income and in short – those of us that own property, increase our wealth at the expense of those who do not. Nobody in his or her right mind should see that as okay. Of course there will be some of those who are benefitting greatly from this, and who don’t give a stuff about others. They would not vote TOP. But those of us who actually care about New Zealand, and not just ourselves – do see the need for change.

(b) Businesses are starved of investment capital because you and I don’t save and invest nearly enough. We don’t need to, I get richer and richer just by owning property, no effort required – yippee. Pity about the grandkids trying to get on the gravy train.

(c)  If businesses don’t get normal access to capital they don’t expand and create jobs to their potential. They certainly can’t afford to pay higher wages. While average per hour wage rates in New Zealand have risen about 1% pa above inflation over the last 20 years, the median wage rise is less – and of course allowing for fiscal drag (tax bracket creep) and the rise in housing costs, disposable incomes have been stagnant for many.

(d) inequality keeps rising – I’m okay Jack, I’ll buy another house or two and then let’s pull up the ladder behind us.

(e) We keep falling over ourselves to make it easier and easier for foreign companies to invest here. We give them tax breaks, subsidies and all manner of privileges – so gagging for their capital we have become, given we don’t save much ourselves nor invest those meagre savings productively.

So the problems are obvious, the cure is straightforward. But are we up for it? Hopefully some numbers might help you clarify for yourself whether you are prepared to make New Zealand fair again – and as a result see greater prosperity for all.

Showing 79 reactions

  • Audrey Holmes
    commented 2016-12-31 10:12:27 +1300
    It’s clear who came up with the policy. And by providing this detail on the policy we are being provided with the opportunity to understand it, debate it, and offer counter arguments.

    When I take step up from the micro economic level to one of social good, I get lost. I too have worked hard all my life for the same benefits all the commenters so far have talked about. But I also get that as a country we have some hard work to do to ensure our brothers and sisters who are challenged by inequality can move out of this reality into one where they enjoy quality of life.

    So how do we shift this conversation from one of ‘me, my children and their inheritance’; ‘if the truck driver didn’t work hard like me and buy a house then that was his ill informed choice’; and personal attacks on the policy designer using profanity – to one of, what’s good for the country as a whole?

    I need to see what this new tax policy will mean for the nation. How will this tax policy translate into tangible results in the areas of poverty, family violence, offending etc. How will this policy ensure that social, cultural and economic equality is achieved? When I see this data I will get a better sense of the sorts of trade offs I will be making as a citizen to improve the country’s ‘wellbeing’ and know whether the sum will be greater than its parts.

    At a fundamental level I don’t have an issue with sharing what I have to ensure that my fellow NZdrs are taken care of although the tax policy proposed is still a hard pill to swallow – I am human after all. But I am willing to keep the conversation going, to commit to further understanding and grow my awareness of what’s best for us as a collective.
  • Gordon Chamley
    commented 2016-12-30 23:48:39 +1300
    Whoever came up with this is a fucking idiot. Expecting pensioners (who have spent their lives ensuring that they have their own home to make their retirement livable) to subsidise tax cuts for those earning $76,000 a year, by paying a tax of $30,000 a year from an income of under $12,000 a year beggars belief. Morons.
  • Chris O'Halloran
    commented 2016-12-30 23:22:35 +1300
    John Charlton has a rather static view of how money circulates in society. When I purchase goods with my tax paid income, am I being double taxed when the item I buy attracts GST, there is PAYE on the business employees wages and company tax on the profits? – all reflected in the price. Not to mention customs duties for some imports, fuel tax(if petrol) or rates also loaded into the price? The double tax argument can be safely discounted.
    Interesting comments from those in income poor houses but with sufficient assets that the equity tax is higher than the income tax reduction. Arguably, if house prices were at a more rational level of 3-4 times income, it’s unlikely the equity tax would be higher than the income tax reduction.
    Similarly, those looking to pass on wealth are possible wanting to help out children who are struggling to own their own home. However, if capital was more rationally distributed, houses would be more affordable and this desire to leave a capital legacy might not be so important.
    Beware to the spin you see in the ’I’m alright Jack camp’ – they pepper their talk with references to the poor having lots of kids, sky TV, spending all their money at the pub. Yes, these things will make you poorer but the intention is always to divert the argument pretend that anyone can make if they just try harder.
    The argument that taxing property will reduce building construction is also a misnomer. The average occupancy per house in NZ is very low. There is ample property around. A capital tax on property may in fact bring many of these properties back into rental circulation or onto the market. When the property market is 14% per annum in Auckland, why would you risk your property being trashed by tenants? Not letting your property makes is more valuable.
    If there truly is a under-supply of housing then the next solution is to curb the over-supply of people. New Zealand political environment cannot simply cope with 70K migrants per year. Auckland is just a mess as regional authorities are so hamstrung for cash (no road tolls, no rate increase, no fuel tax) they simply cannot build infrastructure.
  • Leon Daly
    commented 2016-12-30 21:56:49 +1300
    I really appreciate the explanation – makes a lot of sense and as someone with a rental property I understand first hand how blatantly unfair the current system is.
  • Gary Pauley
    commented 2016-12-30 21:48:01 +1300
    WOW didn’t realise posters with IQ s under 80 were allowed
  • Adam Bender
    commented 2016-12-30 18:10:43 +1300
    John, I wouldn’t waste too much effort on ‘Gary’. If you see the wording in his base (in all senses) post you will see that he is just the sort of fodder that Trump fed on. Trump also made losers think that they would be winners with his policies, while not realising that the main issues would continue.
    Morgan’s main impact will be stealing a few such voters from whichever party they would have otherwise supported.
  • Gary Pauley
    commented 2016-12-30 17:56:24 +1300
    John houses purchased 25 years ago have increased in value 6-10times none of this gain has been taxed if you don’t get the inequity of this I give up I am in the dairy industry which likewise has been a capital gains play
    Bottom line is that I have children who can’t buy their own house because they are out of kilter with incomes. This is what Gareth refers to as the drawbridge mentality or I’m alright jack bugger the rest of the hoi polloi. Personally I think houses have to drop 50 percent to get back to being affordable like they were in our generation
  • John Charlton
    commented 2016-12-30 17:03:19 +1300
    Gary, if you read my original post you will see how I think this is double taxation. Basically the assets bought with income taxed at the old, higher rate (higher than proposed in this policy) are being taxed again at the new, higher rate proposed in this policy. Fair?
  • Gary Pauley
    commented 2016-12-30 16:53:29 +1300
    John this abitrary distribution between capital and operating income is just that and to tax only one is inequitable and distorts investment decisions. I guess you will be voting status quo and perpetuating the class/generation divide. I suspect a great many of our cohort have this entitlement mentality and therefore one can only hope that there are sufficient voters in the young generation can see this is their only hope of enjoying the standard of living we have. If change isn’t made we will end up with revolution from the have nots why should they pay tax to ensure our pensions are paid and we keep all our assets to give to our kids!! It is not envy but equity that we strive for.
  • John Charlton
    commented 2016-12-30 16:23:02 +1300
    Gary, lots of countries with CGT have exactly the same housing price issues as NZ (e.g. Australia). CGT isn’t a cure, it’s a tax on investment in property, so will discourage that, increasing the housing shortage. This policy is the politics of envy: you have something I don’t, so I’m going to take it from you. In this case it is taking it at 1.5% per annum, but it is still theft by the state.
  • Gary Pauley
    commented 2016-12-30 16:14:59 +1300
    John I didn’t miss the point the policy is about equity and there is nothing equitable about tax rates on operating income high enough to allow that capital income is not taxed. This is why other countries have inheritance tax or capital gains tax. You need to get your head around the fact that the current tax regime is so out of step with the rest of the developed world and has lead to the situation where we have disenfranchised a whole generation who will eventually revolt if we don’t make the system fairer.
  • John Charlton
    commented 2016-12-30 15:55:42 +1300
    Gary Pauley: You miss the point. The $40K per annum truck driver who has paid tax, saved and bought a house is now going to be taxed again while his mate who went to the pub and still lives in a rental isn’t. Not fair.
  • Audrey Holmes
    commented 2016-12-30 15:55:22 +1300
    The class system is alive and well in NZ. We may not call it that anymore but it’s here. Block and Somers in their publication The Power of Market Fundamentalism refer to the ‘poor class’ of the late 16th/17th century UK as ‘those who, lacking property, had no choice but to work.’ The poor class were an important labour resource for the wealthy classes who were characterised by their ownership of land and who needed to labour to leverage its economic potential. The Old Poor Laws were established to maintain the poor class and ensure the wealthy classes had ongoing access to this labour resource.

    When my English ancestors arrived in Aotearoa, they brought this thinking with them and the first thing they sought to do when they got here was secure land. From this they could grow, sell and profit and also provide for their own families. They knew its economic potential and they fought tooth and nail to take it from my indigenous ancestors. Over time, my English ancestors created Aotearoa’s own poor class of its indigenous peoples through not only the unfair acquisition of nearly all their lands (and therefore their ability to produce and profit and feed their own) but also policies that restricted their access to education, that prevented them from leveraging the potential of their land etc etc. I was raised biculturally: I grew up in North Canterbury among farming families who lived in mansions; and then, time to time my whanau would come to visit or we would visit them, and I saw the opposite. I am the product of both of English and Maori legacies and can tell you now, that class is alive and kicking in this country. And we need to be honest with each other about it otherwise we will be blind to the cause of where we are today as a nation and the inherent possibilities for change.

    I really respect Gareth for being open and transparent with his policies. I may not agree with the fine detail, but i respect the man and his willingness to be transparent. I wouldn’t liken him to Trump at all; rather I would say that he is a man that is open to our ideas as New Zealanders and is willing to listen. And so I will say this: the social problems in this country will not be solved with economic policy alone. More jobs, more money, more wealth does not equal thriving communities by itself. We need to combine intelligent economic and social policy that better facilitate thriving communities. Shamubeel Eaqub is one economic whose thinking I really appreciate and I would like to see his ideas reflected in Gareth’s work.

    Believe you me I’m not trying to protect an inheritance for anyone. I didn’t even know that a house could be an inheritance until recently. The reality for me is that my home is my superannuation plan. I’m sad to say it but that’s the truth.
  • Gary Pauley
    commented 2016-12-30 15:25:41 +1300
    So far all I see are those who want to protect their kids inheritance thats what was the root of the class system we kiwi’s tried to get away from and is now being promulgated by those who think it OK for a
    $40,000 a year truck driver to pay income tax to protect that premise. Myopic is a kind way to describe that selfishness.
  • John Charlton
    commented 2016-12-30 15:11:57 +1300
    This is very unfair on retirees who have saved to pay off the mortgage and now own their house. They were taxed at the higher rate when they earned the money to buy the house, on the basis they wouldn’t be taxed on the capital gains. Now they are going to be taxed again on the asset they bought with their tax paid income. The idea that this can be paid by a ‘mortgage’ to the IRD so their equity decreases means the beneficiaries of their estate end up paying the tax as they get a smaller inheritance. Houses are unaffordable for one reason: demand greatly exceeds supply. Supply can be improved by RMA and local body reforms which make more land available and development simpler. Demand can be curtailed by making alternative investment options equally attractive. To many, the stock market is unattractive as it is seen as rigged to favour the insider, and the transaction costs are high. Fiascos such as Feltex, Dick Smith, and finance companies too numerous to mention make property the most attractive investment in NZ. Fiddling with the tax regime to penalize those who have worked hard to buy their own home will not fix anything.
  • Adam Bender
    commented 2016-12-30 15:11:04 +1300
    People who have paid off their own house and ease back will be – penalised.

    People who, like Morgan, have a lot of easy money – won’t notice the difference.

    A weak, flawed policy aimed at convincing the stupid if sounds fair? Sounds like the sort of thing Trump would trumpet!
  • Michael Dragonheart
    commented 2016-12-30 14:38:33 +1300
    Low earning older people who managed to get on the property ladder long enough ago that the house is practically paid off will pay a lot more tax. A household worth $445,000 and an income of $32,000 get a tax cut of $2560 and pay property tax of $6675 – hardly fair?
  • Audrey Holmes
    commented 2016-12-30 12:47:44 +1300
    Hhhmmm, well, having this detail really challenges what I thought I believed!

    I am in the wealthy bracket. Hard case though because that’s not how I’d describe my financial position. But the reality is that I – that is we – are.

    The details of this policy are quite hard to swallow. I come from very humble beginnings and only in my 40s have I been able to buy a home for my family. In the next 5-10 years my husband will retire and I will be supporting him. I struggle to conceive of an idea that appears to ‘punish’ me for my hard work and assumes that wealth is static. I too have struggled and spent some years raising my daughter and finally, I’m in a position where I can be comfortable. We had no wealth legacy in my whanau; my parents and grandparents came though an education system that denied Maori access to professional education and so they were domestics and labourers; and any land my grandparents owned, had been locked away by the Crown in multiple ownership meaning it couldn’t be leveraged without extreme difficulty. I feel like I’ve earned my position in life. I was gifted with an education leverage though and for that I’m grateful.

    I guess that I thought this policy was okay, until I realised it affected me. I am being honest here. I thought that I was all for social justice, until I realised this policy was going to hit me in the wallet.

    So to offset this feeling of ‘punishment’ (not the right word exactly but close), I would need to be 100% convinced that my contribution was making a difference. But even then I’m still not convinced as I am not sure taking from the rich to give to the poor is the best way of mobilising communities and building their self sufficiency.

    Anyway, this are my honest, open hearted thoughts.
  • Gary Pauley
    commented 2016-12-30 11:48:06 +1300
    Thanks Gareth for example that’s what was missing and allowing the grey bstds to diss your policy