Let’s talk about tax.
Or more particularly let’s talk about the recently announced tax policy of The Oppportunities Party – TOP. They are proposing to impose a tax on a deemed or imputed return on capital to the extent tax of that level is not paid already. Kinda like a minimum tax. With proceeds going to fund income tax reductions on labour income.
TOP is a party set up by millionaire businessman and commentator Gareth Morgan to change the political discourse in New Zealand. Your correspondent is particularly fascinated as her eighteen year old self voted for a party set up by a millionaire businessman and commentator Bob Jones who set out to change the political discourse in New Zealand. I was righty then and lefty now and both parties were set up to scratch itches on the body politick.
Bob Jones got no seats but he did get 20% of the vote. Today that would be almost the Greens and New Zealand First level of representation.
Now the New Zealand Party never really got into policy much beyond Freedom and Prosperity. TOP however is much geekier and actually plans to release policy ahead of even deciding to register. And their first released policy is one on tax. And and it seeks to tax capital more heavily and lessen the tax on labour. Woohoo. Speak to me baby.
Now New Zealand’s tax system is one designed by economists, drafted by lawyers and administered by accountants – so what could possibly go wrong. Nonetheless all three groups have their own languages and blind spots. It is a marriage that mostly works but only if all three groups keep their eye on the policy development and respect each other’s strengths.
Another perspective is that of the high level ‘strategic’ people versus the detail people. Again each have their strengths but also the ability to talk past and frustrate the snot out of each other. Working at Treasury I was surrounded by the former. To the younger members of this cohort I would always consul them to stay with the process – even when it became boring. As because detail people speak last – they speak best. And what eventuates may not be what the high level strategic people with the higher number of hay points actually had in mind.
In tax a classic example is the Portfolio Investment Entities rules. If you look at the early high level papers it was all about taking away the tax barriers to diversified pooled investment in shares. What we ended up with was the ability to have cash PIEs, land PIEs and single equity investments. Giving us almost a nordic tax system with the taxation of savings. So somewhere the high level strategic people disengaged or conceded to technical design issues that gave some unintended and quite important consequences.
All of this came back to me when I read the TOP tax policy. Clearly designed by economists – and cleverly so – but sadly lacking in input of the other two tax disciplines. So as a tax accountant who is regularly mistaken for a lawyer I thought I’d step up and help them out. Here goes:
General aka random irrelevant points that say more about the reviewer than the reviewee.
One. While Gareth didn’t – I enjoyed the envy tax reference. Coz does this mean taxing labour is a pity tax, or a tax on despair or a tax on barely getting ahead? I am all in favour of taxing envy. Let’s also tax greed, sloth, lust and the rest of the hell pizzas. There’s no risk of that tax distorting those human behaviours after all.
Two. For readers who have been keeping up, a regular whinge of mine is how we effectively give deductions for loss of capital when gains are not taxed. This would be overcome through the minimum tax on wealth (or assets). So under this proposal such capital losses would effectively become valueless. Rejoice.
Three. If you are going to get a bunch of extra money – instead of reducing taxes on labour income – the tax welfare interface is IMHO a much more worthy candidate for any spare money. But maybe the universal basic income is the next cab off the rank.
Specific points that might actually be helpful
One. It is true property ownership is a feature of the rich list but so is serial entrepeneurship – Graeme Hart, Diane Foreman and someone Morgan. Now a key part of entrepeneurship is loss making in the early years. There is some attempt to address this with a potental deferral of up to three years of the tax. The question I have is this long enough? Isn’t Xero still loss making?
Now the received wisdom is that innovation is a good thing hence all the fricken R&D subsidies. With a much less benign tax system for innovation – will this mean that some of the dosh is simply recycled back to small firms via Callaghan? And so maybe not all will go to reduce taxes on labour income?
Two. Is it a tax based on wealth or assets? Both are mentioned in the proposal but they aren’t the same. Capital is used a lot in the proposal and depending on whether you are talking to an accountant or an economist can mean either assets or wealth. But here is why it matters. Assets is the total of all the stuff you have legal title to, wealth is the amount that no one else has claims on. And the difference between the two is usually debt but could also be trade creditors, intercompany advances or provisons or accruals. Not all of these generate tax deductions.
So if it is a tax on assets, is it fair to tax people on stuff that other have claims on? I doubt it. A bit of language tightening here would be cool.
Three. Valuation. For property and things like shares market valuations are not too hard. Businesses – however – wow. There will be what the financial accounts say but then there will be what someone is prepared to pay. Usually some multiple of Earnings Before Interest and Tax – EBIT. And what about valuing implicit parental guarantees from non- residents. The choice then is to be completely fair between all forms of wealth and be a bit arbitrary and compliance cost heavy or not but not tax all forms of wealth evenly. Up to you.
Four. Who owns the wealth? From the vibe of the proposal I would say the intention is that the ultimate owner of the wealth pays the tax. However structurally wealth is likely to be held through many trusts, holding companies , limited partnerships and possibly in individuals own names. This is not insurmountable for design but will involve complicated grouping rules and possibly flows of notional credits to make it work. Perhaps have a look at the actual tax rules for imputation, mixed use assets or cashing out R&D losses to see if you still have the intestinal fortitude for what it will mean to make this work.
Five. Compliance costs. Now I don’t want to overplay this but comforting assurances that if you’re paying enough tax you’ll be fine means – two sets of calculations. The old rules will need to be applied which are not compliance lite and then the new rules willl need to be applied. And after addressing the issues above – they won’t be any picnic either.
But good luck. Perhaps in practice a tax solely on property might work. But after working through their policy I can’t help feeling all this is why countries just cut their losses with a realised capital gains tax.
And thanks for playing. First policy – one on tax – still impressed.
Taxing houses is a ridiculous idea. Why not return to a simple land tax?
Spongebob will get his driving licence before I will vote for this clown.
First all comments here need to be respectful. Disagreements are fine. Name calling is not. Dr Morgan is many things but he is a massive net contributor to our country and is not a ‘clown’.
Secondly what TOP is proposing is really a land tax writ large. They are looking to pick up all capital. Reasonable people may have different views of the respective merits but both represent a significant change from the status quo.
Somehow clown sounded better than Mr Morgan.
Sorry but when he chose to send glowing accounts of Kim Jong Un’s wonderful operation he sort of lost me.
But I am looking forward to his policy on monopolies and any strong anti-trust laws he might want to bring in. That TradeMe has got to be in the firing line – it’s a textbook example of a monopoly screwing the little man.
I think one of the biggest obstacles in getting a tax on deemed return on capital across the line is that it is not sufficiently intuitive to most punters. While such taxes may be popular with some economists, to most people they just seem a bit weird – they expect to be taxed on their actual gains not on a deemed return which may bear no resemblance to actuality. I think this is why, as you say, most countries default to a realized CGT.
Thanks to you and Michael for the thoughts/ comments. Gareth is happy to respond but obviously it is too complex to do here. Can you get in touch so I can send you an email?
Hi Geoff. Nice to hear from you. I have now tried twice to get in touch to no avail. Once when I first wrote the post thru Facebook and again today when the email address became clearer. The first involved a thanks for the contact and today involved your server rejecting my email :).
Perhaps you would like to contact me on email@example.com.
As I said in both contacts – and I think the blog post itself – I appreciate you raising the issues you are and I was happy to talk to you about the issues I am raising.
Interesting points. As a big picture “strategic” person, I guess my biggest unease is that this seems the least appropriate time in modern history to try this approach, given that interest rates (and hence deemed risk free rates of return) are so low. When the tax working group in 2010 looked at this they could use an indicative nominal rate of 6%, now it is only around half that – and in no very sensible world should we be spreading even more widely a tax on inflation. Even in NZ, real risk-free short term interest rates are barely above zero.
My other “big picture” concern is that for all that Gareth motivates his proposal partly on avoiding over-investment in houses, actually we almost certainly have too few houses (certainly too little urban land) not too many.
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Thanks Michael and yes ‘what is the rate’ is a point I had thought about previously with wealth taxes or rfrm on rental properties but had forgotten when writing this. Funny I would consider that as ‘detail’ issue – the type of which could also derail the policy.