Tweeting the budget: what people are interested in

When the Budget was released yesterday, I quickly pulled together two tables of information, one about where government was getting money from, and the other about where government was spending money.

The breakdown of revenue was available directly from the government’s own budget fact sheet. This table simply puts the information in a plainer form.

Projected government revenue for the year ending 30 June 2016

Projected government revenue for the year ending 30 June 2016

The breakdown of expenditure is a little more difficult to put together. Government only releases the total expenditure on welfare in its fact sheet. To get the values for individual benefits, you have to go to the detailed information in Vote Social Development, released under “The Estimates of Appropriations”.

Projected government expenditure for the year ending 30 June 2016

Projected government expenditure for the year ending 30 June 2016

What I find interesting is the number of times that each tweet was retweeted.

The tweet on where government was spending its money – retweeted 20 times.

But the tweet on where government was getting its money from? Only one person retweeted that.

So very few people are all that interested in where government revenue comes from, and yet it accounts for half the Budget. Tax alone accounts for 46% of the Budget.

My inner tax nerd is very sad.

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Budget advisory: where government gets its money and where it spends it

For the purposes of making commenting on the 2015 Budget a little easier, here’s some information about where government gets its money from, and where it spends it. This is taken from the 2014 Budget figures.

Most of government’s money comes from tax. This is the breakdown of government revenue from the 2014 Budget.

govtrev

Government spends most of its income on welfare, health and education. The single biggest item of government expenditure is New Zealand superannuation.

govtexp

Details on government revenue and government expenditure were sourced from the 2014 Budget page on the NZ Treasury website. The revenue and expenditure figures above exclude income and expenditure by SOEs.

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Preliminary thoughts on the government’s new tax

The National Party has announced a new tax on the sale of properties. It will apply to all residential rental properties bought after 1 October 2015. If you buy a residential rental property on or after 1 October, and then you sell it again within two years of purchase, you will be taxed on the difference between the sale price and the purchase price.

A caveat: the full details of the proposals are not available yet, so this analysis is based on the fact sheet issued by Inland Revenue’s Policy and Strategy Division, rather than on any more detailed discussion paper or draft legislation.

First up, is this actually a Capital Gains Tax? Yes, and no. As I’ve discussed before, New Zealand already sort of has, and sort of doesn’t have, a Capital Gains Tax. Our existing tax laws already provide for persons who buy something with the intention of resale, or persons who are in the business of buying and selling something, to be taxed on any gains they make.

This proposed new law doesn’t change those rules. All it does is say that if you sell a property within two years of purchasing it, then you will have to pay tax on the gain on sale, if any.

But some properties will be caught in the tax net when previously they would have escaped it. Previously, IRD had to prove that there was an intention of resale before any gains on sale were subject to taxation, and many investors / speculators would have been able to argue that they had bought the property as a capital asset. That would have meant that any gains on sale were not subject to tax. Now IRD simply has to apply the two year rule. So many more property sales will be subject to taxation. To my mind, that makes this a new tax, or at the least, a significantly expanded tax, and it taxes some capital transactions that previously weren’t taxed.

You can make a reasonable case for this not being a capital gains tax, and not being a new tax. Nevertheless, it’s a significant shift in the way that we tax, or don’t tax, property transactions.

What we don’t know yet is whether losses on sale will be deductable. It would be extraordinary if they were. Most CGT regimes around the world don’t allow the deduction of capital losses, or at best, only allow those losses to be offset against future capital gains. This detail should be clarified when draft tax legislation is released, and in subsequent discussion. Per the IRD fact sheet, a discussion paper will be released in July, and legislation will be introduced in August this year.

So what difference will it make? Very little in terms of tax revenue. I imagine that most property speculators will simply elect to hold onto their properties for at least 731 days, thereby avoiding paying tax on their capital gains. The real effect will be to slow down the property market in Auckland, and elsewhere. It will knock the top edge off the market, winding it back just a little bit. Together with the Reserve Bank’s new rules about the deposits that Auckland property buyers must have, the heat may be taken out of the property market. There will still be pressure due to inwards migration, but frantic speculation in property should calm down.

So why use a tax measure at all, if it’s not going to raise any revenue? And heaven knows that the government must be looking for every possible tax dollar it can find.

It’s a preventative measure, not a revenue raiser. Back when we had a gift duty in New Zealand, there was never very much gift duty raised. Instead, the threat of gift duty meant that people didn’t try to avoid income tax by gifting away assets that earned income. So they couldn’t engage in all sorts of elaborate tax schemes, or if they did choose to do so, there was a price to pay. Most people elected not to engage in the elaborate schemes, and so very little gift duty was ever collected. It was a very effective tax measure.

Likewise, this measure should be very effective in shutting short term speculation down. I suspect that once the two years is up, plenty of properties will end up on the market, but very few properties will be sold under the two year mark, and so very little tax revenue will be collected.

There will be some losers from this new, or expanded, tax. Most property speculators will be able to arrange their affairs so that they are not caught by the two year rule. If you have to move towns for work, and you turn your family home into a rental property, you won’t be caught; there will be an exemption for houses that have been the family home. If your marriage goes belly up, and you have to sell your joint investment property, there’s an exemption for you too. This is more-or-less consistent with other tax law; we try not to tax people on the vagaries of fate.

However, some people who own residential rental properties might get caught out. For example, imagine a small business owner who runs into cashflow difficulties, and so is forced to sell a residential rental property. Or think about someone who has bought a house that they intend to live in, but in the meantime has rented it out, and then loses her or his job and is forced into selling the property.

I suspect that the only people who will get caught by this law will be those who have run into some misfortune. Getting taxed on the sale of your investment property seems to be a harsh consequence, especially when we don’t tax other capital gains.

The big question is whether the two year rule will work. That’s going to depend a little on how investors and / or speculators have structured their finances. A clever investor / speculator will have structured their affairs so that they pay as little tax as possible. Perhaps they will be happy to wear some tax in order to get the cash from a short term gain.

What this tax is not, is a comprehensive capital gains tax. If an investor sits tight for at least two years, then whatever capital gains she or he makes will be completely tax free. The Minister of Revenue has argued that:

They will still be subject to tax under existing rules if they buy a property with the intention of selling the property for gain – even if they do so outside the two-year “bright line” period.

Right, sure, whatever, but at that stage, IRD will have to prove that there was an intention of resale. That has always been hard to demonstrate, and it will be even harder now that government has reified two years as the magical dividing line. Holding onto a property for longer than two years could well be taken to indicate a serious intent to invest for the long time. Those untaxed capital gains will remain, untaxed. And that on-going inequity in the tax system has yet to be addressed.

Posted in NZ Politics, Taxation | Tagged , | 1 Comment

Mr Collins, Mr Key and refusing to hear “No”

Jane Austen wrote a classic scene in Jane_Austen_coloured_versionPride and Prejudice in which a man simply refused to hear the word, “No.” Mr Collins, a bumbling obtuse and really somewhat repulsive clergyman was determined to make an offer of marriage to Elizabeth Bennet, and no matter how many stratagems she employed to make her refusal as obvious as possible, he simply refused to take her at her word.

“I am not now to learn,” replied Mr. Collins, with a formal wave of the hand, “that it is usual with young ladies to reject the addresses of the man whom they secretly mean to accept, when he first applies for their favour; and that sometimes the refusal is repeated a second, or even a third time. I am therefore by no means discouraged by what you have just said, and shall hope to lead you to the altar ere long.”

“Upon my word, sir,” cried Elizabeth, “your hope is a rather extraordinary one after my declaration. I do assure you that I am not one of those young ladies (if such young ladies there are) who are so daring as to risk their happiness on the chance of being asked a second time. I am perfectly serious in my refusal…”

Yet he carries on, and on, and will not hear her, and insists that he will get her father to intervene on his behalf, to force her into an acceptance. Fortunately for Elizabeth, she knows that her father despises Mr Collins, so she will be safe. But it’s hard to imagine exactly how she could have prevailed against Mr Collins otherwise, given his complete unwillingness to take her plain words seriously.

It’s a comic scene, and the reader knows that Elizabeth will never end up married to Mr Collins. But think of the dynamic in a different context, where a woman’s refusal, communicated in all sorts of ways, is simply not heard. Think of it in the context of harassment, of pony tail pulling, of sexual harassment, and in too many cases, sexual assault.

What we have seen recently in the case of the waitress and the Prime Minister is a man who simply refused to hear no.

Amanda Bailley says that she repeatedly communicated a refusal to the Prime Minister. She used body language, approaches to his staff, social media comments, and a direct “No!” And he still carried on.

Mr Key has defended his actions by saying that it was just a misunderstanding, and as soon as he realised that she was unhappy about it, he stopped. It was all just a miscommunication.

Sure… whatever.

“She should have just said no” or, “I’d have stopped if she’d said no” are standard defences used by people who harass other people, sexually harass other people, and sexually assault other people. But in an extended analysis of how conversation works in the real world, Kitzinger and Frith (1999) find that:
– both men and women find ways to soften the word, “No”, because that’s the politeness convention in our society
– it is socially aberrant to explicitly say no
– both men and women understand that that’s how conversation works
– both men and women have the ability to understand all the verbal and non-verbal signals that are used to convey “No”.

Based on this analysis, they argue that:

male claims not to have ‘understood’ refusals which conform to culturally normative patterns can only be heard as self-interested justifications for coercive behaviour.

There is an extensive write-up of Kitzinger and Frith (1999) on the Yes Means Yes website. I recommend it. I especially recommend reading the conversational examples, where “No” is clearly communicated, even when the word itself is not used.

Think again about what the Prime Minister is saying.

Prime Minister John Key has dismissed his hair-pulling pranks as “a bit of banter”, saying he apologised to an Auckland waitress when it became clear his approaches were unwanted.

To be clear, what it took for it to become clear to the Prime Minister is repeated attempts by the waitress to communicate with him, including direct messages to his staff and an explicit “No!” And yet he carried on.

Put that in the context of what we know about how conversations ordinarily work, and what we know about men’s and women’s capacity to understand all the non-verbal and verbal signals we use to communicate “No.”

Either Mr Key is as obtuse and bumbling as Mr Collins, or he’s making a very flimsy excuse for his on-going harassment of a waitress.

Posted in Feminism, NZ Politics | Tagged , , | 4 Comments

The “Property Investors Pay Tax Already” canard

Capital gains tax is back under discussion, with the Governor of the Reserve Bank practically pleading with the government to do something about absurd property prices in Auckland (one, two).

A capital gains tax is not the only measure that can be taken to help cool an overheated property market, and it’s not even the only possible tax measure. There are other tax based steps that could be taken. Nevertheless, on cue, up popped the Minister of Housing to claim that property investors are already subject to tax (interview on Morning Report, at 6.48). The unspoken conclusion is that therefore, no other tax based measures are required.

So is it true that property investors are already taxed?

Well, yes. But it’s not quite as true as Nick Smith and the Property Investors Federation would like it to be.

Residential property investors pay tax on rental income, much as any other business pays tax on their sales income. They get to claim expenses, such as interest, rates, repairs and maintenance, insurance, management fees, and so on. That’s all regular and routine, and it’s not really the focus of the discussion around capital gains.

What is really at issue is whether property investors pay tax on the gain on sale of the houses they own. We see this issue when people say things such as, “New Zealand already has a capital gains tax.

So do property investors pay tax on capital gains?

Yes, and no.

Under New Zealand tax law, if you buy something with the intention of resale, or if you are in the business of trading in something (eg. electrical goods, baked beans, cars, whatever), or you’re in business in general (architects, lawyers, plumbers, whatever) then you are caught in the income tax net. (Income Tax Act section CB1, CB2) There are some specialist rules around buying and selling land (section CB6 ff) but the major effect of these rules is to reinforce the basic rules: you get taxed on gains on sale if you acquire something with the purpose of resale, or you’re in business.

For example, if you hold a portfolio of shares, and you acquire them for the purpose of dividend income, and you hold onto each parcel for a long time, and you don’t engage in buying and selling shares on a regular basis, then those shares will look like a capital investment, and any gain on sale won’t be caught in the income tax net, should you sell any of them. On the other hand, if you regularly buy and sell shares on the stock exchange, then chances are you will be regarded as a trader, and you will end up paying income tax on any gains on sale.

A more down to earth example: imagine that you spend your time scouting around garage sales and second hand stores, spotting bargains and snapping them up, and then reselling them on Trade Me. That might look pretty much like acquiring something with the intention of resale, or being in the business of buying and selling, and IRD will be asking for its share of your gains, or profits.

So when people claim that New Zealand already has a capital gains tax, they’re sort of right.

But really, they’re wrong. We have a tax on people who are in business, or who acquire something intending to sell it. What we don’t have is a tax on the gain on sale of assets like rental houses and farms and business premises that were NOT bought with the intention or resale. So there is no thorough going tax on capital gains in New Zealand.

You might try to argue that of course, if someone buys a rental property, then obviously they intend to sell it at some time in the future, and so the gain on sale will be taxable.

But, it’s not so obvious. If you buy the property, and hang onto it for a long time, and you find tenants for it and rent it out, then it very much starts to look as though you bought the house with the intention of earning rental income from it. And that means that although the rental income is assessable, the house itself gets classed as capital, and so any gain on the sale of the house is not subject to income tax.

You could even try arguing that the property owner’s real intention was resale, and holding the property and renting it out was just a cover-up. But in order to police that, IRD would need the ability to get inside people’s minds. Thankfully, they don’t have that power. IRD has to go on what people actually do, based on documentary evidence. And the evidence in this case points to the house being a capital asset, and so not subject to income tax on sale.

So if you’re a property investor who buys and sells houses regularly, then yes, you will be subject to income tax on those gains on sale. But most property investors buy and hold and rent out their properties. The properties are capital assets, and so any gains on (long delayed) sales fall out of the income tax net.

And that’s why it’s just a bit disingenuous to claim that property investors pay tax already. Yes, they do. Just not on the huge capital gains they make that comprise the bulk of their increase in wealth.

Posted in Economics, NZ Politics, Taxation | Tagged , , | 1 Comment

Dear Zoo, or why charging GST at the border won’t change anything

Dear Zoo, by Rod Campbell

Dear Zoo, by Rod Campbell

My all time favourite book to give to new babies is Dear Zoo, by Rod Campbell, preferably in the board book version, which is much easier for tiny hands to manipulate.

I bought a copy from my local bricks and mortar independent bookshop last year for my cousin’s daughter’s new baby, for $16.95. However, at the time I could have bought it from Book Depository and had it delivered right to my door for about $10. Right now, Book Depository is selling the board book version for $12.25.

If I bought the book on-line today, I would save about $4.70, or 28%. Even if 15% GST is added at the border, the cost to me would be $14.09, and I would still save $2.86, or 17% off the retail price.

It’s only a few dollars, and often enough, I’m willing to pay those few dollars. It’s the price of convenience, or alternatively, the cost of disorganisation. Later on this year this, when Hilary Mantel’s third book in her Thomas Cromwell series comes out, I might buy it on-line, because I should end up saving about $15 on the local retail price (based on what Book Depository charges for Wolf Hall, and a local retail price of about $35). Even if GST was charged at the border, I’d still save $10 or so, or about 28%. That’s worth being organised for.

The real problem for bricks and mortar retailers is not that GST is not charged on goods coming into the country if those goods are worth less than $400. The problem is that on-line retailing is much, much cheaper to operate than running a shop. On-line retailing is a massive disruption to our traditional shopping model, and adding GST to retail goods imported by individuals won’t change that.

We really ought to be charging GST at the border. GST is a tax on consumption in New Zealand, and at present, some consumption is escaping the tax net. If we think about it for the sake of consistency alone, we ought to be attempting to charge GST at the border. However, up until now it hasn’t been clear that it has been worth doing so. There’s only $15 of GST on each $100 of goods imported into country, and it probably costs more to collect the GST than the government would earn in tax revenue.

Except that the total value of goods bought on-line has been going up and up, and now it seems that the government is missing out on something like $300million of GST. That’s starting to look like real money.

I think the government should be attempting to collect at least some of that GST, on the grounds of consistency alone. And to its credit, the government is very clear about its reasons for attempting to collect it. It’s not about small retailers at all. It’s all about shoring up the tax base.

Posted in Economics, Taxation | Tagged , | 2 Comments

Labour leadership: working out how to vote

Every time I’ve talked to a friend or a Labour member or supporter over the last couple of weeks, I’ve asked them who they thought would be the best choice for leader amongst the four people who are standing. People aren’t quite sure, yet. One friend, Ashley Willis, who had a LARGE billboard on his fence during the campaign (thank you, Ashley!) sent me a very thoughtful e-mail, most of which I’m reproducing here, with his permission.

It was good to see you today, I have also been thinking about what you asked about who I would select out of the 4 running for leader of the Labour party well I have really looked at it and I don’t know if this well help you much or not but what I looked at was the following:

  • Which one is capable of not just debating in the chamber but who can be strong and confident and show dominance over John Keys and the opposition parties.
  • Which one has the ability to push and push the opposition for truthful answers and make them accountable for the promises they have made as well as for the consequences to any actions that has been made this includes within Labour too.
  • Which one is able to keep the media such as the reporters in check as you do with a child who is rude and interrupts you or treats you with no respect they must be able to control the interview not let the reporters try and control any interview.
  • I also looked at which one has the right personality to be a leader and which ones are clear followers or are sheep as well as which ones would have the ability to work with other members of the Labour party and will not allow the responsibility of the leader position to change who they are or let the power go to their heads.

.
I’ve found this very helpful in terms of thinking about who to vote for.

A few other thoughts. In the course of my conversations with Ashley and with other Labour friends and supporters, different people have offered thoughtful, reasoned support for each of the four contenders. What this tells me is that the leadership of the party is something about which reasonable people may reasonably disagree, and that each of us sees different strengths in the four candidates.

This is why I think it’s good that we are using STV. It means that we will vote for preferences, acknowledging that if my first preference is not elected, then perhaps it will be my second preference. The system encourages me to recognise that each of the candidates has real strengths, and that more than one of them could be a good leader for our party.

But there’s one thing that’s got me a little irked. Each of the candidates has spoken of the need for unity, and of their capacity to create that unity. Sometimes they talk of it with respect to the party, and sometimes the caucus.

With respect, Andrew, Grant, David and Nanaia, the problem is not the party, or at least, not here in Region 3 (lower central Te Ika a Maui – North Island). We worked hard together on the campaign, as a team, and we’ve worked hard together over the last few years, on policy and campaigns and fundraising. Many of us feel just a little dismayed by the vicious infighting and nastiness within caucus, for which caucus must take responsibility. Don’t imply that it’s the party’s fault.

We’ve got a hustings meeting in Palmerston North tonight. 7.30pm at the Community Leisure Centre, 569 Ferguson St. If you’re a party member, I hope to see you there. If you’re not, you can sign up at the door. At this stage, new members won’t be able to vote, but feel free to bend my ear and offer opinions about how I should cast my vote.

A personal note – my eldest daughter joined the party as soon as she was able to (NB: her decision, not mine), and that means that even though she wasn’t old enough to vote in the general election, she’s able to cast a vote in the Labour leadership election. Her voting log-in and PIN arrived a couple of days ago, and she’s very pleased to be able to vote. I have NOT offered her my opinion about who to vote for, and I’m trying to enable her to make a decision very much free from parental pressure. So I have not talked to her about her vote, and she’s comparatively unemcumbered by prior experience within the party.  I’ll be very interested to hear her opinion after the meeting tonight.

Posted in NZ Politics, Parenting | Tagged , | Leave a comment