The price of milk

John Key says that New Zealanders are paying perfectly reasonable prices for milk. Sub text: so everyone, especially the opposition, should stop complaining because hey, it’s all okay here and we’re on the verge of something special or whatever.

In Countdown supermarkets this morning, housebrand milk was available for $3.99 for two litres, or $1.995/litre.

Countdown milk

Countdown milk

In Sainsbury’s in the UK this morning, housebrand milk was available for £1.50 for two litres, or £0.75/litre.  At present, that’s about $NZ 1.62 per litre.

Sainsbury's milk

Sainsbury’s milk

In Coles in Australia this morning, housebrand milk was available for $AUD 2.00 for two litres, or $AUD 1 for a litre, which at present is about $NZ 1.07/litre.

Coles milk

Coles milk

Yes, there are all sorts of pricing wars going on, and in Australia some supermarkets are using milk as a loss leader to draw people in. The point remains: in a country which is a prolific producer of dairy products, it is more expensive to buy milk than in is in other comparable countries.

Posted in Economics, NZ Politics | Tagged | 3 Comments

NB: costs are not the only factor in rents

State houses at Arapuni.  Source: Wikimedia Commons

State houses at Arapuni. Source: Wikimedia Commons

A child died, and a coroner has argued that her death was due at least in part to living in a cold, damp home. Shamefully, her home was a state house.

The rental property stock in New Zealand, including state houses, is very, very poor. Many houses are cold damp nasty holes, and it’s no surprise that people living in them are vulnerable to life threatening illnesses.

The Labour party has proposed a “Warrant of Fitness” for rental properties, and they have resubmitted a bill to the ballot to achieve this.

But, Bill English says a warrant of fitness for all homes would drive up rent and push housing stock out of the market.

Really? Drive rents up? English seems to think that the only factor determining rents is landlords’ underlying costs. But that’s a mistake. We know that landlords don’t really mind making losses on rental properties, and that they quite happily wear extra expenses. After all, many of them are quite happy to leverage up their properties as far as possible, and pay large amounts of interest. The evidence shows us that landlords just pay up on expenses. Obviously, there is a relationship between expenses and rents, but it can’t be all that’s going on.

So what else drives rents?

Umm… (and really, this ought to be staggeringly obvious to Mr English and the (alleged) top-knotch business people in his party), it’s the MARKET.

If a landlord sets too high a price on her or his property, then the renters will go elsewhere. End of story.

And even if expenses do go higher than the amount that can be earned in rent, the all that will happen is that the MARKET will operate to drive some over-geared landlords out of the MARKET, which in the longer term might help to calm house prices down.

If renters can’t go elsewhere, because there isn’t sufficient supply of houses so they must simply pay the price asked by landlords, then there won’t be a problem with the rents being high enough to cover expenses either. And if that results in some families living in substandard homes, then perhaps the government might like to acknowledge that there has been a MARKET FAILURE, and they need to act.

Alternatively, we could take this as an instance of the MARKET performing perfectly, but not achieving the social aims that we think are important.

Either way, if we think that living in warm, dry homes is a social goal that we should be aiming for, then the case for government action is clear, and there’s nothing stopping it, except for Mr English’s on-going protection of landlords.

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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.

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

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