Chickens won’t shit on their own nest eggs

The Richard Worth conflict of interest affair has made me ponder the extent to which MP’s personal interests influence their behaviour in public life.

For example, I’ve often wondered why only the Greens support a capital gains tax on all assets other than the family home. The current tax regime provides a strong incentive for people to invest in property, where their capital gain is not taxed; and a disincentive for people to invest in productive enterprise that actually makes things and employs people.

A capital gains tax to level the playing field and thereby move investment from property to enterprise makes so much sense. Australia has had one for years. So why don’t we?

Take a look at the Register of Pecuniary Interests of Members of Parliament (the 2008 one, because the 2009 one hasn’t been published yet). You’ll see that most MPs have listed a pecuniary interest in property other than their family home, or a beneficial interest in a Family Trust that no doubt has much of its investment in property.

In all parties other than the Greens, the MPs make the policy. So could it be the simple matter of the chickens not shitting on their own nest eggs that prevents any party other than the Greens from advocating a capital gains tax? It certainly creates a bad look. It is the potential for that sort of look that makes the Greens insist that their members make policy and that MPs are bound by it.

Oh, and getting back to Richard Worth, I see he’s now been sprung for using his diplomatic passport for private business. I wonder how many more dodgy goings on involving him have to be revealed before John Key sacks him.

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6 thoughts on “Chickens won’t shit on their own nest eggs

  1. Capital Gains Taxes (CGT) are a perverse instrument in themselves. There are a lot of reasons why they are not the silver bullet you think they are:

    1. What do you mean by GCT anyhow? A tax on unrealised or realised gains. If the former then do I get a credit if the value of the property falls? If credits don’t apply then in a market that rises and falls above the long-term inflation rate, this creates an entirely unjust ratchet effect.

    2. If you mean a realised CGT, then we have one already… its called Company Tax. Realised CGT’s also create a very strong incentive to never sell, permanently taking properties off the market.

    3. Do you intend this CGT to apply to ALL assets other than the family home? A second bach, a farm, commercial shops and offices, factories and so on? In practise trying to distinguish between these categories is very complex, the boundaries between them can be very easily blurred.

    4. CGT’s are very complex (read expensive) to administer. The IRD has consistently said it doesn’t want a bar of it.

    5. The just popped real-estate bubble had nothing much to do with investors anyhow. Investors look for undervalued properties they can add value to. With prices far too high most investors had their cheque books firmly shut during 2006 and 2007, but the market kept on bubbling all the same.

    6. Overseas countries, like Australia and the USA, that do have a CGT regime, experienced an even worse bubble than we did.

    7. Contrary to what most uninformed people believe, rental investment business is taxed according to exactly the same principles as all other SME’s. There is no tax advantage over and above what applies to all other businesses.

  2. I’m not suggesting a capital gains tax is a silver bullet RedLogix, just suggesting that it could be a part of the mix that makes home ownership more affordable to middle income people and diverts investment from property speculation to productive enterprise.

    And I am talking about a tax on realised capital gain, not unrealised. Your “very strong incentive to never sell” argument only applies if there is not a political consensus to retain the tax, in which case people may hang onto property in the hope some future Government will abolish the tax.

    I disagree on point 7, as does the Reserve Bank, which submitted to the Commerce Select Committee Inquiry into Housing Affordability:

    …New Zealand tax policy appears to be favourably disposed towards rental property, compared to other countries. The Reserve Bank welcomes the initiatives announced in the 2007 Budget to provide stricter enforcement of existing tax rules for rental property. However, it may be appropriate to consider further tax measures such as the ring-fencing of operating losses on investment properties. Care would be needed in implementing a ring-fencing policy in order to minimise any short term impacts on rents. Consideration might also be given as to whether taxation policies could be more in line with those in Australia, where realised capital gains on rental properties are taxed, but at half the normal tax rate.

  3. toad,

    Can you please explain how a CGT on property will lower the price?

    I cant for the life of me see how it will.

    Am with Redlogix on this, it is far to cumbersome for the IRD to pick through all the variable such as is the tax on the variation between purchase price versus selling price?

    If so, a company owned the asset, as all LACQ will be, where will the depreciation cost sit in the tax scheme. If I sell the company the next purchaser cannot claim those depreciation costs again. However the selling price may well reflect the fact that depreciation on the asset has been recovered and the property actually sells for a lot less then the purchase price.

    Will I get a tax credit as the selling price is way lower then the purchase price?

    I think that the IRD knows the capital gains tax has so many pitfalls, that the collection cost may well be greater then the revenue stream, so why bother.

  4. It’s all about a market driven by expectations, Gerrit.

    I don’t think I could put it better than the Reserve Bank did:

    Once house prices start growing strongly, expectations about future house price growth also lift. So a feedback loop is set up. People buy property thinking that its price will rise further; the ensuing higher demand for property then ensures that prices do in fact rise. The danger is that a bubble develops and prices for houses get out of line with their ‘fundamental values’. However, determining the fundamental value of property is difficult. Recent research offers a range of estimates about how much New Zealand houses are currently overvalued; the estimates range from an overvaluation of around 30 percent to no overvaluation at all.

    Expectations of rising house prices have driven not only purchases of rental properties. Many owner-occupiers have probably bought properties, or moved to larger properties, with the expectation that they too would benefit from capital gains. The fact that housing turnover rose sharply in the early 2000s seems to support this.

    Also, it seems that overseas buyers have probably taken a greater interest in the New Zealand housing market as prices have risen. It is difficult to get accurate data on the number of properties owned by people living overseas. The data that we have looked at suggests that less than 5 percent of private residential and lifestyle property is owned overseas.

    The data also suggests that overseas demand has generally strengthened since the early 1990s. In recent years, however, overseas purchases of residential property appear to have eased off, perhaps reflecting the higher value of the New Zealand dollar [as it was then].

  5. toad,

    That is no reply at all. The Reserve Bank has 4 paragraphs that say nothing on how a capital gains tax will LOWER property values.

    What you and the reserve bank are saying is that investment property will carry less of an incentive to purchase by private citizens (not the state?)

    I really dont think that is true. It is still all about demand and supply.

    Only way you can stem house price rises is by oversupply

    Nor have you shown how it will effect company owned housing stock. Companies depreciate the asset and would have to repay the depreciation if they sold it at the full market value (not the depreciated book value).

    So they sell at book value to another company. How will you quantify captial gain?

    There are so many variables that is a mine field to quantify actual capital gain, let alone the tax to be paid.

    Nice theory, not a good application of IRD funds to collect how much?

    In fact the IRD would want the price of housing to rise so that they can collect more revenue. Remember they have to collect at least sufficient revenue to cover the cost of collection.

    If house prices dropped significantly, the cost will end up higher then the revenue stream.

    A total negative. Except we keep a few more useless (as in non productive)public servants on the tax payers expense. Money better spent on education.

    Has anyone bothered to ask the IRD what their thoughts are on the volume of the tax collected by capital gain versus the cost to collect?

  6. I’ve been involved in taxations for longer then I care to admit, both on the personal side (all my employed life story!!) and from a legal point of view since passing the bar and following tax law. I’ve put up a lot of advice and rectified a lot of wrongs, and I must say that what you’ve posted makes complete sense. Please persist in the good work – the more individuals know the better they’ll be outfitted to cope with the tax man, and that’s what it’s all about.

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