How to tax capital gains — a guide for Mr Hipkins

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Conservative tax experts, or the self interested, when discussing the possibilities of taxing capital gains tend to welcome and emphasis the primary question as — whether to tax realised gains or tax accrued gains? This leads to complicated questions of timing, asset valuations, asset identification, with resulting concerns about the volume of new legislation and support resources needed to guide voluntary compliance, and questions about the cost and ability of government to enforce the rules. And capital losses. All arguments that tend to dissuade governments from applying such a tax. 
 
This question, tax on realised or accrued gains, sits on the assumption that capital gains tax is purely designed to raise revenue and create a cost that poor business people would have to pay, and raising costs on poor business people is bad for the economy as it gets passed onto consumers.  With respect; it’s the wrong question, and its a false assumption.
 
My article ‘The fundamental flaw in our economy,’ outlines how our economy is twisted away from its true purpose for the supply of goods and services to ordinary people as the path to wealth for a supplier, and instead has created a second path to wealth through holding capital assets.
 
The most obvious reason this happened was many years ago our oh so clever accountants looking at balance sheets said, too much capital was tied up in assets so to access that capital to grow the business they should borrow against the value of those assets, thus releasing the capital in the form of loans, to be used for growth. And they made sure our tax laws allow and promote this possibility. Borrowing also allowed them to pay a lot less tax. This accelerated the financialisation of the economy and the growth of seeing book keeping balances as the measure of success. 
 
But now the sugar hit of the loan is gone and asset values must be maintained in order to justify and secure the loan. So when asset values fall, or just to grow the amount you can borrow, money is pumped back into the assets to secure the loans. This pumping of money into assets now starves the productive parts of the economy (exports, innovation, improving productivity etc) from investment money, it reduces the possibility of investment into start up companies, and the whole economy’s ability to innovate and grow is diminished. 
 
And worst of all, it pushes investment away from our economies central purpose, the delivery of goods and services to ordinary people so their needs and some wants are met. This is how the success of an economic model is measured. The neo-liberal market economy model is clearly failing if we have booming food-banks. It’s failing if people struggle to pay for essentials like shopping, transport and their rent or mortgage.
 
There is a systemic problem in how we run our economy that is extremely damaging to investment and innovation in the wider economy, and it’s damaging the primary purpose of an economy; the supply of goods and services to ordinary people. A central question is — how to stop a focus on the holding of capital asset as the path to wealth?
 
And the root cause is in our existing tax system. A tax system that can be fixed relatively easily, without the need for international agreements, or info sharing protocols with tax havens. These tax changes are domestic.
 
So where are the business leaders calling for taxes or restrictions on deductions to fix our systemic problems? The wealthy owners, and the CEO’s seem fine with the status quo, they have already invested in holding assets as wealth; feeling safe that government will bail out their assets if there is a fear of economic collapse.
 
Think of Simon Bridges and the Chamber of Commerce so desperately wanting to be heard and helped by Chris Hipkins. But what were they concerned about: 3 waters!? And media mergers!? Bread and butter issues? The importation and exploitation of cheap labour to keep business costs down. Does business want to train and pay New Zealanders?
The supposed generators of wealth are scrambling because it’s tough to make a buck. Bugger everyone else. They seem to lash out — it’s government, its regulations, it’s labour, it’s taxes. Things they have over and over asked for and been given, e.g., lower taxes; but things aren’t better for them.  All these are stale neo-liberal ideas have not delivered for them, or us. 
 
 A basic online search to point out an indicator of a problem with neo-liberal policies. Wikipedia, ’Wealth inequality in the United States’  
  • In 1992 the top 10% of families held about 30% of the total wealth. The bottom 50% of families held about 1 or 2% of total wealth. So the middle class families (from 51% to 90%) they must hold about 68% of total wealth. 
  • In 2021 the bottom 50% of families still had about 1 or 2% of total wealth. But now the top 10% of families own 76% of total wealth!  The middle class share of total wealth is now 22%. 
 
We all know the same problem is here. The middle class, most business people, lost the most opportunity.  All those middle class National or Act voters trashing the future opportunities for themselves, their own children, grandchildren, nieces, and nephews. Labour/Greens have only been slightly better.
 
It’s quite clear business leaders do not know what is best for business, the economy or how to run it. They just run businesses and follow business group think; borrow money as it reduces tax, encourage capital gains as it’s tax free, tax bad, immigration good.  Small businesses, start-ups and innovators need to seriously question whether their business and political leaders are really working in their interests. The facts show they are not. 
 
Labour wants to rebrand itself with a focus on the economy; this is excellent. But relying on engagement with business leadership heavily invested in the neo-liberal status quo is a recipe for economic and political disaster. Just think of Michael Cullen and the capital gains report; some of the conservative members producing alternative reports; in effect trying to sabotage the report.  
 
So the government needs to modify the tax framework to re-focus business and the economy on the provision of goods and services for ordinary people.  
 
The changes required to do this are:
  • Remove the deductibility of expenses. You pay tax on your Gross Income.
(exception for domestic salary and wage payments if taxed correctly at source)
  • Remove the capital/revenue distinction for a non-individual. 
All asset gains and disposals become income and taxable. (Everything a non-individual does has the character income. Exception for assets fully used/consumed in the production process for a consumer. A few other exceptions are possible. No losses would be allowed).


These changes would allow a tax on non-individuals gross income and gains at 10%. More tax would be collected than under the current 28% rate.  (The rate should go up over time).
 
The Government must bring economic change because the status quo is not working. People want a vision of the future and delivering a vision can’t be done by saying yes to the people vested in the status quo. 
 
Quick notes on tax changes above: 
Removing expense deductibility will stimulate the domestic economy as it gives a comparative advantage back to small low cost domestic producers. e.g. It wasn’t long ago our cities and towns were full of burger and fish’n chip shops but they couldn’t compete with the tax subsidised high cost business structure of overseas franchises. Now those franchises will have to carry the full cost of their operations in their prices. Deductibility of expenses gave an unfair advantage to large foreign firms. 
 
Domestic fashion creators who work from home, or low cost sites, may be more able to compete with high street fashion franchises who will now have to carry the full cost of their high cost business structure (e.g., high street rents) in their sale prices. Importation cost will be higher for them. There needs to be rules that people in overseas jurisdiction are paid a living wage or they will still undercut through labour costs. 
 
To reduce the cost of inputs a strong incentive to recycle will appear. With no losses as no expenses, there will be a strong incentive to maintain a supply of goods and services to gain income.
 
Removing the capital revenue distinction removes the current incentive to hold assets and will help redirect finance back to the supply of goods and services. More importantly it removes a huge area of tax avoidance. There will still be challenges around valuations and dishonesty but they are not insurmountable.
 
Values for gains will be the books of accounts values used to get loans. 
 
See my articles on further impacts in ‘Creating the Citizen economy.’

31 COMMENTS

  1. Some more good ideas here. The financial bubble has certainly starved the real economy of investment.

    Reviving the ban on stock buybacks would be another simple step to reverse financialisation.

    If we look beyond tax policy, we should consider some deeper causes also.

    Replacing sound money with the mass printing of paper currency was the major cause of the bubble. This created the ZIRP loans for companies (a wealth transfer), and simply speculating on stocks and real estate was easy money (lower risk than building a factory).

    ‘Globalisation’ is also a key part of this. There IS still investment in production, but it is mostly in sweatshops. The export of capital by transnational financiers is both the dominant part of the largest capitalist economies, and the power centre of the world capitalist system.

    When Fred Hirsch and Paul Volker were calling for “controlled disintegration in the world economy” and “setting bounds to arbitrary national action”, they were describing the attempt to trap countries inside ‘globalist’ treaties — so that countries cannot prevent production being sent to the sweatshops, and must abolish laws maintaining domestic ownership of resources and industries.

    • I agree with most of what you say here but…

      > There IS still investment in production, but it is mostly in sweatshops.

      My understanding is that it’s mostly local entrepreneurs and business banks who do the investing. Transnational corporations then get them into a bidding war with each other and take the lowest bid, regardless of how the bidder cut costs, ie by imposing exploitative conditions on workers). Having outsourced the true costs of production to locals, corporations can then move production to any factory in any country to save money, without losing any investment in production.

      • @Danyl:
        That’s right, they are contractors. Some of that money might come from transnational lenders, but it could also be from local banks.

        So if you are concerned about local production, you have to somehow make that trade unprofitable (returning to tarriffs and import controls, state investment etc.)

  2. Or you could tax all inheritances at income tax rates, and have a time limit on trusts so those funds would eventually be included as income.

    • I agree Ada. Inheritance should be taxed..maybe at flat rate low rate like 20%. Maybe all lottery winnings should be taxed too.

      Stephens suggestion that tax should be on sales is nonsense! The logic is multinational are not paying fair tax by creative accounting, hence lets punish all.

      Labour cost is the biggest expense for most business, and making business pay tax on sales without adjusting for labour costs, rents etc will only kill them. Think of retail businesses, the brick and mortar stores, restaurants. Seems there is no room for entrepreneurship in little NZ.

  3. IMO removing deductability of expenses and paying tax on the gross just would not work for businesses! I can never see this being implemented as it just would not be viable for many businesses to continue to operate. The above mentioned “problem” plus not allowing for losses and a 10% tax on asset disposal helps whom? Not those businesses that shut or struggle on or their customers that lose choice due to failed/ reduced scope of businesses/face higher prices due to businesses needing to stay viable. This would only help the government assuming that it was sustainable in producing higher revenue. Perhaps your idea is that the government then redistributes the added revenue. IMO it is more likely to reduce the pie and shrink the middle class. I’m retired now and apart from investments in some businesses such measures would have little effect on me personally however I dislike these proposals as my view is they would be counter productive. Making the middle class poorer doesn’t help the have nots or encourage upward mobility.

    • The sad thing here Mr Minto, is that once again the supposed silver bullet, the answer to all our problems is tax. Thats the best idea you’ve got? Tax tax and more tax. Ever heard of ‘making money? How about being really ballsy and calling for selling our own oil, gas, minerals and starting some big industry ugly but profitable projects. We might make so much money, gazillions, that we don’t even need a tax system to pay for all our social needs. Oh no, no way….we can’t do that….what about the 3 dolphins and 5 snails. We’d upset the Greens and we can’t have upset Greens now can we. Newsflash – every other wealthy nation makes money that way.

      • > How about being really ballsy and calling for selling our own oil, gas, minerals and starting some big industry ugly but profitable projects.

        You’re about 50 years too late. Muldoon’s government did this in the 1970s/80s. Spoilers; it didn’t work out that well.

        Also, are you serious? Start extracting more fossil fuels when climate change is killing kiwis in flash floods?!? A fact acknowleged by both the National leader and Wayne Brown, not exactly lefty/greeny types…

        • You can’t roll out mass electrification without an exponential increase in mining output, and that mining output relies on cheap energy.

          You need to access all energy sources until the electrification is completed. If they are local, you are building up wealth which remains in the local economy (and creates high-wage jobs).

          Muldoon’s error was that he started borrowing huge amounts of money in the government’s name. Either he needed to proceed more slowly, or he should have signed exclusive contracts with large foreign companies, who could have operated the projects until the government finances improved.

      • More tax is not Mr Minto’s answer, he actually suggests a lower tax rate (10%) but on turnover instead of net profit. This is an obvious way to reduce tax avoidance & would result in any sensible business keeping their expenses as low as possible. I suspect that the verdict is well & truly out as to if this would work as intended.
        While you keep harking back to what worked in the past (oil, gas, minerals, ugly but profitable projects) you only need to ask the residents of Auckland this last weekend how they feel like paying the cost of past profit taking by businesses that did not allow for the inevitable consequence of their actions.

      • “News flash” Kraut most other OECD nations have tax on capital.

        I don’t think inheritance tax is necessarily fair as it can essentially be double taxing, but gain on capital why not? Use that tax take to reduce or eliminate tax on lowest PAYE bands

    • Hi Trev, A key point I made, using data, is that the middle class are the biggest losers in the current neo-liberal economic model. So when you say it wouldn’t work you fail to see the disaster around you. You are teh frog in the pot of water on the stove. These ideas do work because they work within the current system and are just significant amendments to many of the main principles that are still remain in place.
      Technically it is neither a left wing or right wing idea or change. But as these changes attack tax avoidance, and they will impact the wealthiest (small business will do quite well with these changes) it will be viewed as left wing. I’m fine with that as you have to be a horrible horrible insensitive person to be right wing at the moment. Things are working so badly for the middle class under the current system you have to be ill-informed, or indoctrinated, or a bit dim if you back the current National/Act economic framework.

  4. I’m no not completely against Capital gains Tax but I can’t see it solving our economic situation either. I’m not an accountant like Stephen and I don’t understand the intricacies of tax law and I agree it should be reformed, but CGT is a double edged sword. I know a little about it because I’ve paid it in the form of death duties in the 1970s. Our small family farm has survived but never really recovered from the 66000 pounds we had to pay the government on my grandfathers death. I believe those with several houses, farms or businesses should be taxed accordingly, but NZ has a majority of small struggling businesses that need those tax deductions that Stephen would like to stop. The problem as I see it is that there are not enough people in NZ generating enough money that can be taxed and used to give us the services we want. We’re living beyond our means. The real wealth is with a few multinationals and large retailers. They don’t pay their fair share but even getting more tax from them won’t solve our problems. The 5.6million of us is just an overseas city by population and we expect our tiny population where only half us actually do anything, to provide income for all our roads hospitals drains etc and our poor. Our expectations are way too high. We shop till we drop and expect the income to carry on doing it. It’s pretty simple if you tax business so it can’t grow and employ more, it won’t. The way overseas cities have the flash train systems and the smooth roads is because millions of people are generating millions of dollars that can build this stuff. The lowest common denominator with taxation is a transaction tax. Maybe we should try that. Would business grow with that. You tell me.

  5. In many respects I would say that most people would see a tax on realised gains as a necessary evil whereas they may view a tax on accrued gains as a punishment. It is totally the wrong perspective to have, as a tax on accrued gains allows the money to flow more freely and protects economies against unnecessary periods of recession.

    • Hi Daniel Lang, you seem to miss the point, with data, that the current system is working extremely badly for most people (especially the middle class) . So your talk about accruals being protection from recessions is ???? not making sense.
      There shouldn’t be a difference between an accrued gain and a realised gain Because both are real assets on which borrowing can occur so they are both gained. The risk with a distinction (there is a real one for accounting purposes but tax doesn’t have to follow that) is that it will be used for tax avoidance.

    • Gagarin. As I mentioned we used to have a CGT but it was expensive to administrate and didn’t accumulate enough tax to make it worth while. I don’t mind having one so long as it’s fair across the board. It seems that politically it’s unpopular. If it was constructive and not destructive it might win more support.

      • Hi New view. This talk about capital gains tax not collecting much tax shows most systems have been built full of holes that accountants drive through. This version will be much easier to administer but the big purpose in a capital gains tax is behaviour change. There is no advantage (my system is a bit harsher to capital through wealth growth) the business will refocus on supply of goods and services. I.e. the purpose of a CGT is to change behaviour.

  6. my point remains, is germany crushed under the burden of administrating CGT are the scandis wilting under the adminastrative costs?
    it is fair nv CAPITAL GAINS being the operative words

    • You make your point Gagarin how ever the countries you mentioned are super wealthy and we aren’t. Like I said take away the few multinationals here and a few big retailers and you’re left with thousands of small struggling businesses. If we come up with a system that works fairly in this country I’m all for it. Our previous attempt in my opinion was a failure.

  7. Luxon will borrow $2bn give tax cuts to rich, cut back health, education and police budgets, increase GST, invite property speculators in to run NZ housing, don’t add to social housing stock for 30 years. This is the weakest Tory party ever seen in Aotearoa.

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