Capital Gains Tax on shares fails to differentiate between land, capital and labour

Most of us spent some time as children playing Monopoly. The more properties you buy the more rents you collect. “I’ll buy Mayfair, its rents are high. Rent please!” Sooner or later you opponents are out of the game and you win.

I was intrigued to learn on TV3’s The Nation (Sat 6 Sept 2014) that Capital Gains Tax as proposed by Labour includes the gains you make on shares. I thought the whole idea of CGT was to discourage investment in property and encourage investment in the productivity sector. When replying to Lisa Owen on that point, Labour’s David Parker said it was quite fair. “The ordinary worker pays tax on every cent they earn so why not shareholders,” he said.

Well the gains on shares – which are earned and which are merely windfall profits? So I did some looking at the property investment companies listed with NZX and compared them with Xero, a software accounting company which makes its money from its leadership and its labour, and with A2 milk an innovative science based health oriented group.

PwC Tower-266x4001-3-the-terrace-4So thinking about investment and looking at the various types of companies, let’s look at New Zealand’s big property companies – Kiwi Income Property Trust, Goodman Property Trust, Argosy and DNZ. The National Business Review in 2012 said “listed property companies outperformed the NZX50 last year” The listed property companies reported 11.8% growth compared to the NZX50’s 0.4% growth. There are 10 listed property companies in New Zealand and seven of them are listed on the NZX50 and account for 9.7% of the index weight.

If you want to know who owns the most valuable land in the country look no further than the listed property companies owning property in central Auckland and Wellington. Their skyscrapers house tenants as secure as Government departments and all the big names in retail and office. DNZ has warehouses at Wiri and Penrose that dominate the landscape.

Take Precinct Property for example. Their Wellington buildings included HP Tower, 125 The Terrace, State Insurance, Vodafone on the Quay, Pastoral House, No 1 The Terrace, Mayfair, AXA, Deloitte, 3 The Terrace and 29 Willis Street. In Auckland they have the PwC Tower, ANZ Centre, 151 Queen St, 21 Queen Street, and AMP Centre. Tenants include big law firms, big retailers, finance companies, Fonterra, Air NZ. Hewlett Packard and so on.

Argosy has properties in Woolston, Christchurch and the Albany Megacentre. Its tenants include The Warehouse, Briscoes, Mitre Ten, Bunnings, Farmers.

Every major shopping mall in the country seems to be owned by one of these property companies and they report occupancy rates between 96-99%. Tenants in shopping malls are NZ chains, international chains and supermarkets, with only about 10% being independent stores.

What is most intriguing is that they tend to borrow to invest, and Precinct has 37% leverage. (I recall just before the 1987 crash people borrowed to invest in shares and where did that end?) And they all keep acquiring new properties. Every year, their equity rises as properties are revalued higher each year, due to the activity around them.

When I looked at the shareholders of Precinct, (called a PIE or Portfolio Investment Entity for tax purposes) I found something new. Whereas in the 2010 annual report the shareholders didn’t raise an eyebrow, by 2013 report the major shareholder at 20% was National Nominees. Curious, I looked up the directors and found them to be four women, all with Sydney or Melbourne addresses. They each worked in a top managerial role in National Australia Bank.

This means that New Zealand’s most valuable land, our inner city land in Auckland and Wellington, is 20% owned by a Precinct, which is owned by an Australian bank, which in turn is largely owned by a variety of international banks. As someone tweeted back, “Nothing surprises me any more”.

Now what has this got to do with Capital Gains Tax? Well, firstly that property investment firms like Precinct will have most to lose from a even a very mild Capital Gains Tax and will be fighting it tooth and claw behind the scenes.

The point of Capital Gains Tax was, I believe, to get investment money directed to the productive sector not into land speculation.

8964030And why we pray can’t we invest in firms like Xero or A2 milk, both of which are based on entrepreneurship and labour, without being taxed? David Parker says it’s because workers are taxed on every dollar they earn so why shouldn’t investors be taxed. I thought that was what you wanted David? So why tax it? Your logic fails me.

A complete inability to differentiate between land, capital and labour is at the root of the poor thinking on Capital Gains Tax on shares. When men as bright as David Parker and David Cunliffe blunder into this, they should have time off to think. We in the New Economics Party say Government should tax what we hold or take but not what we do or make. Taxing labour is illogical. Taxing the monopoly use of the commons like land and minerals is logical.

Public loses $37 billion to private landowners every year

Sang Architects, Auckland multi residential Remuera101We can work out that the public is losing at least $37 billion a year to private landowners. This should more than replace income tax.

There are 1,771,200 private dwellings in New Zealand (Stats NZ)
The mean house price rose from $395,530 in April 2014 to $466,665 in 1 July 2011 (Quotable Values)

That is in just under three years the mean house price rose $71,135. Almost all of this was privately captured as capital gain.

So let’s multiply these two figures to get the total of privately captured capital gains on those private residences and we get $126 billion.

This is for a period of just under three years, two months short of three years. So yearly the amount of capital gain is now one third of 34/36 of $126b, or one third of $119 billion = $40 billion. A very tiny fraction of it will have been captured by local authorities in rates. Almost none will have been captured by central government.

The rates revenue of all local authorities in 2013 was $4.5 billion. Suppose two thirds of this was land value (a high figure – more like the Auckland ratio), then local authorities revenue due to taxing of land value would be $3 billion. But if the ratio is lower, then it would be as low as $2billion a year.

So $40 billion figure gets reduced by somewhere between $2 and $3 billion and we have lost in public revenue at least $37 billion a year through failing to capture capital gains, or failing to impose full land rentals, which is essentially the same.

To put this in perspective, the GDP of the country is $227billion in the year to March 2014.

The revenue from income tax is $29.8 billion and the total revenue from taxes $72.5 b. Expenses were $73.1 billion in the last budget.

So $37 billion is being pocketed by private property owners every year when the value has been created by the wider public. This money rightfully belongs to the public. (Compare this: Labour’s Capital Gains Tax would yield only $1b a year “in time” and the Greens Capital Gains Tax would yield $4.5 b/ year “in time”)

On the other hand, the government has confiscated $30b of our earnings through income tax and taken nearly $18 billion from our expenditure in GST, making everything less affordable. No wonder there is poverty in New Zealand. No wonder there is inequality.

dairy-farm-for-saleBut revenue from land rental would not be the government’s only income. We should be charging rent for the monopoly use of all natural resources, not just land. The principle that we should pay for what we hold or take but not for what we do or make means that we should pay taxes on our monopoly use of the rest of the commons. What is the commons? Everything that occurs naturally or is part of the social or cultural capital – water, fish, forests, electromagnetic spectrum, minerals, oil, gas, as well as the monopoly use of the infrastructure. The latter includes taxes on use of airports, hydroelectric power stations, ports, and so on. It also includes use of the commons for emission of pollutions. The biosphere is used for emissions of greenhouse gases and the rivers, lakes, and seas cleanse the pollutants from farms. We already tax tobacco, alcohol and gambling and would continue to do this.

address_withheld_negotiation_100189170163421799Lifting the tax burden from the productive sector by taking off income taxes, GST, corporate tax and interest revenue taxes would allow productivity but, given the burden of resource taxes, the pattern of productivity would be very different. It would look more like a post fossil fuel economy.

Would the revenue be sufficient to run a country? We currently spend $73.1 billion. (Budget 2014-5). So we would need a further $36 billion. Karl Fitzgerald in his Australian study worked out the other resource tax revenue and managed to match the current revenue. There is no doubt we could too.

From interest to reciprocity, savings pools are a great innovation.

Among all our discussion of currency and tax changes at national level we must never lose sight of the good things happening at local level. For it is at the level of neighbourhood that we all exist. It is at community level where our comfort comes from.

And that is where we can take action to restore local economic resilience and maximise our chances of survival after a major bank failure and economic crisis. Nicole Foss has reminded us yet again that the system must crash. “When the music stops there is only one chair for every 100 dancers”.

Money-tabooRecently I have had the privilege of attending the annual hui of the Living Economies Educational Trust. Among the local resilience initiatives being taken are green dollars, timebanks and now savings pools. It is the savings pools that I want to talk about here.

A savings pool is a family sized group of people (4 to 30 people) who get together regularly for the mutual financial purposes. It is a cross between a purchasing cooperative, a support group and a pawn shop. There is not a scrap of interest paid to anyone.

So how does it work? Members meet at someone’s home monthly. They discuss what they will contribute to the group’s shared pool. It might range from $10 to $200 a month, but where the membership is say 10, the group’s monthly savings can quickly range from $100 upwards. Before long you have a sum of say $3000.

But you don’t want this money languishing in the bank. You want it out amongst your members doing good. The members volunteer in turn what their financial needs are. Perhaps three in the group have financial needs. Susan draws attention to her credit card debt, Jim is desperate for a new car so he can get to work and a Rosy needs to pay a dental bill. The group then pays attention to those three needs. They figure they can work out how someone can take Jim to work for a while and decide to pay off Susan’s credit card. Then Susan can put more into the pool each month.

Susan’s promise is to pay $50 a month to pay the pool back, plus another $50 as reciprocation (equal give and take) towards her future pool account. She pays a total of $100 a month now.

In savings pools trust is important but there is a saying “Trust in God but tie up your camel”. Tying up your camel entails prudent purchasing agreements. Collateral is usually necessary. e.g. if I want $1000 from the group to pay off my credit card debt and I have a $5000 car, the group can own my car and I enter into a purchasing agreement with the pool to buy back my car for $1000. That way the pool is more like a special kind of pawn shop. The car should be insured.

The whole roup reviews their next month’s contribution, and the result is a bigger fund. Since they don’t know Rosy well they meet in her house next time. As trust builds and the social capital of the group grows, they realise Rosy should be next in line for a contribution from the pool as her teeth really are causing her trouble. Maybe there is enough in the pool to meet her needs now.

Rosy offers some appropriate property for sale and purchase, plus an equivalent savings/contribution to the pool.
Money, Colorful words hang on rope by wooden peg The accounting spreadsheet is available for them all to see. They add up what they will have at each month in the future, aware of some of the future demands on the use of the funds.

When Jim’s turn comes around for a car the pool has $5000 with which to buy a car. The car belongs to the pool. Jim uses it and pays off $100 a month. But as before he also has to put in another $100 a month so that others can have access to his money during the period he pays it off. If $100 a month is all he can afford then the term could be extended for two years. That is reciprocity in action. So instead of paying it off in one year Jim takes two years. At the end of the two years ownership transfers to Jim. He has paid off $5000 plus he has put another $5000 in the pool. He can now withdraw that $5000. Meanwhile it has been at work for the pool’s benefit.

So you see not only has the group lent without interest but nobody gains from being a borrower without paying an equal amount back to the pool. Reciprocity replaces interest.

There are now 22 savings pools in New Zealand and membership is growing fast. Several people are now available to help new groups form. They do this by running a game (it’s more fun than monopoly) where they are each given an identity (e.g. a retired couple with no mortgage or a solo mother with part time work) Each person is then handed a crisis/opportunity card saying what happened that month for them (unexpected expense they can’t meet or an inheritance or ‘no change’). Then they role play what might happen within the group. At the end of the game people are itching to start their own savings pools.

These groups work particularly well if they start with a group who already know each other. It is also good if you have a cross section – those with extra money they want to protect in case of an economic crisis and those whose finances are more precarious. If a person dies or moves away their money can be withdrawn, together with their savings points (amount of money multiplied by the number of months they have had it in there) and passed to their heirs.

You need a person who will be a good recorder.

I have been to several of these events. Enthusiastic members of existing pools tell us of the celebration and joy when a credit card is paid off. One group had a party where they ceremoniously cut up the card.

The first financial threat is a global downturn causing major economic contraction and loss of ability to service mortgages. The second is bank insolvency where depositors (unsecured creditors of the bank) find their accounts have been frozen overnight and wake up with a “haircut”. In crises the solvency of banks depends on the elimination of debt and calling in non performing loans (mortgage foreclosures and asset seizures).

Savings pools already own all assets not yet paid for. Contributions will tend to dry but but the pool community remains. Loss of liquidity results in temporary paralysis of the system, but no loss of its real underpinnings

If you would like to find out how it all started have a look at the 15 min video done by its founder Bryan Innes here.

For more information go to the Living Economies website where you can read more and see a typical agreement.

To start one in your area contact either Peter Luiten, Bryan Innes, Phil Stevens or Helen Dew. Or leave your information here