Why our are farmers farming for capital gain?

Andrew Gawith, Director of Gareth Morgan Investments, described the economics of farming in New Zealand as “speculative” as the financial benefits are almost entirely dependent on capital gains. Other than dairy, income is puny and unreliable, he said.”Farm finances don’t add up.” (NZ Herald, Nov 30, 2010)

Alvin and Judy ReidWhereas UK and US price of rural land doubled in a decade, the value of farmland in New Zealand has risen at 10.7% a year over the past 20 years. (That is the value of farmland doubles in less than seven years). “That’s a real after tax return of something in the order of 7 percent to 8 percent a year.” He points out this is double the return of sharemarkets.

He says, “Farming is the most popular business for banks to lend to. While other areas of economic endeavour are starved of capital, banks have very nearly drowned farming with debt. The ease with which farmers can get capital has helped push up the price of land.”

If farmers are drowning in debt, they will not be able to withstand a rise in interest rates. An article in NZ Farmer warns that with the drop in the price of milk, a quarter of farmers are heading for loss unless prices rise. So as China’s economy slows the high debt farmers are most vulnerable. Winston is watching.

gw-speech-the-significance-of-dairy-to-the-new-zealand-economy-7-may-201400This is our dairy debt from 1990-2014. It has multiplied by eight over those 24 years. Gareth Vaughan reminds us that nearly 70% of this dairy debt is on floating mortgages. Dairy debt was around $32 b in 2013, up from $8 b in 2003, which makes a quadrupling in a decade!

Farming is very capital intensive, with only mining and utilities more so. According to a NZIER study “Around three quarters of value added in agriculture is from capital (land, plant and machinery). This is higher than the economy wide average of around 50%.”

If dairy farming turns out to be the cause of our country’s Minsky moment, can we avert a crisis by taking control of our currency creation and land tenure system at Community Board level? Not only is this our only hope, but it will lead eventually to greater productivity and equality – as well as getting good young farmers on the land at an affordable entry level.


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.