Income tax with tax deductibility invites cheating and corrupts honest people

Posted on April 2, 2014 by Deirdre

Today I heard of someone who in the process of defrauding the tax department. I won’t go into the details of it on this occasion.

We have all heard these tax evasion stories. It’s because the tax system invites fraud like that. I can remember sitting in the accountant’s office at tax time and noting the way the accountant asked his questions. My husband was a GP and we had both written books, so our expenses for our book writing were tax deductible. The accountant would say, “And this $480, was that for travel associated with your book?” It was in the days when you had printed bank statements posted to your homes and it was a matter of labelling each sale and matching it up with a cheque. There was no internet banking then, and it was easy to forget to record a cheque properly.

The time with the accountant was a cross between a conspiratorial plot and an open honest discussion. I know never felt comfortable any way. We usually ended up so that some expenses were declared correctly and some dishonestly. I got the impression that the accountant had to run a fine line between pleasing his clients and keeping a good reputation with the IRD, so the atmosphere was palpable.

Just imagine this occasion multiplied a few thousand times by couples all over the western world. Is it or isn’t this item tax deductible? Such a waste of time. So many hours spent by so many on tax avoidance. Why? Because we have income tax, a completely illogical tax. We should tax what we hold or take not what we do or make.

Apart from the occasional saint, we all have tendency to get away with what we can and the system just brings out the dishonesty in us. Accountants will be more familiar than I am with all the various ways people can cheat – by declaring family gifts as tax deductible capital items and other forms of false deductions, as well as having offshore bank accounts and making false invoices. Then there is the straight “cash job” indulged in by a range of tradespeople and others.

Just as a welfare system based on your relationship status invites you to cheat, so a tax system based on what you earn invites you to cheat. Cheating is an inevitable result of a wrongly targeted tax system and an outdated welfare system.

In contrast a land rental cannot be avoided. There are no tax deductions. You pay for what you use of the commons and that is that. You can’t take your land offshore and hide it in a tax haven. You can’t cheat. The tax is simple and cheap and hard to evade. Likewise if you use water commercially for irrigation or other purposes, you pay for the use of the water. Simple. No tax deductibility there either.

Alert: Environmentalists must start asking questions about currency design and tax reform

Posted on January 6, 2014 by Deirdre

Oh goodness me. I have been doing some searches on “climate action economy” and “climate change” “economic growth” and I find myself mad as hell.

Heavens where are their brains? Economists from the World Bank and IMF, Nicholas Stern and many others are talking about the topic as though the economic system is a given. Shucks. How did they really think we got into this mess? Can’t they ask themselves some basic questions?

Environmentalist Hunter Lovins is just as much to blame. She, like others, thinks that there is an economic case for climate change, but fails to look at the currency system we have and fails to look at the tax system we have. Gosh when she visited New Zealand a couple of years ago I gave her a copy of my book but she can’t have read it or she would understand that if you allow the creation of the country’s currency as interest bearing debt then you have a growth imperative built in to the whole system.

Now calm down Deirdre. Why should an environmentalist be interested in examining why there are flaws in the economic system we assume to be the only one?

Actually there is more to think about than the currency system. You also have to design a thriving low carbon economy as well and you can’t do this without addressing the fundamental change necessary to turn the tax system on its head. It is time to stop taxing labour and sales and start taxing the use of the commons. A post carbon economy will have a flowing currency, but not flowing into the overuse of natural resources. Those avenues have to be blocked. And it can’t flow into housing bubbles either. That is a no-brainer.

That is why my first e-book is going to be about climate change. Its about how currency and tax reform can save us from global warming. I am writing it now, well actually I’m researching for it now. We need a land-backed currency introduced in every single country. Comments like those from the UK Chancellor, George Osborne, after Doha in 2011 “We are not going to save the planet by putting our country out of business” are going to be a thing of the past.

As resourceful human beings, if we are clever enough to have google glass this year, we are also clever enough to start redesigning the political economy so we have both a thriving low carbon economy and we halt the death rush to a burning planet and death from drowning, starvation or drought. We can do both. We must do both. We will do both.

British Columbia has an effective and politically popular carbon tax

Posted on December 31, 2013 by Deirdre

In October 2013 the Los Angeles Times announced that the climate change debate was over and they will no longer be publishing letters from climate deniers. Great news.

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We live in a convenient spot for family travellers so have had a lot of visitors. Between visitors I have been thinking and reading on the politics of climate change. I noticed that since I started on twitter I have gradually become more and more interested in the topic. The typhoon in the Philippines this year made us all sit up and refocus our efforts to ensure there is a liveable planet for our descendants.

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We live in New Zealand and have watched Australian politics closely. It is been blindingly obvious that a carbon tax can be a recipe for animosity and political suicide both within and between parties. But the bitterness and vindictiveness can all be avoided.

So I was very excited when I read about what had happened over the last five years in British Columbia. They have had a carbon tax since July 2008, starting at the rate of $10 a tonne and increasing every year till this year it was $30 a tonne. In contrast to Australia, the carbon tax has been remarkably successful, both from the point of view of reducing emissions and keeping the economy healthy. Strangely enough it has also kept the government in power.

Why is this? Because they have wisely made it revenue neutral. The Minister of Revenue is obliged by law to look at the tax take from carbon tax and reduce other taxes by at least as much. So it isn’t a tax grab. It is a tax shift away from taxing things you want to encourage such as work, to taxing things you want to discourage such as pollution.

Energy policy activist Charles Komanoff in 2007 co-founded the Carbon Tax Center, website http://carbontax.org. On it Komanoff has written a summary of carbon taxes in various countries and starts with British Columbia. Komanoff believes that support for a carbon tax is growing steadily among public officials, economists, scientists, policy experts, business, religious, environmental leaders and ordinary citizens.

Komanoff is an advocate of revenue neutral carbon taxes. The state does not gain tax revenue from it. James Hansen, an American adjunct professor in the Department of Earth and Environmental Sciences at Columbia University and author of The Storms of My Grandchildren also recommends a fee and dividend system where all the carbon taxes collected are returned to the people.

But what is the best method of distributing the carbon tax money to citizens? I think it is the one used by Alaska which has the Alaska Permanent Fund which pays a yearly dividend to all residents who have lived there more than a year. This system is the closest thing to a basic income guarantee that exists in the world today. It is a small, yearly dividend, financed indirectly from oil revenues, paid by the state government to every citizen who lives in Alaska — including all children.

British Columbia has implemented a carbon tax which is revenue neutral, but they would have been better to use the Alaskan method of fair distribution. We can learn from both, and bring the best of each together.

What astonishes me most about the British Columbia carbon tax is the politics. Five years ago it was implemented in 2008 by the the BC Liberal Party, the party further to the right with the most free market policies. The left leaning BC New Democratic Party wanted to repeal the carbon tax but the BC Liberal Party was re-elected in 2009 and then again in 2013. Income taxes are now down to 10% and the drop in fossil fuel use over the five years has been 17% per capita.

A carbon tax makes sense whether you are a conservative or a conservationist, Labour or National, a climate skeptic or a believer. Right and left must unite on this vital issue as the biosphere is no respecter of political views. As academic Guy McPherson says “Nature Bats Last”. It is time the left leaning parties started to understand that tax shifts are not only politically popular but essential if we are to curb climate change. Adam Smith’s invisible hand works well when people are handed a dividend. On the whole the people will spend it wisely.

Why Climate Change is such a Difficult Political Issue

Posted on November 25, 2013 by Deirdre

It has finally struck me, albeit in the middle of the night. I have been pondering why, in the face of all the evidence and despite a growing willingness on the part of all nations to address the issue, efforts to reverse climate change are so insipid. Climate change is still in the too-hard basket. Conference after annual conference never fails to disappoint us and Warsaw 2013 wasn’t much different. A Guardian commentator called Warsaw “more like a shuffling of feet”.

OK what is this Road to Damascus discovery? It is to do with affordability. We are trying to add an extra tax, a carbon tax in a context of deflation, where the affordability of everything is declining. Prices are going up relative to disposable income. We are losing our purchasing power (well apart from the 1% I suppose). So it is no surprise the climate change issue is too hard for politicians. Given the choice of putting up petrol and electricity costs when their constituents are already suffering, politicians will kick for touch and argue they need a ‘balance’. Disappointment is inevitable.

Well then how do you solve this political problem? The answer is by addressing the affordability issue head on.

So let’s look at what is reducing the purchasing power of people on this planet? Why, it is the same old two culprits – the bank issued money system and the illogical tax system.

What do I mean? Well if money is issued as interest bearing debt, then interest is built into the price of all goods. How? Every car comes out of a factory whose owners borrowed money at interest from banks. Every piece of furniture, clothing and kitchen goods is manufactured where the owner borrowed money from a bank at interest to do so. Every potato, every steak, every drop of milk and every orange came from a farm whose owners were mired in debt to a bank. The cost of the bank interest is built into the price of all goods. So if we issue money without debt the price of goods relative to wages will drop. Purchasing power will increase. Affordability will improve.

Then there is the incredibly silly tax system. When we tax labour, every manufacturer or primary industry producer has to build the tax in to the price of their goods. Take off income tax and your purchasing power increases. It is the same as GST and company tax and a range of other illogical taxes.

So part of the price of all primary produce and manufactured good is the burdensome tax and the totally unnecessary interest charged when issuing money. Solve those two problems and our purchasing power rises.

Our solution of having a parallel national currency spent into existence without interest and unburdened by these deadweight taxes will dramatically give more purchasing power. Affordability will improve. See this slideshow or read this site for more on this.

So when we change the tax system away from taxing labour and sales and towards charging rents on the right to use the commons, including the biosphere, it will be politically more possible to do something significant about climate change. After all, in proposing a carbon tax, climate change activists are only asking for a regular rental on the right to use the biosphere to get rid of their greenhouse gases.

If a currency flows freely through the economy and only meets opposition when it comes up against the constraints of the commons, it will stimulate innovation in producing and manufacturing clean liquid fuels and give impetus to the whole post fossil fuel economy. The term “green growth” will transform from rhetoric to reality and innovation will thrive.

Private capital gain from houses eclipses government gain from progressive tax

Posted on August 26, 2013 by Deirdre

Being a political junkie I have been following the Labour leadership issue closely. I have been addicted to twitter. I have read all the good commentators and I became especially enthusiastic when reading David Cunliffe’s speech called Dolphins and the Dole. It said all the right things. But when he announced he was standing, and just when I was getting really excited about his possible leadership, I heard him endorse higher taxes for the rich. Then I remembered why the policy of the New Economics Party is different from Labour’s.

I recalled a short video I had seen where Fred Harrison, the author of Ricardo’s Law – the Great Tax Clawback so I watched it again.

In this video Harrison visits the Hyde Park area near Harrods in London and says the houses are worth millions of pounds. The location of these houses means they benefit from the park, good transport and some superb businesses in the area. These improvements are the work of the community. It is the community that have added value to that land. The poor in apartment homes has paid for the infrastructire in their taxes. It is the poor who are subsidizing the rising land values of the privileged near Hyde Park.

Harrison says sure, the rich with progressive taxes pay about five times as much tax as the poor, but this is all made up for by the huge gains their well sited homes enjoy from these services to their sites.

I couldn’t help thinking about the houses in Parnell, inner Remuera, Epsom, Herne Bay, Freemans Bay and Orakei. It might be their homes. Yes, we owned one once in Mt Eden and made hundreds of thousands when we sold after 13 years. Although at the time we smiled and patted ourselves on the back for making such a good buy, we knew in our bones there was something really unfair about it all.

In Parnell a home might sell for $2 million and the 12% rise on that house price would bring in an extra unearned $224,000 in the first year. This money rightly belongs to society who provided the infrastructure, built the other homes, made the roads, developed the good schools, the CBD, Newmarket and the boutique Parnell shopping centre.

In swanky Herne Bay the capital gains made since 2000 have been astronomical. As one writer says of Herne Bay; “Nip/tuck surgeons live side-by-side with interior designers, ad agency chiefs, and entertainment lawyers.” (Jane Phare, NZHerald)

In 2008 houses in Herne Bay were the first to average $2 million. Their homes are worth 50% more than Remuera houses. Jane Phare in Dec 2008 said the average house price was $2.19m there, and there had been a gain of 24% in house prices over the last year.

A quick look at trademe shows a few houses for sale in the millions.

Dean Barker bought a house in Herne Bay for $5.6 million in 2007. An article on rising house prices TVNZ Aug 8, 2013 said “in Auckland the rate of increase has been even higher, at 12.8% over the last 12 months.” If Dean Barker had been experiencing an average of 10% yearly rise in property value since then (and this is quite likely), his home would be worth $9.9m today. That is a jump of $4.3 million. Even with the steepest progressive tax system, the government could never charge him this amount in income taxes. And whatever it was his tax lawyers and accountants would minimize it. The difference in the two amounts is what the taxpayers are missing out on by not recouping the cost of the government and community services to Dean Barker’s property.

And if the rise in house values on a $3 million Herne Bay property continues at its current rate of 12.8% a year, next year that house will be worth $384,000 more.

In September, 2012 Auckland businessman Grant Nola and his former Bulgarian tennis pro wife Pavlina sold their bungalow on William Denny Ave in Westmere for $2.25 million – $350,000 above its council valuation of $1.9 million. They had bought it three years earlier for $932,000. This is a cool $1.93m profit in three years – once again money belonging to society not to the owners. A progressive tax rate for him would be nothing but a nuisance to be dealt with by tax lawyers and accountants.

Now just imagine if all those capital gains had been captured publicly instead of by the landowner and the bank which issued higher a higher mortgages. The public purse is missing out on billions. And think of all those young people working for a pittance in cafes, bars and hotels and paying their GST and their income tax. Not fair. Or the taxidriver who made just $3 a hour on his long day’s work. Capital gains on houses in Orakei or Takapuna or Queenstown or Fendalton are in their dreams.

Some politicians, arguing for increased income taxes for the rich, will be telling the public they don’t mind paying this tax themselves. But the wealth of the wealthy comes from land ownership and not from a salary, no matter how high. An owner of a home in an elite street makes money from the monopoly privilege of owning this precious land, while Auckland develops round about him.

The gap between the rich and the poor is not the gap between those who earn big salaries and the others. It is the gap between those who own valuable property and those who don’t own property at all.

If we don’t tax what we use (land and other natural resources) but tax what we earn, then wealth pools with landowners while the poor can’t buy food for their children let alone buy land. The effect of progressive tax systems is minor compared with the gains made from rising house values. Those who have the privilege of living in inner Auckland grow rich on the work of others while those who live in small towns or those who rent grow ever poorer. While the part time professional working for a council pays GST on everything he buys and pays income tax, the landowner watches his house value rise.

I don’t know what the solution is for any one person. Martin Adams whose excellent new book Sharing the Earth, puts it rather more strongly. He says the capital gains you make from your house is really stolen from the public at large.

We must get a fairer tax system, where we tax what we hold or take, not what we do or make.

Auckland homeowners benefit at the expense of other New Zealanders

Posted on August 19, 2013 by Deirdre

Media statement

Auckland homeowners profiting from booming house prices are really benefitting at the expense of the rest of New Zealand, according to the New Economics Party.

Spokesperson Deirdre Kent said “If all the private landowners and private banks had reimbursed the public for their windfall gains from rising Auckland land values over the last few years, the Auckland rail loop would have been paid for.

“Or it could have paid for the railway be electrified from Waikanae to Levin or to fix the Gisborne to Napier railway.” She said rising house prices are always due to rising land values. Land values rise because of the action of the community in providing hospitals, transport, roads, schools, sewage, water, businesses, shops and parks. So landowners should pay the public back regularly for this privilege.

“While we allow the private capture of rising land values, we can’t help but get a widening gap between those who own good real estate and the rest of us. The Auckland housing bubble where obscene profits are to be made from selling a house is affecting every New Zealander who pays tax to line the pockets of lucky private landowners and banks. Moreover the relentless rise in the supply of bank credit makes all of our money less valuable.

A regular land fee should be paid to hold land while taxes on labour and sales should go.

For further comment phone Deirdre Kent 06 364 7779 or 021 728 852

Christchurch Eastern Green Frame presents opportunities

Posted on August 8, 2013 by Deirdre

Christchurch has a unique opportunity. The plan of the inner city area includes three “frames”. The largest one is to the east and contains 13 ha of land which will end up as park. Apparently there through the park will be cycleways and walkways. Cyclists will ride past some residential houses and some inner city up market apartments. The south frame will contain the health precinct and the Avon Precinct to the north will have civic buildings.

It is the east frame I have been thinking about. If there are to be private homes in this park – and there is no date for it – then let’s do it right. There are 92 properties to be acquired by Government in the eastern frame. 52 agreements have been reached and there are 30 sites with negotiations being finalised.

In the Press (Sat July 13, 2013) there is a story describing the bitterness of property owners. The Christchurch City Development Unit is apparently offering ridiculously low sums of money for these properties. The Government can acquire the land under the Public Works Act. If property owners allow this, they can seek compensation through the courts.

The article talks about the Government onselling the land at a profit and it is here that I really started to get interested. Putting aside all the unfairness of not paying market prices for the land and getting it on the cheap, this issue of onselling it is where I draw the line. My view is that the Government should keep the land and then auction the leasehold property to the highest bidder. Thus a full ground rent would be payable. The revenue should ideally be shared by local government and central government.

The New Economics Party

Let's fix the economic system that is killing our planet!

Category Archives: Taxes