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.

Banks culpable in Auckland housing crisis

The following letter was sent to the editor of the Listener but not published, so we publish it here.

Absent from the vigorous discussion of the Auckland housing crisis on The Vote (Sept 11, TV3) was mention of the role of banks in creating this crisis. They stand to gain billions not just from the rising price of houses but from the eventual crash.

In a January 2013 seminar IMF economist and former Barclays Bank manager Michael Kumhof makes it clear that the role of banks is not intermediation but to create credit and control its supply.

“The key function of banks is money creation not intermediation. What that means is that it becomes very easy for banks to start or lead a lending boom even though policy makers might not, because if they feel that the time is right, they simply expand the money supply. There is no third party involved, just the bank and the customer and I make the loan.”

Yes the banks have started a lending boom in Auckland, rewarding staff who issue more loans. Banks find it more profitable to row the economy between easy money and tight money then “laugh all the way to the bank when it finally collapses”. Loan to value restrictions will not help.

Alan Dudson, an Auckland accountant, says “In Auckland it is not uncommon for residential real estate investors to own five, 10, 20, 50, or even 100 houses.”

And all the while Government collaborates by making the interest, insurance, rates and maintenance tax deductible. So Dudson says there is hardly any tax to pay.

When we have a government and opposition both blind to the true role of banks, banks are almost in complete charge. A tax policy favouring property investment and making it easy to hold land without financial penalty will see to that.

The opposition solutions are little better. A capital gains tax doesn’t hold down prices when too weak and just keeps land off the market when it is strong.

It can only end in tears.

References
1. Michael Kumhof
http://www.youtube.com/watch?v=YnAtHbDptj8
2. Alan Dudson. NZ Herald Let’s stop subsidising property investors. http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10865946

Deirdre Kent
Spokesperson New Economics Party

The woes of small town home owners and businesses

Recently the locally owned businesses in our local shopping village met to air their troubles. The Council is spending heaps to upgrade the footpaths and underground services because, they understand, they are expecting "better heeled people" to move into the district. A real estate manager told one attendee that he has never had so many properties on his books. The poorer home owners can't afford the rates and the rising insurance costs. And when the homes sell it is to Wellington folk who have the money. The other gripe was that the shops aren't making much profit. Transit NZ won't allow the old time department store to advertise on the main road and traffic isn't coming into the town, which is off the main state highway. The department store, owned by an octogenarian, is struggling to survive. And there is yet another fast food outlet coming to our poor town, a junk food outlet again. That would make 15 cafes and takeaway shops in the village centre, and they are all suffering. So I guess we continue with our race to the bottom in sickness and poverty. When I watched a cartoon video online somewhere recently, it showed very clearly that forcing poorer people to move further and further out is a result of having no price on the "ownership" of land. And here is something else that has happened. A Wellington businessman bought 40 acres on the outskirts of our town 13 years ago for $400,000. He has now managed to subdivide it into three blocks and has recouped $1.2 million for two of those blocks, with another $480,000 to go. So that will be a tidy profit of $1,289,000 in 13 years. This is a privately captured windfall when it should be publicly captured. Work that out at an annual rate and he has reaped just over $99,000 a year. This should have gone to the public purse. Multiply this event up for all the land that has been bought and resold again and you won't be surprised at the Reserve Bank's graphs on land affordability. There is a good video embedded here explaining how Australian land values have risen and proposing the solution shared by Adam Smith, Winston Churchill and many others. Oh, you say, we need a capital gains tax. No, a capital gains tax will only just tie up the land sales. People will sit on their land, curse the government and work to kick them out at the next election. Labour and the Greens are on road to nowhere with this idea. But last night I reread the Values Party 1978 manifesto which clearly outlined that land should never be owned outright and that land prices should be stabilized with a land tax. This policy soon disappeared into oblivion. I don't recall how it went. What we need is for each landowner to pay a sum of money regularly to the public purse so that other taxes can be reduced. Since landowners already pay mortgages and rates, they are certainly going to resist a third charge. And most people believe that once they are "on the property ladder" they have a right to all the capital gain at the end of it. So how we can recapture those windfalls for public revenue?  It may be best done at local authority level, a possibility I am investigating.  It could be connected with a local authority issued currency. I am also convinced now that it needs to immediately result in a Citizens Dividend issued in a local currency by a local authority, facilitated through the Inland Revenue Department. A local authority issued currency would do wonders for our struggling little businesses and homeowners.