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.

Sharing the rents brings social justice – solution to the Auckland housing crisis

imagesDuring Parliament’s question time there are always a lot of questions about house affordability, especially in Auckland. The National government’s solution to rising house prices is just “release more land”. And the Prime Minister usually replies that home affordability was worse when Labour was in government because that included the period leading up to the Global Financial Crisis. Stalemate. Election year biffo. They then go on to questions about poverty, especially child poverty. In New Zealand, ever since Helen Clark introduced an income support scheme called Working for Families anti-poverty groups have rightly pointed out that as it only goes to families in work, children of beneficiaries are the ones that miss out and that is unfair.

Sadly nobody in Parliament ever raises the issue that when “land owners” monopolise land without paying a full rent to the public for the privilege, the rental they should have paid just capitalises into the market value of their homes. Rent is thus privately captured not publicly captured. That capital gain doesn’t belong to them. The very meaning of “freehold” land is land without rent. When settlers came to New Zealand from England in the late 1800s what they wanted was to stand on a piece of land and know that a landlord couldn’t push them off. But the English colonists brought with them their very entrenched legal system of land ownership and imposed on the Maori a strange concept they called “ownership of land”. It was the land tenure system together with the English banking system which was at the very heart of the colonisation process.

Leaving aside the banking system for the moment, let’s concentrate on the land tenure system. When land is held in common, land tenure is about rights to use land. What the settlers really wanted was security of tenure and they wrongly equated this with a freehold land ownership arrangement. Indigenous people share the rights to use the land with others in their iwi or tribe or in their hapu or subtribe through a complicated system different in each iwi or hapu. Colonisation changed the land tenure system and introduced commercial banks.

We are coming up to a general election and the Labour Party, Mana and the Internet Party are all showing concern to engage and enrol the one million non-voters from last election. The Internet Party rightly makes it easy to join a party and participate, through their clever use of smartphone apps and discussion websites.

But what better way to engage young disaffected voters than to share the land rents? Wouldn’t they be delighted it a political party said it was going to charge a full land rental and share it with them by giving them a Citizens Dividend from time to time?

Let’s have a look at the home values in central Auckland suburbs for a start. Parnell, Mission Bay, Mt Eden, Epsom, Herne Bay, Ponsonby and Grey Lynn houses have risen in value by probably an annual rate of exceeding 10% over the last year. In some cases it is 14%, but let’s take the lower value. An article the other day in the Weekend Herald showed a three bedroom home in Grey Lynn for sale at $895,000 and the subsequent text showed it had probably risen at least $103,000 in the last year. What land tax did that owner pay? Rates contain land tax but actually everyone pays on their capital value these days. (by legislation when the supercity was formed, no choice these days like we used to have). So if every home in the inner suburbs has a capital value rise of say an average of $100,000, just think of that accumulated rental which has been privately captured in the inner Auckland suburbs. This rental rightly belongs to the public because it is government both central and local that has paid for the infrastructure, the hospitals, schools and parks and it is the public which has provided the inner city shops and businesses and activities. Suppose there are 100,000 homes in those inner suburbs each rising by $100,000 in a year. That is a capital gain of $10,000,000,000. Yes it is $10 billion which rightly belongs to the public and we haven’t even tried to calculate the rising value of the CBD and Parnell and Newmarket and Ponsonby shops and offices. This total will be far higher.

Dividing this three-way between central and local government and the 4.4m citizens of New Zealand is the next challenge. But for electoral purposes it would make very good sense to give out a citizens dividend straight away. Let’s, for instance, use $4.4 billion of the $10 billion. That is $1000 per citizen. When dependents get it, the money is taken by the designated carer, usually a woman. So a woman with three children would get $4000 a year from this dividend. Nice one. A young solo mother in Northland or Hastings or Greymouth. Since she is on a benefit she doesn’t get Working for Families. She spends it on the basics of food. The next dividend would bring more. When land rents are shared everyone gains. Labour spokesperson on Welfare Jacinda Ardern would not have to think up anything more complicated than this to right the wrong of children in poverty. It would answer the “Feed the Children” plea of The Mana Party.

I have discovered Fred Harrison's site http://www.sharetherents.org/ where his videos tell a great many stories about the value of sharing the land rent. Fred Harrison is a long time campaigner for sharing land rents.

Labour and the Greens both go into the election advocating a Capital Gains Tax on property that isn’t the family home. Unfortunately the Greens have chosen a 15% Capital Gains Tax. That means when a house is sold (and only then) the Government gets a small fraction of the total rent. The property “owner” gets to keep the 85% that rightly belongs to the public. Well I guess it is a start, but honestly it is an extremely timid policy when you see the whole logic of sharing the rents.

Nobody in this whole debate has raised the issue of how many vacant sections there are in Auckland. If speculators are sitting on sections and not paying much (the council even slashes their rates) then naturally they will continue to speculate. A Capital Gains Tax will only delay the sale even further. You must make people pay for the privilege of "owning" land, or monopolising it. If speculators had to pay a full land rental rather than reduced rates, that would spur them into action. Either they would build or they would sell.

Two major blindspots in David Cunliffe interview so the Labour policy won’t deliver jobs.

It was with considerable interest that I spent half an hour watching the streamed online broadcast from thedailyblog recently. Bomber Bradbury and Selwyn Manning were interviewing the new Labour leader David Cunliffe.

For a while I was very excited. Here was a man who was head and shoulders above his predecessor. His replies showed his high intelligence, considerable knowledge and a lot of political wisdom. Yes he would come down hard on tax evasion, he would reform the trust law, focus on exports and jobs. He showed he had a very good grasp of climate change, talked about extreme weather events and said there must be a price on carbon. When asked about the meltdown of unregulated financial markets it was clear he knew about Consolidated Debt Obligations and explained how the world came to be awash with phony debt. He wanted re-regulation of financial markets and described the kiwi dollar being a “speculative plaything of international markets.” He said nobody ever gets pinged for trading the NZD but it drives up the dollar and is bad for exporters.

Asked about FTT he said “If you hear a giant sucking noise it will be overseas money leaving New Zealand”, that will be the global capital would leave in a rush. He said in a borderless and internet-enabled world economy a financial transaction tax has to be imposed by the whole global community rather than going it alone. Interesting.

On the TPPA he wants the text released so we can have a mature public debate. How refreshing that was. He was good on the GSCB and showed a lot of insight on our role in the Pacific.

Like a good Labour Party stalwart he advocated a living wage, raising the minimum wage and said that Labour was working on fine tuning Working for Families so that all children benefit.

But there were two questions which put a halt to any thought he might be the saviour of New Zealand. When asked “Would you find yourself in a position to reduce GST if you are putting up the top income tax rate?” the answer was “I hate to disappoint you but no” he said it would take five years to get the Capital Gains Tax to the stage where it raised revenue, and with all the programmes they wanted to introduce, the Crown balance sheets would be stretched thin. Well this is a huge slap in the face to working poor to keep GST, the most regressive tax of all.

So I looked up Capital Gains Tax and found most countries have it in some form. Wikipedia gives good information. Oh yes there are a few like us who don’t have it, Jamaica, Kenya and Singapore being three of them. But most countries have it in some form or other. It is sending the right signal to property investors. Australia’s and Canada’s seem similar and I guess the Labour Party is modelling theirs on Australia’s. That means they get the capital gain, divide it by two, and apply the marginal tax rate to it, which is 43%. So here we are, all these properties rise in value in Auckland 18% a year. If you sold a rental and made a capital gain of a mere $100,000 you would pay 43% of $50,000 or $21,500 in CGT. The other $78,500 you can keep for yourself. Nice. That is rightly public money, as it is society which creates the extra value on land. The whole of it should be publicly captured.

And if you sell your home and make $300,000 don’t worry you won’t have to pay a cent of that to society. So for just investment properties (and commercial and industrial properties?) you will pay 21.5% back to society and capture the rest yourself.

Capital Gains Tax in its present form doesn’t stop at gains on property. Several websites go into it at length and one is left with two impressions. The first is that there is apparently no apparent understanding of the difference in genre of land and its gifts and capital. Land and capital are collapsed together. One is a gift of Nature and one is the combination of labour and resources.

The second impression is that CGT is so complex that it will be extremely expensive to administer. Already the Inland Revenue Department has to spend $1 billion over the next ten years upgrading its IT systems and CGT will make it worse.

Neither Bomber Bradbury nor Selwyn Manning asked him exactly how he would ensure that jobs were created. And of course jobs can’t be created under this scenario. The CGT is weak and relatively ineffective and the progressive tax means that the tax burden is greater. A currency overburdened by tax and issued by private banks as interest bearing debt will surely not circulate fast enough into productive enterprise.

Only when there is a working moving currency will jobs be created. And the currency must be relieved of its burdensome and illogical taxes on work and enterprise. A lack of awareness of currency theory, linked with a lack of understanding of the difference between the gifts of Nature and the work of humans are two important blindspots. Until then wealth will continue to accumulate with private banks and landowners. It is disappointing that policy shaping up to be about redistribution, rather than creation of wealth. It is so much more important to understand the role of currency design than to artificially prop up wages. Currencies can be designed to be abundant and flow, rather than pool with the wealthy.

So are we to see a Labour Government that showed much promise yet failed to deliver on jobs? Of course. Expensive social welfare programmes, a complicated and burdensome tax regime with a very regressive GST and a money system which perpetuates the status quo will see to that. The tax avoidance industry will have a heyday. Sadly I forecast the only jobs that will be created are jobs as accountants, tax lawyers, WINZ and IT specialists in the Inland Revenue Department.

Rising Auckland House prices are really a tax issue

Rising Auckland House prices are really a tax issue Media Statement July 30, 2013 Rather than ban the buying of homes by people who pay tax in other countries it would be more sensible to impose on them a full ground rent on all urban and suburban properties, according to the New Economics Party. Spokesperson Deirdre Kent said that while it was heartening to see the Labour Party trying to control house prices, they should be focussing on the fact that homeowners who pay tax overseas are not paying enough tax in our country.  “They are coming to our country and expecting huge untaxable capital gains on their house when they only pay rates here”. “It is New Zealanders who have helped increase the value of the land they have bought so the rise in value should be captured by the public.  The best way to do this is not wait till they sell, but charge them a full ground rent every year. For urban sites it might be five percent or over of unimproved land value, depending on the zoning restrictions. (Ideally it should be by auction as this allows for the overvaluing of land at the moment.) This revenue should then be shared by national and local government and ground rent should replace rates.” She said it was the taxpayers of this country who paid for the schools, roads, parks, railways, street lights, community halls, businesses and organisations that gave the site its value. “It is the same when people paying tax in New Zealand go to Australia and buy a house or when John Key buys a house in Hawaii and expects to receive the capital gain without being a tax resident there. Imposing a charge on holding of land is an important way for countries to retain their integrity.” For further comment phone Deirdre Kent 06 364 7779 or 021 728 852      

Reform of tax and money system essential for narrowing gap and bringing jobs

So we have just seen the Ikaroa Rawhiti by-election win for Labour with Mana coming in second. The successful candidate Meka Whaitiri has repeatedly said "Our people are hurting. The issues are poor housing, jobs and poverty" Labour has said people are moving from National to Labour because of the rising cost of living.
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With currency reform and tax reform money will flow into activities that maintain and upgrade assets like houses

If the money system widens the gap between the rich and the poor then a party which ignores this or even understand this will do little to reduce wealth disparity. Explaining this: If money is created by banks as interest bearing debt, but the banks don't also create the interest, then there will never be enough money in the system for everyone to pay back debt. So the losers have to go further into debt. This widens the gap. If in addition the tax system causes wealth to concentrate with property owners and stops money going into investment in the productive sector then a party which ignores this will surely make little progress in alleviating poverty or bringing jobs for the rangatahi of Ikaroa Rawhiti electorate. Explaining this: If we tax labour, sales and enterprise with income taxes, GST and company tax, then the purchasing power of everyone declines. The cost of living rises relative to income. At the same time investment money goes into housing, because there is no tax on land and everyone is betting on rising land prices. A notable example was of an Auckland house which was recently sold by New Zealand Transport Agency for $220,000 above Rateable Value. The housing bubble in Auckland is a serious threat as the Reserve Bank constantly reminds us. Because our party has looked to the root of the issues, and have proposed a well designed domestic-only currency linked to a completely new tax and welfare system, (see http://neweconomics.net.nz/index.php/2013/06/how-to-build-a-life-supporting-economic-system/), only our party can offer serious solutions to the growing wealth disparity and bring real jobs to the Ikaroa Rawhiti electorate.  

Labour affordable housing scheme a ‘patch-on solution’

Media Statement November 19, 2012 Labour affordable housing scheme a ‘patch-on solution’ A New Economics Party Spokesperson Deirdre Kent said that although Labour had the right goal, their proposed method of doing it doesn’t get to the bottom of the problem and is an artificial patch-on solution. “While land remains as an asset class to speculate on, property prices will keep rising. It is private landowners and banks who reap the unearned gains from rising land prices, and this widens the gap between rich and poor.” “Land now comprises an average of 60% of the value of a property in Auckland,” she said. “These 100,000 affordable homes will be bought cheaply and flicked over for a profit, so at least Labour should put a caveat on each title to prevent that.” “Only by addressing the rising land price problem at its roots can we wrench power from the overseas owned banks, which took $3.5 billion in profits last year out of the country. Other solutions are artificial and only work for a while. “Until we wake up and see that the property bubble in Auckland concentrates wealth with landowners and banks, we will not make much progress in bridging the wealth gap,” she said. “Land should be treated as quite a different asset class to buildings. We need a method to take land out of the market place,” she said. She said Labour’s weak Capital Gains Tax won’t touch the affordable housing problem, because it leaves the family home untouched and is set far too low anyway. For further comment phone Deirdre Kent, 06 364 7779 021 728 852 New Economics Party