Capital Gains Tax

[lou]

The problem with CGT on a realised basis is there is no tax generation for a number of years.

People end up holding on to assets far longer than normal would just to avoid tax. This creates an inefficient allocation of capital and a deadweight loss to the whole economy.

If you want to get radical on a tax reformation. Lets get rid of all GST, income, and company tax. Put a tax on all land. Land owners pay tax directly and everybody else pays tax indirectly through higher prices.

It might sound extreme but land taxes are the only tax that do not produce a dead weight loss. Just some food for thought.

[CJ]

It might sound extreme but land taxes are the only tax that do not produce a dead weight loss. Just some food for thought.

How would it be applied? Cant be by area or farms wouldn't be viable so it must be by 'ratable value'. Given that is somewhat arbitary it doesn't seem fair. Plus it creates cashflow issues to those that own land with no income.

Why not go to a full consumption tax (ie. GST). You need to buy what you need to buy.

[lou]

How would it be applied? Cant be by area or farms wouldn't be viable so it must be by 'ratable value'.

Hypothetically it would be applied based on "ratable value" and zoning. Basically your rates bill on steroids.

Given that is somewhat arbitary it doesn't seem fair.

Taxes aren't fair at the moment. We have a progressive tax system where higher income earns pay proportionately more. A land tax would fair in the sense that it is a proportionate tax, however would be less equitable to lower income earners.

The biggest hurdle or moving to a tax system like this is it will change the land values around the country meaning thousands of people will be either adversely or positively affected for no reason and that would not be fair.

Plus it creates cashflow issues to those that own land with no income.

If they own land that produces no income they are either saving on expenditure (ie living in there own home). Saving on expenditure can be thought of income and should be captured by tax net. Making this new system even more efficient.
Option two they own land with no income. They are not making efficient use of the land. It should be sold so that the most efficient use of the land can be found.

Why not go to a full consumption tax (ie. GST). You need to buy what you need to buy.

I don't have anything against GST. I excluded in my first post as I thought idea of one tax was a more utopian view. I would mean we would not need accountants for compliance work.

[rpcas]

Once you go right back to the basics and think about the purpose of a tax, you start to get a better idea of which taxes are well directed. The purpose of a tax, despite common belief, is NOT to fund government spending, but rather to create demand for the currency and to regulate aggregate demand (restrict inflation). Quite clearly, the government actually believes they must tax or borrow in order to fund spending (this is not the case for a sovereign government that issues its own non convertible currency, with a floating exchange rate), therefore they enact tax policy with the idea that the more tax revenue, the better. This is all misguided.

Since the purpose of the tax is not to raise revenue, how taxes are directed should depend mostly on the side effects of the tax. I believe income taxes discourage additional work, unfairly take away from the people that produce NZ's real output, and do not meet the purpose of a tax (like land taxes and GST do).

EDIT: Oh, and another problem with income taxes.... there are loopholes, and they require a lot of work to keep track of. The sad part of all this is that the income taxes hurt the productive capacity of NZ. How much time is spent keeping track of income taxes that could be spent elsewhere? How many bright students go into tax accounting/law, an industry that adds absolutely nothing to the real standard of living? I have read of one former hedge fund manager and fiscal/monetary operations expert that estimates this loss of productivity from income taxes could be between 10-15% of GDP.

Taxes aren't fair at the moment. We have a progressive tax system where higher income earns pay proportionately more. A land tax would fair in the sense that it is a proportionate tax, however would be less equitable to lower income earners.

I think it would be more equitable for lower income earners. The current system, whereby ordinary workers automatically get dollars deducted from their wages while property speculators and those that can afford tax lawyers/accountants get away free (well, relatively) is not fair.

A land tax would be perfect. Like you said, it could be based on value, and I think it could be perhaps slightly progressive. For example, 4% per annum for the first 500K of the houses value, 5% for 500-1M, 6% for 1M+.

The biggest hurdle or moving to a tax system like this is it will change the land values around the country meaning thousands of people will be either adversely or positively affected for no reason and that would not be fair.

Agreed, though it could be phased in over time (and income taxes phased out) to reduce this effect.

Option two they own land with no income. They are not making efficient use of the land. It should be sold so that the most efficient use of the land can be found.

Agreed.

[CJ]

Once you go right back to the basics and think about the purpose of a tax, you start to get a better idea of which taxes are well directed. The purpose of a tax, despite common belief, is NOT to fund government spending, but rather to create demand for the currency and to regulate aggregate demand (restrict inflation). Quite clearly, the government actually believes they must tax or borrow in order to fund spending (this is not the case for a sovereign government that issues its own non convertible currency, with a floating exchange rate), therefore they enact tax policy with the idea that the more tax revenue, the better. This is all misguided.

interesting. Can I just clarify. Taxes aren't there to fund government spending because the government could just print the money. Therefore taxes are for another purpose????

[rpcas]

interesting. Can I just clarify. Taxes aren't there to fund government spending because the government could just print the money. Therefore taxes are for another purpose????

Yes, though I prefer not to use the term "money printing", as there is plenty of room for confusion because of its many different informal meanings.

Essentially, every time the government spends they are "money printing", and every time they tax, they are "destroying money". If the government spends $100 today on welfare benefits, all that will happen is the Treasury's account at the RBNZ will be debited by $100, and the recipients commercial bank's reserve account at the RNBZ will be credited $100 (and so will the recipients account at the commercial bank). If the government then decided to tax the beneficiary $100, the exact reverse process would occur.

Looking at this process, it becomes quite obvious that there is no operational limit to the government's (Treasury + RBNZ) ability to credit and debit numbers on a computer - meaning that there is no operational constraint on government spending (There is perhaps a political constraint on government spending though. I am fairly sure that the USA has a law prohibiting the Treasury's account at the Fed from going into overdraft [a stupid law made by misguided politicians]. I do not know for sure if there is a similar law in NZ).It is also important to note that government spending logically must come BEFORE taxes and the issue of securities (contrary to popular belief) - if the government didn't spend before it required taxes to be paid, then citizens could not obtain the dollars necessary to pay their taxes.

Moving on, the purpose of taxes is to create demand for the currency (the obligation to pay the government NZ dollars creates demand for those dollars, essentially enforcing their use), and to regulate aggregate demand (to ensure the private sectors "spending power" does not outstrip the productive capacity of the economy) in order to maintain price stability. Don't get me wrong - taxes are absolutely vital, just not for the commonly thought reason.

Note - I think it is worth mentioning here that the USA, UK, Japan, Australia, and NZ governments are all currency issuers, whereas Germany, France, Greece, Portugal, California, Christchurch City Council etc are all currency users. The differences between currency users and issuers is HUGE, and any comparison of the sort that John Key regularly makes is totally inapplicable.