Capital Gains Tax

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Originally Posted by Lizard

One issue with CGT as a form of revenue is that it tends to dry up just when the economy is at its weakest, thereby dealing a double blow to govt accounts and capacity to stimulate.

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Sorry, but that is totally incorrect.

The sovereign government that issues its own non convertible currency never has nor doesn't have dollars, and ALWAYS has the ability to spend/stimulate. Government spending is NOT funded by taxation or the issue of securities, and the extent to which the government collects taxes does not in any way limit the governments capacity to spend (despite politicians and commentators telling you otherwise). Think of it this way - how can the NZ government "run out" of dollars, when they create them out of thin air on a spreadsheet?

The only issues with a capital gains tax are there is normally plenty of loopholes, and other taxes are potentially more efficient.

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Originally Posted by rpcas

Sorry, but that is totally incorrect.

The sovereign government that issues its own non convertible currency never has nor doesn't have dollars, and ALWAYS has the ability to spend/stimulate. Government spending is NOT funded by taxation or the issue of securities, and the extent to which the government collects taxes does not in any way limit the governments capacity to spend (despite politicians and commentators telling you otherwise).

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That begs the question then why do we pay taxes. The govt does indeed issue securities to raise funds to spend.

The better way to look at it is any type of spending by the govt is taxation. When the govt borrows to spend its just a delayed form of taxation as the taxpayer not the govt has to repay the debt.

I think what you mean is the govt can print money. But I dont think the RBNZ would be too keen on doing that. The end game of that scenario is inflation which is also a form of taxation, the one you dont get to vote for.

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Originally Posted by drew

That begs the question then why do we pay taxes.

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No it doesn't. It raises the question, but it's a simple, if inaccurate, statement.

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Originally Posted by fungus pudding

No it doesn't. It raises the question, but it's a simple, if inaccurate, statement.

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Oh im sorry i didnt realise the internet spelling police were patrolling these forums.

In any case it is not an inaccurate statement. The statement by rpcas was a circular argument saying taxes do not matter the proof being it has no impact on govt spending. Which is a bunch of nonsense.

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Originally Posted by drew

Oh im sorry i didnt realise the internet spelling police were patrolling these forums.

In any case it is not an inaccurate statement. The statement by rpcas was a circular argument saying taxes do not matter the proof being it has no impact on govt spending. Which is a bunch of nonsense.

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It is rcpas' statement that is inaccurate, which is what I wrote, but there is nothing circular about it. And I'm not sure what any of this has to do with spelling.

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Originally Posted by drew

That begs the question then why do we pay taxes. The govt does indeed issue securities to raise funds to spend.

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Why does the government tax?

a) To create demand for New Zealand dollars. Have you ever asked yourself why you accept a paycheck in NZD's, and why shops accept NZD's in exchange for real goods and services? By placing a tax liability on the private sector that is payable in NZD's and nothing else, the private sector instantly demands NZD's. Essentially, a fiat currency is only as good as governments ability to enforce its use (taxes).

b) To regulate aggregate demand (spending power). If consumers have too many net financial assets, aggregate demand may exceed the real productive capacity of the economy, and thus drive up prices (inflation). Taxing drains net financial assets from the private sector (government spending does the reverse - adds net financial assets), and therefore reduces the private sectors spending power.

c) To discourage the use of a certain product/action etc (smoking for example)

Don't get me wrong, taxes are absolutely essential, but just not for the commonly thought reason.

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When the govt borrows to spend its just a delayed form of taxation as the taxpayer not the govt has to repay the debt.

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No they don't.

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I think what you mean is the govt can print money. But I dont think the RBNZ would be too keen on doing that. The end game of that scenario is inflation which is also a form of taxation, the one you dont get to vote for.

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A government deficit that is followed by the issue of securities is actually LESS inflationary than a deficit "funded" by "money printing". This is because interest is payable on the securities, which further increases the deficit. If the government choose not to issue Treasury securities (which would most likely be a better alternative to the current risk free welfare that bonds are), then government spending would be less inflationary.

What you don't realize is that government spending occurs the same way (operationally) regardless of whether it's "funded" by taxes, debt or "money printing".

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Originally Posted by fungus pudding

It is rcpas' statement that is inaccurate, which is what I wrote.

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No it is not.

Quite clearly you don't understand reserve accounting and monetary operations.

He is correct on his reasons for taxation.

The US Dollar as a Federally-controlled currency only came into being when the US Federal Government levied a nationwide income tax payable only in US Federal Reserve Dollars.

Before that it was commercial banks who issued their own bills of exchange, thus the money supply was not under governmental control.

I'll also put my 2 cents in. In general I agree with rpcas, though I do disagree with a couple of his conclusions (at least as I read them):

1) The government spends using NZD.

2) This can generally be funded in three ways, i) Issue Debt, ii) Print NZD, or iii) Tax.

3) However even when the government uses the "tax" method, it's the same as printing NZD then destroying other NZD through tax.

4) The broad impacts of each method.

5) Issuing debt: This is the same as destroying dollars but with a promise to print more later... reducing inflation/tax now but increasing inflation/tax later.

6) Printing NZD: This directly increases inflation. All dollars are worth less with inflation and this impacts everyone to the extent they are long/short cash. In theory it does not impact people with real assets; so someone long real assets and short cash benefits and vise versa. Funding government spending through inflation does not seem fair and does not promote the use of the domestic currency.

7) Taxing: Assuming we want a government who spends, and assuming we don't want this to be funded via inflation then we need tax. So it is about making the tax both fair and non-disruptive. Problem is everyone has a different view on fair and fair often does not equal non-disruptive.

8) I agree with Liz here, I really would like the FDR to be broadened across all investment assets. Maybe exclude the family home from the definition of investment assets, this would be done so as to help get the act through, (and because the government sees positive externalities from home ownership and therefore wants to encourage it).

9) Personally I would like the tax on the family home as well, but that's mainly because I like renting and don't particularly like the idea of subsidising land owning families. (Which I would need to do as the FDR tax would be accounted for in the rent I pay).

10) By borrowing to fund the current deficit spending, the government is effectively reducing the inflation its spending would otherwise be causing. Later on this will need to be funded through inflation or taxes.

11) I generally support the governments aim to get into surplus quickly, as the long term inflation/tax impacts of excessive borrowing are harmful to our economy and increase the potential for future inflation/taxes.

Cheers
Te Whetu

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Originally Posted by Te Whetu

5) Issuing debt: This is the same as destroying dollars but with a promise to print more later... reducing inflation/tax now but increasing inflation/tax later.

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Issuing debt doesn't destroy dollars, but merely exchanges their form. When you buy a Treasury security, you exchange cash for a security - both denominated in NZD's. This does not destroy your financial assets, but rather changes the length of maturity (where cash has an instant maturity, and Treasuries have longer maturities). It's best to think of a Treasury security like a normal term deposit at a bank.

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6) Printing NZD: This directly increases inflation. All dollars are worth less with inflation and this impacts everyone to the extent they are long/short cash. In theory it does not impact people with real assets; so someone long real assets and short cash benefits and vise versa. Funding government spending through inflation does not seem fair and does not promote the use of the domestic currency.

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Consider this: If I printed myself $10 billion NZD (assume they are identical to legitimate currency) and stored them in my basement, would I be causing inflationary pressure? No.

"Printing money" as such is only inflationary if people use/spend that money. If they choose to de-leverage or save (especially de-leverage), then there won't be inflationary pressure.

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10) By borrowing to fund the current deficit spending, the government is effectively reducing the inflation its spending would otherwise be causing. Later on this will need to be funded through inflation or taxes.

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That is incorrect sorry, and is a common mistake.

Government deficits that are offset by the issue of government securities are NO LESS inflationary than deficits not offset by anything - or "money printing" if thats what you like to call it. This is a very important point.

Consider this:

Scenario A - Issue of Securities
Private Sector Financial Balance Sheet Before: Deposits 200, Equity 200
- then securities are issued: Deposits 100, Securities 100, Equity 200
- then government deficit spends: Deposits 200, Securities 100, Equity 300

Net result: 100 increase in net financial assets

Scenario B - "Money Printing"
Private Sector Financial Balance Sheet Before: Deposits 200, Equity 200
- then government deficit spends by printing: Deposits 300, Equity 300

Net Result: 100 increase in net financial assets

Difference: In Scenario A, the private sector has 100 additional net financial assets in the form of Treasury securities. In Scenario B, the private sector has 100 additional net financial assets in the form of cash. What's the difference between cash and Treasury securities?

Answer: Treasury securities are the most liquid financial investment on the planet. The owners of Treasury securities are always savers (whether that be banks or pension funds etc), therefore it is not important whether they hold cash or Treasury's. They will be saving either way - not issuing securities and forcing them to hold cash will NOT suddenly make these savers go out and spend. Furthermore, if these savers did want to spend, they could trade their very liquid asset for cash quickly and easily. Therefore the difference between Treasury securities and cash (when considering inflation) is negligible.

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I generally support the governments aim to get into surplus quickly, as the long term inflation/tax impacts of excessive borrowing are harmful to our economy and increase the potential for future inflation/taxes.

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Thats a bad idea. Our economy is struggling with additional spending (deficits) that are larger than ever. Remove this spending, and the economy goes down the hole.

Ok, we should switch to M1, M2, and M3 if we want to discuss this properly. For those who have not done economics (ever/recently):

M1 – Cash, on demand deposits etc. (This is money you can go out tomorrow and spend).
M2 – All of M1 and also short term deposits etc. (Effectively cash and other amounts which can be converted to cash within a reasonable time frame).
M3 – All of M2 and also longer term deposits.

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Originally Posted by rpcas

Issuing debt doesn't destroy dollars, but merely exchanges their form. When you buy a Treasury security, you exchange cash for a security - both denominated in NZD's. This does not destroy your financial assets, but rather changes the length of maturity (where cash has an instant maturity, and Treasuries have longer maturities). It's best to think of a Treasury security like a normal term deposit at a bank.

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You can't look at a treasury security as a normal bank term deposit. A bank term deposit gets on-lent (subject to reserve requirements), so does not reduce the amount of cash available. However a treasury security reduces the cash (M1 and M2) in the economy, but needs to be repaid later.

Yes a treasury is a financial asset, but it is not M1 and is not generally used to purchase goods and services. Thus something which is in M3 and not in M2 will generally be accruing interest and not be used to purchase goods and services.

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Originally Posted by rpcas

Consider this: If I printed myself $10 billion NZD (assume they are identical to legitimate currency) and stored them in my basement, would I be causing inflationary pressure? No.

"Printing money" as such is only inflationary if people use/spend that money. If they choose to de-leverage or save (especially de-leverage), then there won't be inflationary pressure.

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I feel you are getting way off track and losing the point here. We are talking of the government printing money. This implies they are spending it, sure they could print and keep it at the reserve bank, but this is the same as not printing it at all as it would not enter M1. When I say "printing money" I'm obviously talking about the government printing money and spending it.

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Originally Posted by rpcas

That is incorrect sorry, and is a common mistake.

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You don't need to apologise. Anyway apologising on a forum as you are arguing the other side of a point just sounds condescending.

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Originally Posted by rpcas

Government deficits that are offset by the issue of government securities are NO LESS inflationary than deficits not offset by anything - or "money printing" if thats what you like to call it. This is a very important point.

Consider this:

Scenario A - Issue of Securities
Private Sector Financial Balance Sheet Before: Deposits 200, Equity 200
- then securities are issued: Deposits 100, Securities 100, Equity 200
- then government deficit spends: Deposits 200, Securities 100, Equity 300

Net result: 100 increase in net financial assets

Scenario B - "Money Printing"
Private Sector Financial Balance Sheet Before: Deposits 200, Equity 200
- then government deficit spends by printing: Deposits 300, Equity 300

Net Result: 100 increase in net financial assets

Difference: In Scenario A, the private sector has 100 additional net financial assets in the form of Treasury securities. In Scenario B, the private sector has 100 additional net financial assets in the form of cash. What's the difference between cash and Treasury securities?

Answer: Treasury securities are the most liquid financial investment on the planet. The owners of Treasury securities are always savers (whether that be banks or pension funds etc), therefore it is not important whether they hold cash or Treasury's. They will be saving either way - not issuing securities and forcing them to hold cash will NOT suddenly make these savers go out and spend. Furthermore, if these savers did want to spend, they could trade their very liquid asset for cash quickly and easily. Therefore the difference between Treasury securities and cash (when considering inflation) is negligible.

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A agree; in your two examples financial assets do increase by 300. However in one M1/M2 increase by 200 and the other by 300. The long term impact of both is an increase in cash when the debt is repaid but in the short term this is not the case.

Those that buy the treasury securities don't then use them to trade for goods and services. When the government spends by borrowing they still pay in cash, those that get the deposits are the parties who wish to save.

Lets take your Scenario A:

Government sells 100 securities to China, China needs to purchase those treasuries with NZD. To do this China first purchases NZD and then uses these to buy the NZ government securities. The NZD is removed from the economy and both M1 and M2 are reduced.

Note that China doesn't then use those treasuries as pseudo cash to buy stuff. Also note if later on they do need cash then they can sell the securities but this takes the cash out from elsewhere in the economy.

The same would be true if it was an NZ investment fund instead of China purchasing the government securities. Except in this case it would not need to go through the intervening step of purchasing NZD as it would already have local currency.

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Originally Posted by rpcas

Thats a bad idea. Our economy is struggling with additional spending (deficits) that are larger than ever. Remove this spending, and the economy goes down the hole.

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Remove this spending and you lower the crowding out of private investment. Removing spending means less inflation and lower interest rates. This in turn means people borrow more to invest elsewhere. It also means households have lower interest costs which mean they can return to spending sooner.

Now I’m no Act supporter, I’m not saying we should chop spending and taxes too far or quickly. But what our current government is doing seems both sensible and pragmatic. A low inflation and interest environment is easily the most encouraging of business development and expansion. If we want to grow the economy then this seems like the best way to go about it.

The only thing we need to be careful of is that property prices don’t start ramping up again, which is why I’m quite happy for a tax on property. Now whether this is in the form of FDR or CGT is a fair argument, and it is an argument which needs to be had.

Thanks for reading.
Te Whetu

Hmm

So sadly a property tax is not something I see our current National government doing of its own volition; these sorts of taxes are generally implemented by left leaning parties. Labour didn't want to implement this sort of tax in its three terms, as many of its middle voters are those that have gone out and heavily invested in property. That said I would not be surprised to see this sort of tax implemented in Labours next term, so likely 4-7 years away.

That's not to say this sort of tax couldn't be implemented by a National government, but it would require pressure from all it's supporting parties. This basically means both the Maori party and Act would need to team-up. An unlikely combination but this sort of tax does seem like the type which each could support, though the Maori party would likely ask that there is a discount for Maori land written into the legislation due to its reduced marketability, (it is very hard to sell as only certain parties can purchase it).

It would also increase the chances of National implementing some sort of tax like this if Labour campaigns on a CGT/FDR tax, which is certainly not out of the realms of possibility.

Cheers
Te Whetu

rpcas im curious where you came up with this stuff? I've heard a lot of economic theories in my time but nothing quite like yours.

Te Whetu is pretty much bang on, treasuries reduce money in circulation being M1 so total money supply will not increase (assuming the securities are not being purchased by govt) and velocity of money remains the same.

Going back to your earlier reply to me about why govt taxes apparently to "create demand for NZD" really does not make any sense. The govt exercises a monopoly over currency in NZ therefore there is no competition. If we had a free banking system where a bank could issue its own currency then govts monopoly over money would be taken away and so its ability to execute monetary policy in the economy. In any case, for what purpose would a govt want to create demand for the currency it exercises a monopoly over?

You seem to be engaging in a fallacy of only looking at currency and not the fact that the currency needs to be exchanged for resources.

As for "regulating aggregate demand" that just sounds like Keynesian nonsense (no offense to Keynes of course :) ). Go back to your Milton Friedman son, "inflation is always and everywhere a monetary phenomenon".

Te Whetu a couple of comments - inflation has very negative impacts on an economy not just poor people but the business environment as it creates a lot of uncertainty. Its not the actual rate of inflation that causes this problem but the rate of change in inflation. If inflation was a constant 10% p/a and we all knew and expected that we could deal with it in wages, contracts, capital purchases etc. Its when it varies that it causes so many problems and people are unprepared.

Also not sure why you think a property tax is a good thing. In my opinion income is the most appropriate thing to tax. And capital as compared to income and consumption is the most sensitive to taxes. Capital can flee an economy if it doesnt like a tax unlike labour and consumption. Obviously land is not the kind of capital that can flee an economy and because of this there is a strong economic argument that taxing land is efficient but there are very strong counter arguments against this when you consider the role of the govt becomes landlord and master of your property and free to levy taxes as they see fit.

Anyway in my opinion property taxes are more likely to drive property prices up not down.

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Originally Posted by drew

Te Whetu a couple of comments - inflation has very negative impacts on an economy not just poor people but the business environment as it creates a lot of uncertainty. Its not the actual rate of inflation that causes this problem but the rate of change in inflation. If inflation was a constant 10% p/a and we all knew and expected that we could deal with it in wages, contracts, capital purchases etc. Its when it varies that it causes so many problems and people are unprepared.

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That is partly true, a steady 10% is better than wild fluctuations between 2% and 7%. However I can name a several things that high inflation do impact which is not desired, here are a couple:

i) Very high inflation means depreciation becomes worthless for long life projects (significantly reduced tax shield), this discourages investments in longer term projects in favour of shorter term projects even when the longer term project might otherwise be a better use of capital.

ii) High inflation is a nightmare to model out more than a few years. This also disadvantages long term business projects and a high inflation country is disadvantaged vs. one with low inflation due to the degree of confidence that can be provided with scenarios provided to decision makers. High inflation also harms the validity accounting records makng things like ROE or ROA fairly meaningless.

iii) High inflation means that the tax on bank deposits would be greater than real interest. Also in the cases where capital gains are taxed there would either be massive over-taxing OR additional complexity added to the tax system to allow for inflation.

iv) High inflation means where a party pays another party annually (e.g. some taxes are only paid annually based on prior year income). The government would effectively lose out on larger amounts which are from one year ago.

v) High inflation disproportionally hurts the poor, as they are less able to structure their affairs to account for the fact that inflation is high. If they only got one pay rise a year then they will be fine at the start but by half way through the year things are all 5% more expensive and the're another six months away from a pay rise. Giving more frequent pay rises would become a necessity which puts additional strain on businesses. Alternatively you could agree to 2.4% pay rises each quarter... but even that adds more complexity.

vi) Prices need to be updated a lot more. That's fine for larger businesses which have automated systems and possibly also smaller businesses where it's not too large a task. But in some businesses re-pricing is not something which is a cheap exercise and can cause disruption to customers. The tighter the margins in the industry the more often prices need to be changed.

Mainly just wrote these as they came to mind...

EDIT: Basically a lot of these could be adjusted and accounted for, but that in itself would take a lot of resources. So I'd argue high inflation increases the dead-weight loss in a countries economy, even when inflation is correctly forecast to be high.

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Originally Posted by drew

Also not sure why you think a property tax is a good thing. In my opinion income is the most appropriate thing to tax. And capital as compared to income and consumption is the most sensitive to taxes. Capital can flee an economy if it doesnt like a tax unlike labour and consumption. Obviously land is not the kind of capital that can flee an economy and because of this there is a strong economic argument that taxing land is efficient but there are very strong counter arguments against this when you consider the role of the govt becomes landlord and master of your property and free to levy taxes as they see fit.

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What form the property tax takes has different advantages/disadvantages, a CGT is less likely to drive off capital. But it's also harder to implement (and would need to be higher) than a FDR tax. I'm actually rather unconcerned which it is but we should really have I just feel we need something.

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Originally Posted by drew

Anyway in my opinion property taxes are more likely to drive property prices up not down.

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I'd argue this, but not now... and can certainly see some arguments which could be made on your side. What does history show us? I'm sure property taxes have been introduced and the impact recorded in other places in the world. Do you also say that a CGT would increase prices (I'm assuming not)?

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Originally Posted by Te Whetu

I feel you are getting way off track and losing the point here. We are talking of the government printing money. This implies they are spending it, sure they could print and keep it at the reserve bank, but this is the same as not printing it at all as it would not enter M1. When I say "printing money" I'm obviously talking about the government printing money and spending it.

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Yes, but whether or not that "money printing" results in inflation depends on whether the private sector goes on to spend. If for example the government "prints money" and gives it to beneficiaries who then go on to save it, then inflation won't be a problem.

This is the situation NZ is in now. The private sector is de-leveraging, so big government deficits are not nearly as inflationary as they otherwise would be. Remember inflation of the sort we are talking about is caused by excessive spending.

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A agree; in your two examples financial assets do increase by 300. However in one M1/M2 increase by 200 and the other by 300. The long term impact of both is an increase in cash when the debt is repaid but in the short term this is not the case.

Those that buy the treasury securities don't then use them to trade for goods and services. When the government spends by borrowing they still pay in cash, those that get the deposits are the parties who wish to save.

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Yes, agreed. However the key point here is that the people that buy the Treasury securities (banks, insurance companies, funds etc) wouldn't be spending anyway. It is ridiculous to say that "Those that buy the treasury securities don't then use them to trade for goods and services" because they wouldn't anyway. Holding Treasuries instead of cash in no way alters these firms/savers propensity to spend, and therefore won't alter inflationary pressure.

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Government sells 100 securities to China, China needs to purchase those treasuries with NZD. To do this China first purchases NZD and then uses these to buy the NZ government securities. The NZD is removed from the economy and both M1 and M2 are reduced.

Note that China doesn't then use those treasuries as pseudo cash to buy stuff. Also note if later on they do need cash then they can sell the securities but this takes the cash out from elsewhere in the economy.

The same would be true if it was an NZ investment fund instead of China purchasing the government securities. Except in this case it would not need to go through the intervening step of purchasing NZD as it would already have local currency.

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Agreed, but would China Central Bank be spending their dollars if they didn't hold securities? No, they would hold them in their reserve account at the RBNZ. Whether they hold the securities or not (if Treasuries weren't issued), and is not relevant to inflation, despite the differences in M1..

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Remove this spending and you lower the crowding out of private investment. Removing spending means less inflation and lower interest rates. This in turn means people borrow more to invest elsewhere. It also means households have lower interest costs which mean they can return to spending sooner.

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Government spending only crowds out private investment when the economy is almost or fully employing their resources (in which case more investment will lead to inflation). This is not currently the case in New Zealand, with 6% (?) unemployment and untold underemployment.

On the other side of the spectrum, if the government doesn't net spend enough, then businesses sales won't increase fast enough, and the firms won't bother investing. Firms invest when they face increased sales/believe future prospects are better. If the economy isn't growing, then these firms won't invest.

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The only thing we need to be careful of is that property prices don’t start ramping up again, which is why I’m quite happy for a tax on property. Now whether this is in the form of FDR or CGT is a fair argument, and it is an argument which needs to be had.

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Agreed.

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Thanks for reading.
Te Whetu

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Thanks for the discussion!