Capital Gains Tax

[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

[drew]

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.

[Te Whetu]

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.

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.

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.

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.

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

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)?

[drew]

Te Whetu all you comments i mostly agree with. The point i was simply making is that a constant rate of inflation can be dealt with. If we know its going to be say 5% or 10% then all prices can simply be indexed to the expected inflation rate. It would be a little problematic but Brazil has coped with high inflation for a very long time now. Thats not to say inflation is not harmful but when it fluctuates year on year is when it really makes a mess of things.

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.

The houses and land cant leave the additional capital required to build new houses certainly can leave or not come at all.

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)?

I think testing empirical evidence against impacts of a CGT on property prices is a very difficult task and studies always need to be discounted due to potential bias.

I think you should base your opinion on basic economic reasoning on what impact a CGT is likely to have. Prices are only signals and are a function of supply and demand. Whenever a govt taxes something it is expected to reduce both demand and supply. Maybe check out duncan macgregors posts in the property section - he correctly points out how regulations, red tape and unreasonable costs being imposed on the building of houses that has caused the high prices in NZ.

The basic problem in the housing market is there are not enough houses. There is no shortage of land in NZ either. During the last 10 years or so prices kept rising in the housing market. We had the most fertile conditions to create an oversupply of houses with low interest rates, rising GDP, general public confidence etc. Instead the only oversupply occurred in central city apartments because that was the only area in which the market could quickly and cost effectively create new housing units in response to price signals.

So a CGT will reduce demand somewhat but people still need to live somewhere so the demand is a bit inelastic. The bigger concern is what a CGT will have on supply. Also it might make it more difficult to sell or rather people will be more reluctant to sell if they cannot pass on all of the cost to a buyer. Either way, supply will be restricted and costs will go up.

I remember over a year ago reading an article by John Whitehead about how house prices were a problem and he blamed everybody from greedy mums and dads, property hoarders, the banks etc. Everyone was to blame except of course the govt. If you want to fix the housing market we need more houses - in that case we should be encouraging the speculators and high prices because thats the only way more houses will be built. If you try to force the prices down then, as is typical in the wonderful world of economics and counter intuitive unexpected consequences, you will end up with even higher prices.

[rpcas]

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.

Well I don't "come up with it" as such . Much of what I am saying here is based on the accounting identities and true realities of our monetary system. Obviously I learn it from books and online papers. Here are a couple of useful links:

The balance sheet visualizer is accurate, lays everything out nicely and is fun to play around with: http://econviz.com/balance-sheet-visualizer.html
This book is aimed is easy and fun to read, as well as somewhat shocking. It avoids complications and technical terms, but is still a must read: http://moslereconomics.com/2009/12/1...nocent-frauds/

That will get you started!