Introduction
As Phil has said, debt is unacceptably high and must come down. It is basic common sense to refuse assets sales as the short term answer to do this.
So how then, do we proceed?
A viable economic alternative must deliver more than debt reduction; it must deliver across three key areas: reducing debt, building equity and creating growth.
There has been a great deal of speculation about capital gains tax as a way forward. But capital gains tax is only part of what needs to be on the table. What we really need is a different system, a fairer system that gets the incentives right.
Fair Tax Plan – Elements
So what does our Fair Tax Plan look like?
The first shift required is to put the top tax rate for the top 2% of people earning large sums of money, above a threshold of $150,000 back up to 39%.
In the current economic environment, and after the Canterbury earthquakes, New Zealand simply cannot afford all of the windfall gains that top income earners have received in recent years. We need to ask the highest income earners to pay a little more income tax to help out.
The $150,000 threshold, which will be indexed, means this will only affect the highest income earners. This rate is lower than in Australia.
The revenue raised from this change effectively enables GST to be taken off fresh fruit and vegetables – improving affordability and quality of life for all New Zealanders.
The second change in the Fair Tax Plan is to make the first $5000 of income every person earns, tax-free. This is a simple change that creates a fairer balance in our tax system, and again, improves life’s affordability.
Fairness means that when times are tough, everyone gets a fair go and everyone pays their fair share. At the moment some New Zealanders are not paying their fair share and are leaving it to others to shoulder the burden.
The current Government’s own Tax Working Group found that of the top 100 wealthiest New Zealanders, only half are even paying the top tax rate. That is simply wrong.
There are a range of moves required to close down the tax loopholes that make this tax avoidance possible.
To address this, the incoming Labour government will ring fence property tax losses so that they can be written off against future property income, but not against other earnings.
We will ask a high level Expert Panel to address other aspects of tax avoidance including a review the taxation of trusts, building on the work of the Law Commission.
And we have previously announced the introduction of R and D tax credits, paid for by bringing agriculture two years earlier into the Emissions Trading Scheme.
So let’s note the impact of fairer income tax changes on the tax system.
The top rate rises for the top 2% of income earners, the bottom rate falls to zero, and nearly everyone, including beneficiaries and superannuitants, benefits from that rebalancing.
And there is major gap that really must change in the area of capital gains.
Capital Gains Tax – Rationale
At present, the major tax burden falls on individuals through wages and salaries. But while wages and salaries are taxed, capital gains are not taxed at all, whether on the sale of shares, or of a company or the sale of investment properties. Huge sums of money can and have been made, but the fortunate recipient pays no tax.
A well know example is Trade Me. It was sold for $700 million but no tax was paid on the capital gain on the sale. Yet every person working for Trade Me pays tax on every dollar they earn. To his credit, Trade Me Founder Sam Morgan publicly said he thought that that tax system was wrong.
The Tax Working Group noted that there is an estimated $200 billion invested in property in this country – but property investors holding these properties reported net rental losses $500 million - that’s right, property investors declared a net loss on $200 billion of investments!
This distorts incentives so that investment does not flow where it does the most good – to productive businesses that innovate, employ and export.
A fundamental problem with our tax system is therefore that wages are taxed and capital is not.
Taxation of capital has long been on the table. The words “capital gains tax” are used as if they were a radical and unpalatable economic raid on individuals. Well – let’s address this myth right now.
In nearly every other country in the developed world these forms of income contribute to their respective economies through a capital gains tax.
The only 2 OECD countries that do not have capital gains other than us are Switzerland and Turkey. Switzerland has long been known as a tax haven. Do we want to be the other Turkey?
Capital gains tax is not a maverick political proposition. The IMF, the OECD, Treasury and The Reserve Bank have said that New Zealand needs to implement one. Capital gains tax is thoroughly main stream. Simply put, it is just fair.
Capital Gains Tax – Design
There are a range of forms to capital gains tax. The good news about being one of the last countries to adopt one is that we are in a unique position to learn from the rest of the world and work towards a best practice form for our country. Let me take you through how it will work:
The family home or primary residence will never be taxed.
CGT will be set at a low 15% flat rate – that means everyone keeps 85% of their capital gains.
It will only cover future gains from the date of the legislation being implemented. It will not be retrospective.
CGT will generally be paid on what you actually make when those assets are sold. It will not apply to unrealised gains.
It will be broad based and fair to all. It will cover (non-primary residence) property, shares, and business investments including farms.
It will not be intrusive. It will not apply to personal property or collectibles.
It will not be an inheritance tax and will not be payable on death.
The Kiwi CGT will be a two way street – you will be able to carry forward losses on assets and count those against future capital gains.
It will be exempt on all real estate, land and buildings within the Canterbury CERA area for at least five years. We will then review the situation to make sure Canterbury is not unfairly affected. Our Christchurch MPs have been very clear that the people of Canterbury have enough on their plate right now.
The capital gains tax will recognise the special status of long-held, owner operated small businesses. A plumber or farmer over 55 years in age who had held their personal business for 15 years or more would get a tax-free exemption for their first $250,000 of capital gains.
CGT Expert Panel
The Kiwi CGT will be carefully designed and well advised through a high-level Expert Panel to guide its design and implementation, which will then go through a fully consultative Generic Tax Policy Process.
Once implemented, because we have deliberately chosen a broad design that is simple and straight forward, there will be minimal bureaucracy. There will be a choice of valuation methods to minimise compliance costs.
Under this top line overview there are of course lots of details to be worked through. The important thing is that we will have the best minds from business, tax practice, law and economics working through the Expert Panel to ensure that this tax system is fair, efficient and well implemented in practice.
Fair Tax Plan - Economic Impacts
The economic impacts of this tax system are very important:
Our debt gets paid off without selling our assets. It enables us to reduce net debt to zero as fast as National’s Budget projections, and to build assets over the medium term.
New Zealand keeps the long term value of our assets and dividends, rather than seeing them captured by foreign corporations and ticket-clippers. We are planning for the long term, not selling assets in a short term game.
We can pay for fair tax cuts that mean the first $5000 everyone earns is tax free, and there is zero GST on fruit and vegetables.
The revenue generated would start modestly but build to a level that would sustain our future needs and enable us to invest in our communities – in R&D, in Education, in Health, in Jobs and in our children’s futures.
Summary
So, rather than a one-off, short term fix that opens up our best assets to foreign ownership, Labour’s plan is a long term, balanced approach that will help us build our economy, not someone else’s.
I am going to hand over now to my colleague David Parker, who will take you through the economic impacts in more detail and set out why this tax system is essential to future jobs, to growth and to owning our future.
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