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Tuesday, November 08, 2005

The Case for Capital Gains Tax

I never thought I'd hear myself say it but I think I would support a capital gains tax on property sales.

Having witnessed the futile efforts of the Reserve Bank under two governors to control inflation by way of interest manipulation and governorial tongue lashing I have concluded their remedies simply don't work. The fixed rate interest phenomonon has largely seen to that. Also having witnessed over thirty five years a roughly fifteen year boom and bust cycle of property prices, I suggest that if the Gummint wants to curb the explosion in residential property prices it will need to remove the glittering prize of tax free capital gains which is the prime motivator.

There is no doubt in my mind it is the prime motivator for the remarkable and ludicrous increase in dairy farm prices over the last three years. Dairy farms are being purchased at prices which in many cases equate with three times their true productive value. The reason for this is that accountants are advising farmers with large tax bills (and in the last three years there are thousands of these) to borrow heavily and buy property with view to selling in five to ten years' time. The high interest rates are of little concern because they are offset against income for tax deductions and are far outstripped by the perceived tax free return at the time of eventual sale.

We seem to have a half arsed capital gains tax of sorts now where the IRD looks at one's alleged intent at the time of purchase. Of course these farm purchases are set up carefully to indicate a long term productive investment but lo and behold, there is nothing to prevent the best of apparent intentions becoming the subject of a change in strategic plans.

Even serious talk of a capital gains tax will have far more effect than all Bollard's baloney. Come on Labour, let's see if you've got what it takes. After all, you are going to need some new taxes to pay for your student loan interest and Kyoto bills.

Posted by Adolf Fiinkensein | 11/08/2005 07:43:00 AM

19 Comments:

Blogger Berend de Boer said...

They have it in The Netherlands, and it doesn't help.

You cannot improve the market Adolf, but you can distort it.

It's all about supply and demand. Councils limit supply of land, which increases the value of existing houses. As soon as councils stop limited land, house prices will drop considerably (to the outcry of many, including me).

11/08/2005 08:35:00 AM  
Blogger Adolf Fiinkensein said...

I disagree Berend. We are a small country with limited supplies of productive land. Laisez faire would see much of the best soils used to grow houses. The damage done to economic growth and jobs by a precipitous and blinkered RB has been and will be immense. Australia has a capital gains tax and has had for some decades now. Witness their comparable interest rates and prosperity. No it's not all to do with mineral wealth.

11/08/2005 08:45:00 AM  
Blogger Antarctic Lemur said...

Why not reduce taxes on other investment types instead? E.g. Get rid of RWT.

And introducing a property tax now would infuriate a large segment of the population who were expecting a tax reduction.

11/08/2005 09:19:00 AM  
Blogger antihippy said...

Hasn't worked n London or Sydney either

11/08/2005 09:19:00 AM  
Blogger Adolf Fiinkensein said...

AL I agree but as well as rather than instead. Antihippy, what would the prices have been like without it?

11/08/2005 09:29:00 AM  
Blogger Adolf Fiinkensein said...

Antihappy, the Aussie capital gains tax does not apply to one's primary residence.

11/08/2005 09:35:00 AM  
Blogger antihippy said...

Unsure...I just can't imagine they could have got much worse basically...

11/08/2005 09:39:00 AM  
Blogger Antarctic Lemur said...

Adolf that's a very .... leftie argument.

All of this property trading is still voluntary. If there's a 'market correction' then so what? If you don't want to play in a dangerous market, then don't. Seems fairly simple to me. And during the correction the money doesn't disappear - it's moved into other investment areas, surely.

Unless of course large numbers of people might default on their mortgages. Is that what you're suggesting?

11/08/2005 09:40:00 AM  
Blogger Adolf Fiinkensein said...

That's exactly what did happen in 90/91. What I am suggesting is that it seems silly to destry jobs and growth by trying to use interest rate increaes to control inflation when two of the major drivers of inflation are not affected by interest rates. Oil prices and property prices. Capital gains tax sure as hell will dampen the speculative component of current property prices and I don't see that as a particularly 'leftie' thing. If it is, well then at least the left have got one thing right. Woops, I mean correct.

11/08/2005 09:52:00 AM  
Blogger Antarctic Lemur said...

The leftie thing was referring to the line : "what would the prices have been like without it?"

Surely there are two problems: (1) The Government using interest rates as a very brutal way of manipulating the economy, and (2) the inclusion of external price increases (e.g. oil) into the calculation of interest rates.

11/08/2005 09:57:00 AM  
Blogger Adolf Fiinkensein said...

Yes that's what I'm trying to say. There is the additional problem of perceived capital gains being a more attractive target for savings than actual savings which are invested in production and growth. Paying three times more for a farm than the price five years ago does nothing for the economy. THe money that is going in here is not borrowed. It is wealth seeking the best return. That's the problem. Old timers call it speculation and the passage of time has not transformed speculation into a virtue..

11/08/2005 10:05:00 AM  
Blogger MarcusD said...

Adolf, the issue about interest rates is simple. The fact the Reserve Bank keeps hiking the OCR has no bearing on the New Zealand mortgage rates as the banks are able to source low cost money from overseas sources in Asia and Europe. The New Zealand cost of borrowing will only go up if the cost of these overseas sources goes up as well. The Reserve Bank effectively has no control of mortgage rates in NZ anymore.

Don't you find it interesting Kiwi Bank is leading the charge of lower mortgage rates as well? Irony perhaps?

Maybe a capital gains tax with a private home exemption could be the way to go here, but I suspect it would be political suicide for any party to introduce it. After all, if a Kiwi has any savings, where are they going to put it? Sharemarket? Funds? Term Deposits? Unlikely as the returns aren't good enough.

11/08/2005 11:11:00 AM  
Blogger Adolf Fiinkensein said...

MArcus D, you've just made my case for me. The reason the returns are not good enough is that they are taxed. Hosue price increases are not taxed. Of course it's political suicide if it is not mitigated. Hoever the status quo is fiscal suicide. Would you prefer your throat cut or your brains shot out?

11/08/2005 11:29:00 AM  
Blogger Adolf Fiinkensein said...

Marcus D your arguement falls flat on it's arse when you consider lending rates in Australia vis a vis NZ. Of course the OCR has an effect on mrotgage rates, via 90 day bills.

11/08/2005 11:31:00 AM  
Blogger MarcusD said...

Adolf - I am not disagreeing with your stance at all - the point about other forms of savings being taxed and property not does ensure New Zealanders put their savings into property. Ironically one way Cullen could convince New Zealanders to save is to get rid or RWT on interest etc etc. But that is never going to happen.

Interest rates and OCR - also agree the OCR rises do affect floating mortgage rates. However, fixed rates, especially 2-3 year rates, are staying basically the same - this is a direct result of lower cost cash the NZ banks are obtaining from overseas. And there is not much the Reserve ank can do about it.

Oh, brains shot out please!

11/08/2005 12:07:00 PM  
Blogger Colonel Tux said...

Finally someone agrees with me!

The problem NZ has more than anything else is we invest all our savings in houses (builders and timber merchants). Houses do not produce any exports, any food, any electricity, any product, anything. They are the most useless unproductive form a savings ever invented. I would go so far as to say they are negative savings. To pay for our houses we send most of our interest payments overseas.

All I know is that NZ needs to save more and invest in productive export industries.

11/08/2005 02:34:00 PM  
Blogger Antarctic Lemur said...

I think such a policy would make it harder for poorer and middle class people to get their feet in the housing market, and I also think a populist government would simply introduce some kind of taxpayer funded "house starting" scheme which would make a farce of the reason for bringing in capital gains tax.

Here's something relevant:
http://www.institutional-economics.com/index.php/section/schadenfreude_sex_and_house_prices/

11/08/2005 06:53:00 PM  
Blogger Gooner said...

Scrap the RMA. Flood the market with houses as a result; and make supply exceed demand. I agree with Berend first's comment.

11/08/2005 10:47:00 PM  
Blogger Adolf Fiinkensein said...

The real distortion is in the tax system which taxes profits on savings but gives a free ride on house sale profits.

11/08/2005 11:00:00 PM  

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