OPM: Other People’s Money
OPM
OPM: Left wing: Tax the rich.
OPM: The taxes the left wing will implement are others people’s money, not theirs. They won’t be affected.
“Rules put in place by successive governments privilege wealth hoarding. Not only are these rules unfair, they’re counterproductive and starve our health, education, transport and social services. They privatise profit and socialise cost,”. Chlöe Swarbrick, Green MP
In this press release, Green Party revenue spokesperson, M.P. Chlöe Swarbrick, calls it wealth hoarding, calling for a wealth tax and a capital gains tax. The problem with this is both an oversimplification of why some people are rich, and the sad fact that taxes have increasingly been consumed by a central bureaucracy that rewards itself and a cadre of regulars who feed off the tax dollars, while the real problems facing the country get worse.
Agreed: Wealth-hoarding is not good… but
“Wealth-hoarding” is a cheap shot. It gives the image a greedy old dragon sitting on a pile of gold, silver and jewels, like Smaug in the Lonely Mountain. In reality, rich people make their money work. They take risks, use their wealth as collateral to build businesses. Or in later generations, they invest in the stock market, providing cash to the industries that provide jobs. Yes, some do hoard – like the land bankers or those who brought in cash from an overseas country where the money was derived under questionable circumstances – where they buy a rental building, evict the tenants and sit on it for capital preservation beyond the reach of the overseas tax collectors. But it would be a mistake to lump all the rich as wealth hoarders.
A fairer Treasury report would not just ask about the income the family derived, but offset that by how many people have jobs created by those said to be rich. How many employees, contractors and suppliers earn a living and pay tax from income earned by the businesses the rich start, operate and grow? Or to put it in the negative, if the targeted rich person were to pullup stakes, cease being a NZ tax resident, taking their money overseas, what would be the fiscal hole they would leave? That number would be far greater than the tax collected on their assets.
Instead of a sledge hammer to do brain surgery, use a scalpel, and instead of a vote of the Green Party members, consult with people who understand both how money works, and how the rich are an essential part of the NZ social ecosystem.
Change the system to reward capital investment in NZ that grows the common wealth, and penalise capital hoarding or capital flight that impoverishes the country.
Create Common Wealth
Redistribution of money is not the same thing as redistributing wealth. Every country that has tried the former eventually finds its economy collapses. Perhaps the best example is Zimbabwe.
Land reform begun in Zimbabwe in 2000 was supposed to redistribute land from predominantly white-owned commercial farms to much poorer Black farmers who toiled on communal lands. However, commercial farming requires expertise, and when the titles were revoked and the commercial farms made communal, the farms deteriorated. As this chart shows, over a quarter million jobs were lost when the commercial farms were taken.
Without knowledge and expertise the assets, be they money or tangible property will soon lose its value.
Some people are entrepreneurial, they are good at making money. Others are not, and they prefer to work at jobs for pay. As long as the national pay-scale ensures they can afford a mortgage or rent, buy food and clothing for themselves and their family, pay for the basics of transportation, utilities and put aside some savings, the country works.
At present, NZ is suffering from a severe polarisation with an emerging struggling class, primarily precipitated by the cost of housing. At its core, successive governments encouraged population growth, primarily through immigration, without commensurate rezoning of greenfields for new housing. Like a game of musical chairs, there are not enough seats for people, but unlike the game, where the loser is “out”, in housing, the prices rise and the losers end up as hidden homeless, living in cars, tents, garages and overcrowded conditions.
The rich should be encouraged to solve this problem. It is solved in part by eliminating red tape in the housing industry. But it’s not just housing. Also give them incentives to invest in domestic jobs, so those newly-housed people become tax payers, not beneficiaries.
Fair Capital Gains Tax
Unfair Capital Gains on Unrealised Value: Value and cash are very different. A business or land owner can borrow more money when value rises, but they can only earn money when they sell the asset. Taxing value (unearned income) in a global economy produces unanticipated negative side effects – the message to those taxed is they are unappreciated. Some will leave, selling their local assets before the capital gains tax goes into effect; moving to parts of the world where they are appreciated. Potential rich migrants will give NZ a pass. It’s a big world, where clean and green is a slogan, but not that big a draw.
Unfair Capital Gains at 39%: For many centuries, money had a tangible value that remained fixed, mostly to gold. Since nations, including NZ have gone to fiat currency, over time, the purchasing power of the dollar drops, thus when a capital item is said to have increased by the true rate of inflation, that increase is not real capital gain; it’s just holding its value. Real capital gain is driven by population growth (more people, no more land) and by trends (25 years ago, Kiwis did not pay a premium for waterview properties, today they do).
Taxing capital gain at the same rate as PAYE is politically dishonest. This is why in other countries, capital gains is taxed at a lower rate. In the US for example, the top rate is 20% for couples earning over US$517,000 per year, while their income tax rate is 37%.
Fair Capital Gains tax: In today’s digital economy, digital technology can provide for more precise tax calculation. Baseline is set the year of purchase. No re-valuation while the capital is held, but not liquidated. On liquidation, add the annual inflation rate to the baseline and pay the income tax rate on the net, but spreading the gain over the held term. If for example, the capital is held for ten years, and during that time the investor was in the 28% bracket, the gain adds 10% per annum to their annual income over the ten years, rather than jumping them to the 39% bracket during the tax year the capital was sold.
Manage the rich to serve the common good
A Better Approach: Develop policies that encourage risk takers to invest in nutritive economics and make them feel welcome in our country. We used to be an egalitarian society, not by suppressing wealth creation, but by ensuring a quality of life that was affordable by all. We must get back to the 3:1 house price to median income ratio by expanding the market and lowering the paper cost of new construction. We need more money import than export – a positive balance of trade, and not overly dependent on dairy solids. We need entrepreneurs and risk-takers who focus on money turn, so once money is imported, it recirculates at least 20 times before it is wired overseas. We need jobs in industries that make essential goods domestically. It may cost more, for example, to make medicines, but if the ships stopped bringing in medicines, the effect would be catastrophic for our most vulnerable.
Don’t chase them away
In today’s world, the extremely rich don’t need to live here. They can pull up stakes, qualify as a non-resident for tax purposes and move to a country that are not hostile to them. Except for American citizens – taxed world-wide regardless of where they live, a NZ wealth tax is avoidable by relocation. In the present political climate of populism, bash the rich is sending a negative message, and if they feel hostility is directed at them, they will leave and the common wealth of this nation will be poorer.
Case Study: Graeme Hart. Mr. Hart is NZ’s richest man. He began life as a truck driver, but built businesses, took risks and won. The Treasury Report no doubt asked Mr. Hart what taxes he paid, and what earnings he made (in cash and on paper), concluding that while he would have been in the top tax bracket on income, his overall taxes would be lower because they included capital gains and business income. What the Treasury failed to ask was the total indirect taxes Mr. Hart paid. For example, a quick google query says Carter Holt Harvey, owned by Mr. Hart’s Rank Group employs 5,000 people. If the average wage or salary was $50,000 a year ($8,000 PAYE), then Mr. Hart indirectly pays $40 million in taxes the Treasury did not record in its study. If the Hart family began to feel they were targeted in NZ, they would leave. He would cease to be a NZ tax resident, and would sell or close his NZ businesses. The Greens and Te Pāti Māori would find their tax-the-rich plan backfired. Not only would they not be able to tax Mr. Hart’s offshore, non-resident wealth, but he would have every right to close Carter Holt Harvey and lay off 5,000 tax paying employees.
In 1937, George Orwell wrote
“It may be said, however, that even if the theoretical book-trained Socialist is not a working man himself, at least he is actuated by a love of the working class. He is endeavouring to shed his bourgeois status and fight on the side of the proletariat — that, obviously, must be his motive. But is it? Sometimes I look at a Socialist — the intellectual, tract-writing type of Socialist, with his pullover, his fuzzy hair, and his Marxian quotation — and wonder what the devil his motive really is. It is often difficult to believe that it is a love of anybody, especially of the working class, from whom he is of all people the furthest removed. …. Though seldom giving much evidence of affection for the exploited, he is perfectly capable of displaying hatred — a sort of queer, theoretical, in vacua hatred — against the exploiters. Hence the grand old Socialist sport of denouncing the bourgeoisie. It is strange how easily almost any Socialist writer can lash himself into frenzies of rage against the class to which, by birth or by adoption, he himself invariably belongs..
Some things never change. Today’s left hate the rich – although in NZ the actual number of real rich is very small, perhaps about 300 families – and what the left calls rich in NZ are upper middle class.
Taxing the rich and giving it to the poor is an old story – a Robin Hood story. But the old sayings do not support it: Teach to fish, eat for life. Serve fish, eat for the day.
As policy it is a bad idea because its advocates do not understand that wealth is a representation of human activity that can be steered as a force for good, or be good for the rich, but bad for humanity. The role of government is to provide incentives to steer the human motive of greed to benefit society.
Think of it like the honey bee. She is solely focused on wealth creation, in her case collecting pollen to make honey for the hive. But not all the pollen makes it back to the hive. Some pollenates the host, thus the plants reproduce – something bees and plants have been doing for over 150 million years.
So how do we structure a monetised society so “the rich” pollinate the planet as a happy side effect? Remember the bee has no altruistic motive, all she wants are the raw materials from which she and her class create wealth (honey).
The Rich as Part of the Social Ecosystem.
The 6th Labour Government commissioned a report from Treasury that targets rich people to lay the ground for a Capital Gains tax and/or a Wealth Tax. In doing so, government paints the rich as laggards, by saying the effective tax rate for the wealthiest New Zealanders is less than half that of the average person – with untaxed capital gains the largest driver of the disparity.
The Treasury failed to do its job. To accurately assess tax the rich pay, it must examine not only direct taxes, but indirect. A farmer who employs dozens of farm workers pays salaries that include PAYE. To fairly assess the tax the farmer pays, all that PAYE must also be counted. The same with a captain of industry who owns large businesses. Every tax dollar paid by an employee, a contractor or a supplier comes from the captain at the top. If they close the business, move their assets and residency overseas because they feel targeted in NZ, the tax loss will be far greater than that counted by Treasury.
Make no mistake about it. The rich are not stuck in a country that targets them. They can move their tax residency to numerous countries around the world who will appreciate them. Italy, for example, has a flat tax of €100,000 on all overseas income for rich people who take up tax residency. The climate is pleasant, the food sublime, the culture enriched and there are ready-made historic palaces and castles to enjoy their riches. Once they make the move, they won’t return, except to pop in for visits to family and friends. And the rich migrant entrepreneurs who previously looked at New Zealand as a welcoming base will give it a pass.
In the words of Mark Twain, quoting Disraeli: “There are three kinds of lies: lies, damned lies, and statistics.”
This White Paper examines the rich in the context of a social ecosystem, asking if they are – as presumed – parasites on society, or if they are essential to its health. In reality, some rich are nutritive – they feed the health of society, whereas others are parasitical – they weaken society by greed and self-indulgence.
No shortage of tax revenue
In this chart (NZ tax revenue in USD), tax collection rose precipitously since the Labour government won a majority and has governed without the need for a coalition partner. In addition to tax collected, as shown in this chart, the Reserve Bank in 2020 expanded its Quantitative Easing programme to up to $100 billion. QE is when a government increases the money supply beyond the growth of the economy – in layman’s terms, its not dissimilar to counterfeiting except its legal.
While the tax revenue saw a massive increase, the 6th Labour government has been hard pressed to show a matching increase in use of that money to solve core problems facing the nation. For example, the state house waiting list, which was at about 6,000 families when Labour took over in 2017, grew by about 400 families every month until it peaked in March 2022 at 26,868. To provide emergency housing the government moved large families into hotel rooms totally unsuited for them.
The government does not need more tax, it needs better tax managers.
Parasitical Government: Taxation takes money from those who have it, and uses it to pay officials charged with executing government policy and to purchase goods and services the private sector will not provide. Parasitical taxation is when that money fails to serve the needs of the people, but instead is consumed by the system – by the service providers in the form of bloated bureaucracies and a proliferation of high-priced consultants who previously worked for government and then exit, returning as consultants to fill the vacancy they created. Parasitical government also takes the form of rigging the game by writing rules that block competition and require extensive paperwork that is only accepted if it is written by expensive approved experts.
The affordable housing crisis, precipitated by the Resource Management Act and the Building Act, is an egregious example of parasitical government. Personal money – both savings and mortgage borrowing – is spent on mandatory paper (reports) paid to specialised consultants as a precondition to consenting.
Licensing of all the parties required to provide that paper tripled the paper costs with no evidence the outcome is symmetrically better. The approved building products regime created Fortress NZ, insulating the approved from global competition, resulting in excessive building material costs. As a result, the final cost of housing is higher. Those who cannot afford to pay it become polarised into a Struggling Class.
Understanding Wealth Creators: The Treasury study looked at the gross income, including unrealised capital gains, and compared it to the wage earner where PAYE is deducted on a sliding scale, concluding the median tax payer pays about 20%, while the rich pay 10%. However, it asked the wrong questions and therefore failed to distinguish between nutritive wealth creation and parasitical hoarding or self-indulgence. The report is Twain’s statistical lie.
Yes, the wealth game is rigged and it needs to be fixed
Money is needed to make money, but in the name of protected the unsophisticated investor – the mom and pop investor looking to build a nest egg, the FMA rules were written in a way that makes it far too expensive and complicated. Thus the sophisticated investor can realise 10-15% in passive income, but the ordinary Kiwi is left with bank interest that does not keep up with the cost of living.
The first ladder is has lost its bottom rungs by government policy ostensibly made to protect the very people who now are locked out of wealth creation.
In NZ, the one safe investment for the ordinary Kiwi was real estate, first buying the family home and then buying a rental where mortgage interest was deductible. As a relatively unregulated industry, there were bad landlords offering substandard housing and some of those tenants in their earlier years remember now that they have been elected to Parliament, or taken comfortable jobs in government.
The upshot has been a series of laws and regulations that target landlords. The result is predictable. The middle-level landlords will be driven out as large commercial firms buy up the rental stock as is happening overseas.
What common-wealth creation looks like
The Multiplier Effect: The profit on a cup of coffee at Starbucks is wired out the country every night. The profit on the same cup from a locally-owned café stays in the local economy. The entrepreneur owner spends it locally. Called money turn or multiplier, the measure of how many times a dollar is spent locally before it crosses the border is an essential measure of the nutritive value of money.
The other measure is balance of trade. Money crossing the border outbound is not bad, provided more money is imported than exported. This form of wealth creation requires local productivity – offering a service or product made domestically but sold overseas. In a healthy society, money importers become critical to common wealth, provided there is high multiplier (local money turns), once it arrives.
Over the past quarter century, every week the auction companies would auction off another small-to-medium NZ enterprise that closed. Goods made in NZ were replaced by goods made in China and other low-wage countries. The money that previously circulated within the national economy is wired overseas with the primary agriculture sector (dairy, meat, timber, etc.) at 71% of the offset (goods sold abroad).
This not only depletes common wealth, but it increases risk in times of uncertainty. When the shipping system was disrupted by Covid and the Suez Canal blockage, supply chains were disrupted. Now the sole oil refinery has been decommissioned, putting the transport system at risk even though NZ pumps oil from the ground.
These are matters of national security, and while harder to distil in a populist headline, they are far more important to the common wealth and national wellbeing.
The Wealth Ecosystem: From the outside, populist politicians and pundits call them “the rich”, lumping together a broad ecosystem. While this gets votes, it’s not smart when it comes to policy and law. Deeper understanding is required:
Wage Earners: The first thing a family or person needs to do is develop a reliable income stream to pay for the cost of living… food, shelter, clothing, heat, transport – the basics. Then they wants a few perks, which also can cost money – going out with friends, buying a beer. Most do this by developing a marketable skill and getting a job, where they don’t have to worry about where the money comes from, as long as they perform. They are easy to tax using PAYE. According to the IRD, there were 4.2 million taxpayers in the 23% or lower bracket and 28,000 in the highest 38% on their earnings over $180,000. Top earners are 0.6% of the total taxpayers, but pay 6% of the total PAYE tax.
Active investors – often serial entrepreneurs – are an essential part of the social ecosystem, and are essential to its overall health. Taxing them is antithetical to their purpose, because they use money to grow businesses. Taxation reduces the money available to them, but if they can reduce their tax obligation by investing in the business (capital gains) and in personnel, goods & services (expenses) they don’t pay tax on that income. Thus the taxation system only taxes the active investor when they extract money from the business (personal income tax) or retain it as profits (28% company tax).
Overseas investors – Especially from Asian countries where their domestic investments lack the protections of Common Law, overseas investors move money into NZ. They create jobs and provide markets, but as part of the global economy have no loyalty to NZ. At any time, they may move their investments overseas. As such, while they are of benefit to NZ, care should be taken to not cause them to uproot and leave. They are a higher-risk category of “the rich”.
China Market Domestic Businesses – Over the past several decades, many NZ businesses have moved their export trade to China. According to the Chinese embassy in Wellington, China accounts for 42%, 42% and 65% of New Zealand’s dairy, meat and wood exports to the rest of the world as of 2021. The money is good, but the risk is political. The Chinese government is not afraid to use trade restrictions as a weapon, and the government has been negligent in not making provisions. If, for example, China were to invade Taiwan, would NZ condemn the move as they have done with Russia in the Ukraine, if that meant losing half their export trade in their top three industries? These farmers are the lifeblood of the NZ economy, yet due to the value of their farms, they may be classed as “the rich.”
Passive investors emerge when they earn (or inherit) more than they spend. In the old days, they would put their money in a bank that would then loan that money out for mortgages, consumer loans or to risk-takers starting or growing businesses. With passive investment, the person or family is relieved of the pressure to be personally productive. Some turn their attention to social good, volunteering – nutritive contributions to society. Others become self-indulgent, pursuing a hedonistic or decadent way of life – not parasitical, because their spending does support businesses, but of little value to society overall. The name Paris Hilton is often used to put a face to this form of passive investing. But, while the poster child, the trust fund babies are a very small part of the problem, and if taxed, will be sure to relocate to the ski slopes of Switzerland or the sunshine of the Caribbean.
But Kiwi passive investors are not Paris Hiltons. Most worked hard all their lives, lived frugally, paid off their mortgage and invested the money for their old age. This form of passive investing is critical to relieving the government of the burden of old age. Pensioners without savings live in poverty if their sole source of income is the retirement benefit. This is especially the case with divorced women who rent and find they cannot make ends meet.
Cartels: The biggest problem in the realm of the NZ rich is not the top 300 families, per se, but the presence of an old-boy-network that works like an unregulated cartel. There is an establishment where people who have known each other, and whose families are well established who have a closed network that benefits them. Competition laws are weak in NZ, thus, for example, the food industry, banking industry and building materials industry charge higher prices in NZ by creating de facto cartels. Moves made to suppress competition in NZ would be illegal in the US or EU, but here operate in the light of day, ignored by the media and not addressed by the elected or appointed officials.