Paying to rebuild – cuts vs levy

John Key’s Government is now openly talking about cuts to Working for Families to pay for the cost of earthquake rebuilding.

As Russel pointed out yesterday, we think a small, temporary earthquake levy would be a much better and fairer way of funding the rebuilding. Depending on how you set it, it would raise between $230m and $1b per year for rebuilding.

By contrast, cutting from ‘high income’ brackets of WFF would raise very little.

As Bill English himself pointed out in 2008 (hat-tip to The Standard for digging that one out), cutting WFF completely for families with an income of more than $100,000 back them would have saved just $1.1m per year. It would take thousands of years to pay off the cost of rebuilding at that rate.

We asked the Parliamentary library for figures showing how much WFF costs at different income levels. Even cutting support from families earning over $80,000 would hardly produce any savings – just $70m per year, nothing like the billions needed for earthquake recovery.

Clearly, to get any meaningful savings from WFF you’d have to cut from significantly lower income brackets.

A temporary earthquake levy of the kind proposed by the Greens could raise up to $1b per year. To save that much from WFF would require cutting support completely from families earning over $40,000. That’s clearly unacceptable, even to this Government. It would affect more than 160,000 families around the country, and cost them up to $180 per week.

Since that option is so unpalatable, it’s more likely that the Government would either change the abatement rates or lower the payments.

Neither option is particularly appealing. Changing the abatement rates so that people earning over a certain amount receive less from WFF could actually create the perverse incentive for them not to seek more or higher paying work, which is the exact opposite of what this Government is purportedly trying to achieve with its work-focussed welfare changes.

Lowering the payment rates across the board would affect people in every income bracket, and make it harder for many low- and middle-income families to make ends meet.

And neither would save significant amounts for earthquake recovery! David Farrar models some possible changes to WFF over at Kiwiblog today, which he thinks National should campaign on at the election. Funnily enough, he says nothing about how much this would save for earthquake rebuilding – because it would be very little.

By contrast, a temporary levy at the highest level we’ve modelled would cost an individual earning more than $50,000 just 58 cents per week and raise over a billion dollars a year.

I know what I think sounds more fair!

23 Comments Posted

  1. Treasury’s MEI confirms my original assertion regarding the positive impact the earthquakes will have on GDP and taxes:
    “ The outlook for the New Zealand economy was weaker even before the earthquake as
    domestic demand was soft despite income gains from high commodity prices
     The earthquake will have a negative impact on economic activity in 2011, but a
    positive impact from 2012 as the rebuilding gets underway
     Domestic developments are occurring against an international backdrop of political
    unrest, high commodity prices and rising inflation”

    Most of the $15bn Treasury has just wiped off it’s GDP growth forecast has actually been wiped off in response to the slower than expected recoveries in USA and China. Additionally, Treasury now considers that the rebuild is so massive that a significant amount of the positive economic impact from the earthquakes will occur beyond the 4-year forecast period, hence the perception of a negative impact being that is dominating the media coverage.

  2. Leftrightout asks “A lot of figures have been thrown about, up to 15 billion. But wait, a lot of that will be covered by EQC and insurance. Does anyone have a figure for the shortfall? I think it would be too early.”

    Estimates released this morning by treasury say the govt will need to pay about $5b of the $15b.

  3. SPC, I am well aware of Ansvar and other church insurance. However, I am still believe there will be a push from churches to claim from the public purse that which they did not pout there in the first place. On top of which, as I mentioned above, tey have been a drain on emergency services, again, without providing a cent in funding for said services.

    Regardless of their own insurance status, it is time god and his minions paid there way, rendering unto Caesar, as it were.

    Why does Sanitarium, for example, pay not once cent in taxation?

  4. photonz – the difference between maitenance and improvements, the former is an expense claim against rent income before tax, the latter is a capital investment.

    So onto a tangent, if government required all rentals to be insulated or with more efficient energy, it could simply allow half or 100% of
    the improvement to be placed into the maitenance expenses.

  5. leftrightout, churches have their own insurance cover to fund their rebuild.

    The estimate of public works cost is $5B (local and central government) and the loss to the budget revenue of government another $5B.

    There is a need to replenish the EQC – possibly another $5B for the reserve – from increasing the levy over the medium term.

  6. bj says “The folks who own the house rent it out. So they didn’t buy and sell for capital gain.”

    Whether you rent it or not is not relevant to IRD – It’s whether your primary gain from the rental is rent, or capital gain.

    It’s all done on a time basis. If you keep it long term, IRD consider you have it for rent. If you buy and sell short term, IRD preceive you are in it for capital gain and you will be taxed on that.

    bj – you say CGT is not difficult, yet you haven’t said how a typical rental will be taxed for capital gain, taking into account inflation, maintenenace, improvements, and unknown amounts of labour – all adjusted for inflation over the years.

    The truth is the average return on NZ housing over the decades, AFTER maintenance, insurance, rates, etrc, and AFTER inflation, is just 3% per annum.

    People neglect to work out the costs and inflation. A house that cost $200,000 ten years ago, has had ten years of insurance, maintenance and rates (say $5000 per year x10 = $50,000). A total cost of $250,000, with a decade of inflation at 3% per year (compounded = around 40% for the decade) means the $200,000 house has to be worth at least $350,000 just to retain the same value.

    Some people think their house has increased by $150,000. But in reality – is is hasn’t gained a single dollar in ten years.

    And that doesn’t even factor in what’s been paid in mortgage interest.

  7. I don’t think that we have to read too much into this the governments backers don’t want to pay any extra tax!!!!

    End of story!!!!!!

  8. And people who buy and sell houses in NZ for a capital gain profit, ARE taxed on the capital gain – it’s just not called capital gains tax.

    A funny thing happens on the way to the tax office you know. The folks who own the house rent it out. So they didn’t buy and sell for capital gain. They bought and sold in an effort to maximize their rental income – yeah right –

    Photonz, I know you don’t like it. You’ve made it clear enough. However I went through the list a while ago and the only ones not having CG taxes taxed it as plain income. Which isn’t what happens here either.


  9. A lot of figures have been thrown about, up to 15 billion. But wait, a lot of that will be covered by EQC and insurance. Does anyone have a figure for the shortfall? I think it would be too early.

    I have no doubt that there will be a clamour for the public purse to fund the rebuild of Christ Church Cathedral.

    So, here’s a thought – let’s revoke the tax exempt status for the churches, make them pay their way. They can pay tax on all their business profits, they can pay council rates, and then, just like any other business, they can claim a tax deduction for the actual $ spent on charitable works.

  10. SPC – I don’t know what percentage of people with rentals pay tax on capital gains, but I would also bet that it’s less than half (and yes – I do know all the other things you point out).

    Landlords are taxed when it is considered the primary reason for owning the property is capital gain rather than rental. I beleive the main thing the IRD look for are houses that are bought and sold in a short time frame. From what I’ve heard less than two years and particualrly less than six months.

    Contrary to what bjchip says, captial gains tax is horrendously complex in the longer term.

    Take a typical situation where someone buys a rental for $200,000, and sells it 15 years later for $400,000.

    The capital gain is $200,000.
    – Part of the capital gain is due to mainetenance they’ve done over 15 years.
    – Part is due to improvements made over 15 years.
    – Part is due to thousands of hours of labour the landlord and their family have put in, maintaining the house, improving the section, cleaning after tennants have left etc.
    – Part is due to 15 years inflation.

    So how much of the $200,000 is an actual capital gain, after you take off inflation, inprovements, maintenenace, hours of labour etc?

    And should the improvements and maintenance from 15 years ago, be adjusted for inflation, (and 14 years ago, 13 years ago, 12 years ago etc?).

    And what value to you put on thousands of hours of unpaid labour? And should they be inflation adjusted for the years they were worked?

    And how do you count the thousands of hours of unpaid labour over 15 years, when no one was keeping track of the hours?

    And this is a typical situation.

    It can be far more complex if
    – someone first lived in a house, then rented it,
    – or bought a rental and later lived in it then sold it,
    – or let their kids live in it free when they were at university,
    – or rented their house out while they went on an oe, and lived in it again when they returned.
    – or have flatmates.

    And BJ says it’s not difficult to work out – very funny.

  11. In saying that bjchip, the proposed Capital Gains Tax for New Zealand will probably not include shares – that changes things quite a bit on the revenue side.

  12. photonz – can you state how many people who own rental properties pay CGT and how many do not? No. I would bet less than half pay CGT. You do know that holiday homes are exempt, you that home residences worth more than a $M are exempt. You know that farmland is exempt. You know that shares are exempt.

  13. Photonz – yes the Netherlands does not have one – its mortgages are over 100% of GDP.

    While I support a CGT – I don’t do so to finance the earthquake cost – that is a temporary matter. A CGT is part of tax reform.

  14. bj says “We’ve heard this before and every other nation in the civilized world has one”

    You mean except Singapore, Netherlands, Switzerland, etc.

    And people who buy and sell houses in NZ for a capital gain profit, ARE taxed on the capital gain – it’s just not called capital gains tax.

    If your prime reason for buying and selling is for capital gain, you are taxed on it. If you prime reason is for rental income, and you keep the property long term, you are not taxed on capital gain.

    So bj – what is your main reason for capital gains tax? To collect tax, or to change behaviour?

  15. Photonz

    We’ve heard this before and every other nation in the civilized world has one, or something that passes for one. Clearly it is NOT so difficult to work out and your disinformation has been answered over several times now.


  16. sprout says “A capital gains tax would be a much more useful way of bringing in useful funds and direct investment into stuff that will give a real boost to the economy.”

    A capital gains tax has many drawbacks –
    1/ It is highly complex, and very expensive to administer.
    2/ The amount of taxation it pulls in (i.e. from Australias experience) is negligable.
    3/ People can easily set up their finances to avoid it.
    4/ It can be hard to calculate – i.e. how much gain is from house improvements, landscaping, painting etc and how much is true capital gain.
    5/ If someone buys a house for $250,000 and sells if 15 years later for double, much/most of the capital gain isn’t real – it’s inflation.
    6/ It can criple people financially in some situations i.e. having to sell assets in a marriage breakup.
    7/ Are capital losses then tax deductable?

    CGT systems are expensive to run and generate little tax, so have little value from a taxation point of view.

    Their strength is that they can change peoples financial behaviour, which can have good aspects.

    But again can also have negative effects, for example, discouraging people to leave money in businesses to make them grow (because they would later be stung for a capital gain)

  17. A capital gains tax would be a much more useful way of bringing in useful funds and direct investment into stuff that will give a real boost to the economy.

  18. I suspect the right wing backlash against this post is on Gareth’s thread, rather than in trying to defend their approach here.

    If you go to Red Alert, you can see David Farrar say that the left was politicising the disaster by raising the idea of a levy and then conceding points made by Labour (we had not sone this) and seeking agreement from pro Labour commentators (ironically of the Standard) that this did not include Labour. It’s of an attempt to silence Labour and marginalise Greens from them on the issue of recovery planning.

    While this is going on the mainstream media will editorialise in favour of National breaking its promises on WFF and interest free loans (note the link to Gareth’s thread now) supported by Richard Long (last Tuesday)and Hooton and the NBR editorial yesterday. Same old same old but now using the disaster as a new reason for National to sell it to the electorate (and offering their support).

    While I do not support the levy proposed by Russel Norman at this time (we can propose one in the future once we are out of recession first), it is the least political of proposals – it does not revisit contentions about tax rates or spending programmes that get litigated at elections. It should be a 1% levy applied on all working incomes (the inequality of that can be met by political ideas such as an tax free income threshold).

    I suggest we have options that enable provision for families and for retaining graduates in a low wage economy.

    1. ending the $1000 pa tax credit in Kiwi Saver – $1B PA and $5B over 5 years (we should not borrow to subsidise private saving).
    2. a 1% levy on all working incomes and company tax once we come out of recession. Again about $1B pa and over (year 3 to 7) years $5B.

    1 and 2 show the means to borrow and pay back within 5-7 years $10B. $5B for the rebuild and $5B for the lost revenue resulting from the economic dislocation.

    3. a $5B loan paid into the EQC reserve (so we are seen as able to meet further committments if they should fall due in the near future). The money invested (taking over assets sold for the insurance liability) would cover the borrowing cost and once an increased levy could replace the amount the loan could be repaid and the levy returned to a normal level.

    We have other options – cancelling the asset issue and instead offering local investors bonds that bear interest on maturity (and are not taxable). Or is that too political? This is an alternative to borrowing all $15B from overseas – but if we have a public plan to pay all the money back asap, it’s not a biggie that we source it locally.

  19. And to ensure that Auckland does not stagnate. The biggest impediment to Auckland’s viability is currently its totally inadequate transport infrastructure.

    I would expect that the recovery would help with that, as it did with infrastructure projects that were suspended during the Great Depression.

    In saying that though, a special CBD Loop rate should perhaps be considered by the Auckland Council – interest rates are super low at the moment, and borrowing the $1.5 billion necessary for the project (the $2 billion included duplicating the Onehunga Line and a number of grade separations) might only incur an interest expense of between $90 million and $100 million – and all you would need to do is increase rates to the point that it can cover that interest expense.

  20. And to ensure that Auckland does not stagnate. The biggest impediment to Auckland’s viability is currently its totally inadequate transport infrastructure.

    If people have to drive 45m+ each way to jobs that pay $5K p/a more than the job they have already 15 minutes away, they are just not going to apply.

  21. I suspect that we are going to need both spending cuts, a levy and borrowing – remember, it is likely that we aren’t just going to need to rebuild Christchurch, but also ensure that all the government owned buildings that date from prior to the 1970s are brought to modern standards. It would be the latter that would cost a small fortune, as opposed to the former.

  22. Very good point, Kevyn, although I don’t expect much to be coming from ACC or EQC – they are isolated from the consolidated fund apart from ACC expenditure on the non-earners account. NZTA isn’t though, but your point is still largely, although not entirely, valid.

  23. According to Treasury’s last Half Yearly Fiscal and Economic Update the Sept 4 would reduce real GDP growth by 0.2 %point in FY 2010/11 and increase it by 0.4 %point in FY 2011/12. The assumption was that the immediate decrease in economic activity in Christchurch would be followed by an inflow of funds into the country from global reinsurers and that only a small proportion of that money would be spent on imports.

    Even if the Government has to pick up a $5bn tab to repair schools, hospitals, water mains and sewers much of that can be funded from the GST when the money from the insurance money is spent in this country. The two big questions are how much of the Governments $5bn is actually coming from the consolidated fund and how much from ACC, EQC and NZTA? And since the GST on the approx. $10bn from global reinsurers is unbudgeted income for the government why are we hearing that tax revenue is going to go down instead of up?

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