Newsroom Pro's 8 things: The Cullen Tax Working Group and its possible big tax switch; Rod Oram's column; Weekend Reads

In this morning's email we look in detail at the new Tax Working Group and the parameters the Government has set for it.

1. 'It's not a tax grab'

Finance Minister Grant Robertson released the terms of reference for the Tax Working Group yesterday and named Sir Michael Cullen as the chair. He confirmed Labour's pre-election comments that it would not look at taxing the family home and cautioned that it was not about increasing the Government's share of GDP.

It would instead focus on improving the structure, balance and fairness of the system.

“Somebody who goes to work every single day and pays tax on every dollar they earn can look at somebody who is speculating in the housing market and wonder why they’re not being treated fairly - we want to address that issue,” Robertson told a news conference.

He said it was possible the changes could be revenue-neutral, and denied the review was an attempted tax-grab. The terms of reference specifically directed the Group to aim for a system that supported Government operating expenditure around its historical level of 30 percent of GDP.

“We are not setting out on this process to increase or grab revenue, we’re setting out on this process to get a fairer and more balanced tax system,” he said.

The terms of reference for the group said it should specifically consider the benefits of a capital gains tax or land tax, a progressive company tax, and the economic environment over the next five to ten years -- although the exemption for the family home was stated repeatedly.

Robertson confirmed comments made before the election that certain areas would be outside the scope of the review, including increasing any income tax rate, the rate of GST, inheritance tax and changes that would apply to the family home or land beneath it.

The terms of reference also say the group should focus on “what role the taxation system can play in delivering positive environmental and ecological outcomes”, but Robertson confirmed a carbon tax was not specifically on the table, with a separate agreement in place around reforming the Emissions Trading Scheme.

“What we are saying is over the long term, we want the tax system to support positive environmental outcomes. Now that may be around other issues to do with water or to do with pollution, I’m not going to preempt that today - what I can tell you is this an issue that both our coalition partners have asked us to include within the taxing group.”

While GST rates would remain unchanged, the working group could consider whether to exempt certain products from GST, such as female sanitary products or fresh fruit and vegetables.

A proposal to apply GST to online purchases from overseas was still being worked on, and could be fast-tracked ahead of other tax changes if the working group “feel we can make a concrete step forward”.

“For main street retailers in New Zealand at the moment they feel like there’s an unfair advantage for international companies selling online.

“In principle, [Revenue] Minister [Stuart] Nash and I agree on that, what we now need to work through is the way in which a regime could be developed.”

Robertson said the review would also look to the changing nature of work and how the tax system needed to adapt.

“Issues like the changing nature of work won’t necessarily impact in the next three years, but the tax system that we design for the future needs to understand that people working traditional 40-hour weeks in continuous employment is changing.”

The group could consider the possibility of tax breaks on pensions and savings if it wanted, Robertson said. (More on that below)

However, any changes to Working for Families or consideration of a universal basic income would be part of a separate review undertaken as part of a coalition agreement with the Greens.

The terms also ruled out looking at international tax reform under the Base Erosion and Profit Shifting agenda, although Robertson said the broader issue of multinationals and company tax was still on the table.

The rest of the group, set to be announced before Christmas, was likely to be made up of eight people including Cullen, covering those with tax expertise and other representatives.

“We obviously need people who are tax experts...but we also want to make sure that the people who are affected by the tax system have a voice in this process, so that means businesses, that means working people as well, and we've also included a specific requirement that the group is able to understand the role of Maori business and enterprises as well.”

It would be supported by a secretariat of officials from Treasury and Inland Revenue and have an independent adviser to analyse advice. Robertson said the group would meet no later than February 2018 and would produce an interim report by September 2018.

Any changes would not be implemented until the 2021 tax year, which would give voters the chance to accept or reject any proposals at the 2020 election, he said.

2. Room for another big tax switch?

I've taken a closer look at the terms of reference to see if this Tax Working Group might produce another surprisingly big tax switch like the last one did. There is plenty of wiggle room for a tax switch where a new land tax helps pay for tax breaks for pensions.

This one has a remarkably similar look and feel to the Tax Working Group set up in May 2009 by John Key and Bill English. It may also come up with a tax switch that surprises people, despite having its scope severely limited to come up with the 'right' answer.

The 2009 effort was also created to address a perceived lack of fairness in the tax system that saw taxes more heavily weighted to income from wages and profits than from capital. Key and English did not stop their Tax Working Group from considering a capital gains tax, but Key virtually ruled one out well before the Group made its final recommendations in January 2010.

The following May the then National Government picked the recommendations it liked and had wanted all along and introduced them in the 2010 Budget. They included cuts to both personal and corporate income taxes and an increase in the GST rate. This was all billed as a 'big tax switch' that was both fiscally and distributionally neutral.

It all seemed like a magic solution. An increase in the GST rate from 12.5 percent to 15 percent paid for a cut in the top personal tax rate from 38 percent to 33 percent and a cut in the corporate tax rate to 28 percent from 30 percent. This then aligned the top personal tax rate with the trust rate of 33 percent, removing one of the incentives for higher income earners to shuffle their assets into trusts.

This switch certainly wasn't envisaged during the 2008 election campaign and the switch could have been a different one. The Tax Working Group actually recommended the extra revenue needed for income tax cuts could come from a broad-based and low rate land tax. Key wouldn't agree to that because it could have triggered an immediate one-off drop in land prices of around 15 percent. Instead, he chose the recommendation to go with a GST hike instead, which was something he promised before the election he would not do.

Fast forward seven years and Grant Robertson and Jacinda Ardern also want their Tax Working Group to address a perceived unfairness in the different ways capital and labour are taxed. But they have also circumscribed the target zones for the Tax Working Group. It cannot look at taxing capital gains on the family home or land under the family home.

It also cannot look at increasing the GST rate again or suggest anything that could be described as an inheritance tax.

It's clear Robertson and Ardern are nudging the Group towards some form of land tax or capital gains tax that applies beyond the family home. It was just as clear in 2009 that Key and English were nudging their Group towards cuts in personal and company income tax rates and matching up of the top income and trust rates. The GST hike and the 'big tax switch' was the surprising outcome.

This latest Tax Working Group could also generate a surprise outcome, despite its apparent straight-jacket on what it can look at.

The key was in Robertson's comments at the news conference to unveil its terms of reference and that it would be led by Sir Michael Cullen, his predecessor as the last Labour Finance Minister.

The group could consider the possibility of tax breaks on pensions and savings if it wanted, he said.

The new Government wants to even the playing field between investing in residential property and investing in real businesses that produce goods and services, preferably for export.

There is a way to do that without taxing the capital gains on the family home. The Government could just reduce taxation on investment in other types of assets such as term deposits or managed funds used for pensions.

Currently, regular 'Mum and Dad' investors know that leveraged investments in property are not subject to capital gains, unless they are in rental properties sold within two years of purchase. Given the doubling of house and land prices over the last 12 years and their ability to easily borrow to buy these assets, buying more property has been a no brainer. They know that investing their savings in a term deposit or an investment fund in the stock market would generate earnings that were taxed every year, either through withholding tax on interest or because income from buying and selling shares would be treated as income.

They also can't borrow to invest in these assets. It's a simple choice that means households now have over $1 trillion invested in housing, while have just $163 billion in bank deposits and $56 billion in investment funds such as KiwiSaver.

Part of the reason for this almost five-to-one investment in housing over other financial assets is that pensions and other savings do not receive tax breaks in New Zealand.

This seems natural to and pleases the tax purists who like simple tax systems with broad bases and low rates where all types of income are treated the same, but New Zealand is unusual in doing this.

Up until 1989, New Zealand did provide tax exemptions and breaks for money invested in pension funds.

New Zealand now taxes income that is being put into pension and savings funds two times over. That money is taxed at the point it is earned and before it is put in the fund. It is then taxed while it is in fund and earning money each year.

Other countries exempt income from tax if it is being put into a pension fund that is only touched upon retirement. They also don't tax income made by the fund as it is being built up before retirement. But they do tax the money at the other end of the process as it is being withdrawn from the pension scheme.

The end result of this difference is that it makes a lot more sense for New Zealand 'Mum and Dad' investors to put their money into leveraged property where their capital gains are not taxed and the income from the property they live in in the form of imputed rent is also not taxed.

One way to even up the playing field would be for the Tax Working Group to recommend tax exemptions for income being put into retirement funds and tax exemptions on earnings made by those funds as they are being built up. That would be expensive, but they could be paid for through a land tax on high value land that is not the family home, which would include rental property land, farm land and commercial property land.

In essence, there would be a switch in the way assets owned by already wealthy people are taxed. Taxes on land and property would rise, but taxes on long term investments in shares and other assets needed for retirement would be reduced. That would encourage more investment in real companies that produce goods and services, potentially for export.

This type of tax switch was suggested earlier this year by academic economist Andrew Coleman as a politically acceptable way to even up the playing field without having to impose a capital gains tax on the family home or farm. Here's a slide pack version of his argument.

This could be the surprise 'tax switch' that this new Tax Working Group comes up with: a tax cut for pension savings paid for by a tax increase on commercial and residential landlords and farmers. It would fit within the parameters set out by Robertson and achieve a fairer and more even approach to taxing property versus real investments.

Unfortunately, just as the last Tax Working Group was restrained from recommending the simplest and most effective tax change (a land tax including the family home), this one will also have to come up with a clever way of achieving some of what many deem necessary, but is politically impossible.

3. Rod Oram: F&P Appliances thriving under Haier

When China's Haier bought Fisher and Paykel Appliances in 2012, Rod Oram worried the New Zealand company would shrivel and die.

Five years on, Rod reports in his weekly column for Newsroom Pro that the New Zealand operation is actually thriving under Haier's ownership in New Zealand and as a high-end global brand.

He says F&P's once-industrial factory half the size of a rugby pitch in East Tamaki tells you a lot about the history and future of Fisher & Paykel Appliances.

Built 20 years ago, the cavernous building on its Auckland site first housed electronics manufacturing for its healthcare division. Back then, that was the height of product and technology sophistication for the company.

Today, the cavernous space is F&P’s sleek global design centre for refrigerators, laundry appliances and kitchen exhaust hoods. Adjacent areas in the same building house its testing facilities for prototypes and production models made overseas, and its global customer service and support centre, staffed 24 hours a day.

Down in Dunedin in the Wall Street Mall on Castle Street, a space almost as large houses F&P’s global design centre for cookers and dishwashers.

These two facilities are at the heart of F&P’s mission to become the world’s leading designer and maker of premium kitchen appliances. It’s gunning in particular for Miele, the German company that claims the role today.

“Haier have bought into our vision, and have told us to go faster,” Stuart Broadhurst, F&P’s chief executive told Rod.

See Rod's full column, which is provided first for Newsroom Pro subscribers here.

4. 'It's a waste of money'

Newsroom's Public Affairs Editor Shane Cowlishaw is interviewing new ministers as they get their feet under the desk and their teeth into their incoming briefings from officials.

His latest interview was with Justice and Treaty Settlements Minister Andrew Little. It underlined the alarming advice arriving on the forecast growth in the prison muster. Little is opposed to loosening the bail laws, which are responsible for most of the rise, but told Shane something had to change.

Little said he was shocked at how fast officials are expecting the prison population to rise, he says.

“The projections for the prison population were pretty alarming and I think we were all taken by surprise by that. They assume at the current rate, after they build this $1b prison, they’ll be looking at building a new prison every two to three years. That’s truly alarming.

“We carry on doing what we’re doing and we’re going to be needing to build a new prison every two to three years. Now what the hell is the good of that? What a waste of money.”

Prisoners were not getting the help they needed while those eligible for parole were missing out because the courses they were required to do were not available. To change this, Little said, would require a change of thinking.

See Shane's full interview published first here on Newsroom Pro.

5. 'Swallowing a dead rat'

Newsroom Co-Editor Tim Murphy spent yesterday in Auckland Council's meeting to decide on a new cruise ship 'dolphin' and the wharf investments needed to accommodate the America's Cup.

He reports Auckland Councillors didn't quite burst into choruses of We are Sailing, but they couldn't hide their relief at six words from America's Cup holder Team New Zealand.

"We are prepared to be flexible," Team NZ's chairman Sir Stephen Tindall, told the council as it steeled itself for a controversial decision on how and where to house sailing teams on the waterfront during the next Cup event in 2020/21.

And with that, the wind went out of the sails of all those in the room wanting to speechify against a big, $170 million extension of Halsey Wharf, 210 metres out into the Waitemata Harbour.That was the option Team NZ had favoured.

The Mayor, Phil Goff, and council officials favoured a compromise in which $132m is spent on just 73 metres of extension to that wharf as part of a cluster of Cup bases over three wharves; Halsey, Hobson and Wynyard.

A third party, missing from yesterday's High Noon council meeting, is the government, whose unannounced Minister for the America's Cup, David Parker, apparently liked a third option based solely on the old Tank Farm land known as Wynyard Point.

When Tindall and the Team NZ chief operating officer Kevin Shoebridge sat before councillors to answer questions about the Cup bases options, everyone had expected them to push hard for the big wharf spend, given that it allowed all teams to be housed on one wharf and best met the event criteria.

Team NZ, however, didn't get (back) where it is today without reading a room and understanding the public mood. When the National government withheld public funding before the winning Bermuda Cup challenge, Team NZ moved on and found private financing.

This time, Tindall and Shoebridge had watched the Council argue for two hours about another harbour structure - two mooring 'dolphins' off Queens Wharf to berth giant new cruise liners - and heard councillors and two local boards explain why even agreeing to that 80-85 metre structure was "swallowing a dead rat".

See Tim's full report this morning on Newsroom.

6. Weekend Reads

Here's a few longer reads for the weekend on political, economic and social issues from around the Internet.

New Zealand journalist Anna Fifield is The Washington Post's Bureau Chief in Tokyo and is always worth reading on North Asian issues. She has interviewed numerous North Korean defectors and lets them tell their own stories of what life is really like under Kim Jong Un in this enlightening piece.

Guardian Editor Katherine Viner gave a speech this week about the state of the media in an age dominated by Facebook and Google. The Guardian now has over 800,000 supporters who fund its online journalism as advertising revenues become less and less relevant and useful.

These quotes from her resonate for New Zealand too.

“Our digital town squares are mobbed with bullies, misogynists and racists, who have brought a new kind of hysteria to public debate. Our movements and feelings are constantly monitored, because surveillance is the business model of the digital age,” Viner said.

“Facebook has become the richest and most powerful publisher in history by replacing editors with algorithms – shattering the public square into millions of personalised news feeds, shifting entire societies away from the open terrain of genuine debate and argument, while they make billions from our valued attention. This shift presents big challenges for liberal democracy. But it presents particular problems for journalism."

Publishers funded by targeted advertising, aims to reach audiences with certain characteristics rather than being specifically placed on a website, were “locked in a race to the bottom in pursuit of any audience they can find – desperately binge-publishing without checking facts, pushing out the most shrill and most extreme stories to boost clicks”, she added.”

I couldn't agree more.

This Reuters analysis on how Central Banks will cope without the ability to cut rates sharply or buy bucketloads of bonds is worth a read, particularly as our Reserve Bank Board deliberates on who to recommend to Grant Robertson as Governor.

is a bit off-piste, but it's a wonderful obituary of ACDC's Malcolm Young by Jon Michaud in The New Yorker.

There you go. I've exposed some of my musical tastes...

7. Coming up...

The Labour caucus is scheduled to hold a half day special meeting on Friday in Wellington to prepare for a four-week legislative and executive sprint to Christmas to achieve the bulk of the new Government's 100 day plan.

8. One fun thing

Some house price humour here...from HaveIgotNewsForYou:

"Budget: First-time homebuyers won't have to pay stamp duty on first £300k, in great news for Londoners looking to replace their garden shed."