Capital Gains Tax

[macduffy]

Tax Justice Aotearoa NZ. Read their ad in the herald this morning and agree with a lot of what they say but the name and colours make them sound like a cross between the Greenies and Maori parties. A lot of "out there" people in that crowd.
Campaign supporters include the Public Health Association, New Zealand Council of Christian Social Services, Council of Trade Unions, Public Service Association, Hui E! Community Aotearoa, Equality Network, Closing the Gap, Poverty Action Waikato, and UCAN (United Community Action Network).

A coalition of supporters of the other coalition's tax policies?

[steveb]

Gone!
Looks like jacinda does not have the stomach to roll the dice on an early election.Would have been interesting to see the results.I suspect winnie would have picked up a stack of votes from the nats

[777]

Gone!
Looks like jacinda does not have the stomach to roll the dice on an early election.Would have been interesting to see the results.I suspect winnie would have picked up a stack of votes from the nats

Don't see your reasoning here. Winston has lost votes since the election which probably never went to National, since they have also lost votes. So they will just come back from where they went which is likely Labour due to the fact they are the only party to have increased their votes in the polls.

[Lego_Man]

He is correct on his reasons for taxation.

The US Dollar as a Federally-controlled currency only came into being when the US Federal Government levied a nationwide income tax payable only in US Federal Reserve Dollars.

Before that it was commercial banks who issued their own bills of exchange, thus the money supply was not under governmental control.

[Te Whetu]

I'll also put my 2 cents in. In general I agree with rpcas, though I do disagree with a couple of his conclusions (at least as I read them):

1) The government spends using NZD.

2) This can generally be funded in three ways, i) Issue Debt, ii) Print NZD, or iii) Tax.

3) However even when the government uses the "tax" method, it's the same as printing NZD then destroying other NZD through tax.

4) The broad impacts of each method.

5) Issuing debt: This is the same as destroying dollars but with a promise to print more later... reducing inflation/tax now but increasing inflation/tax later.

6) Printing NZD: This directly increases inflation. All dollars are worth less with inflation and this impacts everyone to the extent they are long/short cash. In theory it does not impact people with real assets; so someone long real assets and short cash benefits and vise versa. Funding government spending through inflation does not seem fair and does not promote the use of the domestic currency.

7) Taxing: Assuming we want a government who spends, and assuming we don't want this to be funded via inflation then we need tax. So it is about making the tax both fair and non-disruptive. Problem is everyone has a different view on fair and fair often does not equal non-disruptive.

8) I agree with Liz here, I really would like the FDR to be broadened across all investment assets. Maybe exclude the family home from the definition of investment assets, this would be done so as to help get the act through, (and because the government sees positive externalities from home ownership and therefore wants to encourage it).

9) Personally I would like the tax on the family home as well, but that's mainly because I like renting and don't particularly like the idea of subsidising land owning families. (Which I would need to do as the FDR tax would be accounted for in the rent I pay).

10) By borrowing to fund the current deficit spending, the government is effectively reducing the inflation its spending would otherwise be causing. Later on this will need to be funded through inflation or taxes.

11) I generally support the governments aim to get into surplus quickly, as the long term inflation/tax impacts of excessive borrowing are harmful to our economy and increase the potential for future inflation/taxes.

Cheers
Te Whetu

[rpcas]

5) Issuing debt: This is the same as destroying dollars but with a promise to print more later... reducing inflation/tax now but increasing inflation/tax later.

Issuing debt doesn't destroy dollars, but merely exchanges their form. When you buy a Treasury security, you exchange cash for a security - both denominated in NZD's. This does not destroy your financial assets, but rather changes the length of maturity (where cash has an instant maturity, and Treasuries have longer maturities). It's best to think of a Treasury security like a normal term deposit at a bank.

6) Printing NZD: This directly increases inflation. All dollars are worth less with inflation and this impacts everyone to the extent they are long/short cash. In theory it does not impact people with real assets; so someone long real assets and short cash benefits and vise versa. Funding government spending through inflation does not seem fair and does not promote the use of the domestic currency.

Consider this: If I printed myself $10 billion NZD (assume they are identical to legitimate currency) and stored them in my basement, would I be causing inflationary pressure? No.

"Printing money" as such is only inflationary if people use/spend that money. If they choose to de-leverage or save (especially de-leverage), then there won't be inflationary pressure.

10) By borrowing to fund the current deficit spending, the government is effectively reducing the inflation its spending would otherwise be causing. Later on this will need to be funded through inflation or taxes.

That is incorrect sorry, and is a common mistake.

Government deficits that are offset by the issue of government securities are NO LESS inflationary than deficits not offset by anything - or "money printing" if thats what you like to call it. This is a very important point.

Consider this:

Scenario A - Issue of Securities
Private Sector Financial Balance Sheet Before: Deposits 200, Equity 200
- then securities are issued: Deposits 100, Securities 100, Equity 200
- then government deficit spends: Deposits 200, Securities 100, Equity 300

Net result: 100 increase in net financial assets

Scenario B - "Money Printing"
Private Sector Financial Balance Sheet Before: Deposits 200, Equity 200
- then government deficit spends by printing: Deposits 300, Equity 300

Net Result: 100 increase in net financial assets

Difference: In Scenario A, the private sector has 100 additional net financial assets in the form of Treasury securities. In Scenario B, the private sector has 100 additional net financial assets in the form of cash. What's the difference between cash and Treasury securities?

Answer: Treasury securities are the most liquid financial investment on the planet. The owners of Treasury securities are always savers (whether that be banks or pension funds etc), therefore it is not important whether they hold cash or Treasury's. They will be saving either way - not issuing securities and forcing them to hold cash will NOT suddenly make these savers go out and spend. Furthermore, if these savers did want to spend, they could trade their very liquid asset for cash quickly and easily. Therefore the difference between Treasury securities and cash (when considering inflation) is negligible.

I generally support the governments aim to get into surplus quickly, as the long term inflation/tax impacts of excessive borrowing are harmful to our economy and increase the potential for future inflation/taxes.

Thats a bad idea. Our economy is struggling with additional spending (deficits) that are larger than ever. Remove this spending, and the economy goes down the hole.

[Te Whetu]

Ok, we should switch to M1, M2, and M3 if we want to discuss this properly. For those who have not done economics (ever/recently):

M1 – Cash, on demand deposits etc. (This is money you can go out tomorrow and spend).
M2 – All of M1 and also short term deposits etc. (Effectively cash and other amounts which can be converted to cash within a reasonable time frame).
M3 – All of M2 and also longer term deposits.

Issuing debt doesn't destroy dollars, but merely exchanges their form. When you buy a Treasury security, you exchange cash for a security - both denominated in NZD's. This does not destroy your financial assets, but rather changes the length of maturity (where cash has an instant maturity, and Treasuries have longer maturities). It's best to think of a Treasury security like a normal term deposit at a bank.

You can't look at a treasury security as a normal bank term deposit. A bank term deposit gets on-lent (subject to reserve requirements), so does not reduce the amount of cash available. However a treasury security reduces the cash (M1 and M2) in the economy, but needs to be repaid later.

Yes a treasury is a financial asset, but it is not M1 and is not generally used to purchase goods and services. Thus something which is in M3 and not in M2 will generally be accruing interest and not be used to purchase goods and services.

Consider this: If I printed myself $10 billion NZD (assume they are identical to legitimate currency) and stored them in my basement, would I be causing inflationary pressure? No.

"Printing money" as such is only inflationary if people use/spend that money. If they choose to de-leverage or save (especially de-leverage), then there won't be inflationary pressure.

I feel you are getting way off track and losing the point here. We are talking of the government printing money. This implies they are spending it, sure they could print and keep it at the reserve bank, but this is the same as not printing it at all as it would not enter M1. When I say "printing money" I'm obviously talking about the government printing money and spending it.

That is incorrect sorry, and is a common mistake.

You don't need to apologise. Anyway apologising on a forum as you are arguing the other side of a point just sounds condescending.

Government deficits that are offset by the issue of government securities are NO LESS inflationary than deficits not offset by anything - or "money printing" if thats what you like to call it. This is a very important point.

Consider this:

Scenario A - Issue of Securities
Private Sector Financial Balance Sheet Before: Deposits 200, Equity 200
- then securities are issued: Deposits 100, Securities 100, Equity 200
- then government deficit spends: Deposits 200, Securities 100, Equity 300

Net result: 100 increase in net financial assets

Scenario B - "Money Printing"
Private Sector Financial Balance Sheet Before: Deposits 200, Equity 200
- then government deficit spends by printing: Deposits 300, Equity 300

Net Result: 100 increase in net financial assets

Difference: In Scenario A, the private sector has 100 additional net financial assets in the form of Treasury securities. In Scenario B, the private sector has 100 additional net financial assets in the form of cash. What's the difference between cash and Treasury securities?

Answer: Treasury securities are the most liquid financial investment on the planet. The owners of Treasury securities are always savers (whether that be banks or pension funds etc), therefore it is not important whether they hold cash or Treasury's. They will be saving either way - not issuing securities and forcing them to hold cash will NOT suddenly make these savers go out and spend. Furthermore, if these savers did want to spend, they could trade their very liquid asset for cash quickly and easily. Therefore the difference between Treasury securities and cash (when considering inflation) is negligible.

A agree; in your two examples financial assets do increase by 300. However in one M1/M2 increase by 200 and the other by 300. The long term impact of both is an increase in cash when the debt is repaid but in the short term this is not the case.

Those that buy the treasury securities don't then use them to trade for goods and services. When the government spends by borrowing they still pay in cash, those that get the deposits are the parties who wish to save.

Lets take your Scenario A:

Government sells 100 securities to China, China needs to purchase those treasuries with NZD. To do this China first purchases NZD and then uses these to buy the NZ government securities. The NZD is removed from the economy and both M1 and M2 are reduced.

Note that China doesn't then use those treasuries as pseudo cash to buy stuff. Also note if later on they do need cash then they can sell the securities but this takes the cash out from elsewhere in the economy.

The same would be true if it was an NZ investment fund instead of China purchasing the government securities. Except in this case it would not need to go through the intervening step of purchasing NZD as it would already have local currency.

Thats a bad idea. Our economy is struggling with additional spending (deficits) that are larger than ever. Remove this spending, and the economy goes down the hole.

Remove this spending and you lower the crowding out of private investment. Removing spending means less inflation and lower interest rates. This in turn means people borrow more to invest elsewhere. It also means households have lower interest costs which mean they can return to spending sooner.

Now I’m no Act supporter, I’m not saying we should chop spending and taxes too far or quickly. But what our current government is doing seems both sensible and pragmatic. A low inflation and interest environment is easily the most encouraging of business development and expansion. If we want to grow the economy then this seems like the best way to go about it.

The only thing we need to be careful of is that property prices don’t start ramping up again, which is why I’m quite happy for a tax on property. Now whether this is in the form of FDR or CGT is a fair argument, and it is an argument which needs to be had.

Thanks for reading.
Te Whetu

[rpcas]

I feel you are getting way off track and losing the point here. We are talking of the government printing money. This implies they are spending it, sure they could print and keep it at the reserve bank, but this is the same as not printing it at all as it would not enter M1. When I say "printing money" I'm obviously talking about the government printing money and spending it.

Yes, but whether or not that "money printing" results in inflation depends on whether the private sector goes on to spend. If for example the government "prints money" and gives it to beneficiaries who then go on to save it, then inflation won't be a problem.

This is the situation NZ is in now. The private sector is de-leveraging, so big government deficits are not nearly as inflationary as they otherwise would be. Remember inflation of the sort we are talking about is caused by excessive spending.

A agree; in your two examples financial assets do increase by 300. However in one M1/M2 increase by 200 and the other by 300. The long term impact of both is an increase in cash when the debt is repaid but in the short term this is not the case.

Those that buy the treasury securities don't then use them to trade for goods and services. When the government spends by borrowing they still pay in cash, those that get the deposits are the parties who wish to save.

Yes, agreed. However the key point here is that the people that buy the Treasury securities (banks, insurance companies, funds etc) wouldn't be spending anyway. It is ridiculous to say that "Those that buy the treasury securities don't then use them to trade for goods and services" because they wouldn't anyway. Holding Treasuries instead of cash in no way alters these firms/savers propensity to spend, and therefore won't alter inflationary pressure.

Government sells 100 securities to China, China needs to purchase those treasuries with NZD. To do this China first purchases NZD and then uses these to buy the NZ government securities. The NZD is removed from the economy and both M1 and M2 are reduced.

Note that China doesn't then use those treasuries as pseudo cash to buy stuff. Also note if later on they do need cash then they can sell the securities but this takes the cash out from elsewhere in the economy.

The same would be true if it was an NZ investment fund instead of China purchasing the government securities. Except in this case it would not need to go through the intervening step of purchasing NZD as it would already have local currency.

Agreed, but would China Central Bank be spending their dollars if they didn't hold securities? No, they would hold them in their reserve account at the RBNZ. Whether they hold the securities or not (if Treasuries weren't issued), and is not relevant to inflation, despite the differences in M1..

Remove this spending and you lower the crowding out of private investment. Removing spending means less inflation and lower interest rates. This in turn means people borrow more to invest elsewhere. It also means households have lower interest costs which mean they can return to spending sooner.

Government spending only crowds out private investment when the economy is almost or fully employing their resources (in which case more investment will lead to inflation). This is not currently the case in New Zealand, with 6% (?) unemployment and untold underemployment.

On the other side of the spectrum, if the government doesn't net spend enough, then businesses sales won't increase fast enough, and the firms won't bother investing. Firms invest when they face increased sales/believe future prospects are better. If the economy isn't growing, then these firms won't invest.

The only thing we need to be careful of is that property prices don’t start ramping up again, which is why I’m quite happy for a tax on property. Now whether this is in the form of FDR or CGT is a fair argument, and it is an argument which needs to be had.

Agreed.

Thanks for reading.
Te Whetu

Thanks for the discussion!

[drew]

Yes, but whether or not that "money printing" results in inflation depends on whether the private sector goes on to spend. If for example the government "prints money" and gives it to beneficiaries who then go on to save it, then inflation won't be a problem.

This is the situation NZ is in now. The private sector is de-leveraging, so big government deficits are not nearly as inflationary as they otherwise would be. Remember inflation of the sort we are talking about is caused by excessive spending.

Nonsense. If the beneficiary puts the money in a bank then the bank will be paying interest to the beneficiary and will seek to onlend the deposited funds. In a fractional reserve banking system savings will exponentially grow the money supply. Inflation is not caused by spending alone - it is caused by spending of an increased quantity of money that finds its way into an economy.

When the total quantity of money increases people will tend to spend more money. When more money gets spent on the same amount of goods and services being produced, prices will tend to rise. Thats inflation.

Yes, agreed. However the key point here is that the people that buy the Treasury securities (banks, insurance companies, funds etc) wouldn't be spending anyway. It is ridiculous to say that "Those that buy the treasury securities don't then use them to trade for goods and services" because they wouldn't anyway. Holding Treasuries instead of cash in no way alters these firms/savers propensity to spend, and therefore won't alter inflationary pressure.

Wrong again rpcas - treasuries held by a bank will be treated by them as core capital and will allow them to increase their lending and hence the money supply will grow.

If a non-bank institution or business or whatever holds a treasury note they can use that as security to borrow funds against. The treasury will likely end up in the hands of a lending institution and the money supply will most likely increase.

Agreed, but would China Central Bank be spending their dollars if they didn't hold securities? No, they would hold them in their reserve account at the RBNZ. Whether they hold the securities or not (if Treasuries weren't issued), and is not relevant to inflation, despite the differences in M1..

In this example the RBNZ would likely use the funds deposited by a foreign central bank as part of its open market operations which is a more subtle way in carrying out monetary policy than adjusting interest rates and capital ratios. Those funds will very likely find themselves somehow sloshing through the NZ economy.

Government spending only crowds out private investment when the economy is almost or fully employing their resources (in which case more investment will lead to inflation). This is not currently the case in New Zealand, with 6% (?) unemployment and untold underemployment.

No thats not right. Crowding out can occur in a specific sector it depends on what action the govt is going to take. It seems to me you are only looking at things in aggregate when oversupply and undersupply can occur at the same time in different areas of an economy.

On the other side of the spectrum, if the government doesn't net spend enough, then businesses sales won't increase fast enough, and the firms won't bother investing. Firms invest when they face increased sales/believe future prospects are better. If the economy isn't growing, then these firms won't invest.

Well thats debatable. The govt is only able to spend money by taking it from the consumers through taxes. I prefer to look at it from a philosophical perspective - if the people at large want to spend less money in aggregate or in a particular sector (both of which can cause a recession) what right has a govt to take money from them forcibly and spend against their will?

[Te Whetu]

Hmm

So sadly a property tax is not something I see our current National government doing of its own volition; these sorts of taxes are generally implemented by left leaning parties. Labour didn't want to implement this sort of tax in its three terms, as many of its middle voters are those that have gone out and heavily invested in property. That said I would not be surprised to see this sort of tax implemented in Labours next term, so likely 4-7 years away.

That's not to say this sort of tax couldn't be implemented by a National government, but it would require pressure from all it's supporting parties. This basically means both the Maori party and Act would need to team-up. An unlikely combination but this sort of tax does seem like the type which each could support, though the Maori party would likely ask that there is a discount for Maori land written into the legislation due to its reduced marketability, (it is very hard to sell as only certain parties can purchase it).

It would also increase the chances of National implementing some sort of tax like this if Labour campaigns on a CGT/FDR tax, which is certainly not out of the realms of possibility.

Cheers
Te Whetu