Bye Bye Bach: Cullen Recommends Capital Gains Tax

Sir Michael Cullen has done it.

He has officially slashed the throat of the New Zealand economy.

If you own land…or property…or stocks…or a business…you have just become a victim to the greedy, grubby hands of a government that can’t resist spending more of your money.

Here’s how they plan to do it:

• Sell your land? Taxed.
• Sell your stocks? Taxed.
• Sell your business? Taxed.
• Sell your idea (IP)? Taxed.
• Sell your bach? Taxed.
• Any solid waste? Taxed.
• Use fertiliser? Taxed.
• Extract water? Taxed.

In return for gobbling up your investment returns, the Tax Working Group suggests potentially tweaking the tax brackets a little…just for the low and middle-income groups.

Does that sound balanced to you? Who’s the real winner here?

I’ll answer that because Sir Michael certainly won’t. It’s the state. It’s the politicians who like buying things with other people’s money. It’s the folks in power who have backs to scratch…and ‘initiatives’ to launch.

They want to spend more, so they feel like it’s appropriate to claim a greater slice of YOUR income.

It’s silly, though, isn’t it?

Because, over time, this will not only hurt New Zealand as a whole, but it will eventually hurt the state’s revenue stream. It’s basic economics.

Tax discourages growth. It takes investment dollars and turns them into government dollars. An economy grows through investment and entrepreneurship, not bigger government.

You need flourishing businesses backed by ambitious investors to spark new economic expansion. Sir Michael’s proposed tax only deters potential business owners and investors.

Imagine that you’re an entrepreneur with a good idea for a new business. It will cost time and money to get started, but eventually it might become profitable and you could sell it for a tidy sum. Maybe enough to retire comfortably.

But with the new proposed capital gains tax (CGT), you’d have to fork over a big chunk of the proceeds.

If you were on the fence about launching the business, would this news spur you on to start the business? Or would it push you the other way?

And if you’re an investor with a few thousand dollars to spare…and the opportunity to fund a new business, would you be incentivised or disincentivised to invest knowing that your potential returns will get a taxman’s haircut?

Frankly, it’s not hard to see the cause and effect with this recommendation. Higher taxes mean lower investment. Lower investment means decreased productivity. Decreased productivity means worse profitability for businesses, higher unemployment and thus a nationwide shift towards lower income. [openx slug=inpost]

In the short term, soon-to-be retirees will get hit the hardest. Perhaps you’re one of them. You’ve invested into stocks, planning for the day you’ll cash out and retire comfortably. Maybe you own a couple extra houses too…again, as retirement-funders. Maybe you own a small business and are almost ready to sell your stake there too.

All of those sources of funding for your retirement are about to get slashed…thanks to Sir Michael’s recommendation.

You can forget retiring at 65. Try 70 or later…

The whole thing isn’t logical. Or at least…it’s not logical if you’re looking at it from a citizen’s perspective.

From the state’s perspective, it’s fantastic!

Not one but a dozen or more new income streams to feed the fat and hungry government troll.

And with the new flow of cash streaming into state coffers, politicians will have the flexibility to launch whatever programmes they like…generally as means to ‘buy’ voters come election season.

It’s double taxation — first your income, then again when you cash out on your investments.

It’s an envy tax — take from the haves and ‘give’ to the have-nots…

…Just as long as the have-nots vote the right way.

Don’t be surprised if the mainstream media cheers this proposal from the Tax Working Group. It fits into their anti-wealth agenda quite conveniently.

You’ll also hear hurrahs from the millennials and uni students who can’t resist a nice handout.

But for small business owners, farmers, shareholders, soon-to-be retirees, landlords, property investors…this new regime could mean a life-changing setback.

In fact, this sort of major change could finally be the catalyst that triggers the property crash we’ve been concerned about. For the most part, New Zealand’s managed to hold on to a surprisingly buoyant property market…while our similarly-unaffordable neighbours in Australia and Canada have collapsed.

But it’s primarily been because of the heavily-encouraged property investment sector.

Unfortunately, with ring-fencing gone as of last year…and property sales being taxed under Cullen’s recommendation…there’s hardly a thread for the market to hold onto.

I wouldn’t be surprised if heaps of Kiwis dump their secondary and tertiary properties before this new tax goes live. And what does a surge in supply mean? A freefall in price. A market crash.

Kim Dotcom nailed it in his recent tweet:

Source: Twitter | @kimdotcom

As investors in the stock market, we’re very concerned for what implications this new plan could have for the future of Kiwi investing.

Now, it’s not unmanageable, of course. Two-thirds of the OECD nations have capital-gains tax, and they’ve gotten by just fine. That includes the UK, Germany, Canada and the US, to name a few.

As an American myself, it was a pleasant treat to come to New Zealand and find that capital gains weren’t taxed.

On the upside, after reviewing the Final Report from The Tax Working Group, it appears that CGT will not be levied on foreign shares and the existing rules will continue to apply. We’ll continue to monitor this area as the government announces its approach to the recommendations.

But the logic doesn’t change — this tax is a disincentive for investment and could easily trigger a countrywide collapse. That’s a real risk for you to consider right now.

We’ll keep an eye out for new details…and relay them to you as soon as we have them.

Best,

Taylor Kee
Editor, Money Morning New Zealand