New Zealand is considering changes to its taxation policy in order to make the country more competitive for foreign investment. In this task they are destined to fail. Let me suggest why. There are several failures the NZ government will make.
1. It will fail to consider efficiency measures - it will focus on raising money rather than improving efficiency/productivity or cutting expenditure. e.g. From hospitals
2. It will fail to recognise where the prospects for economic growth come from. It will focus on cutting the corporate tax rates in order to attract large companies. The scope for expanding business in NZ does not rest on big business, it rests on small business. The reason I say this is because NZ is a very small market, and any decision to align with Australia is only going to reinforce the belief that any regional office in Australia (Syd/Melb/Bris) can service the NZ market. For most countries, NZ does not even justify a presence. This could actually be a strategic advantage for NZ small business.
There are likely to be two serious contenders for tax increases:
1. Capital gains tax on investment property - this would be consistent with the tax regime in Australia, and there is considerable appeal in aligning the tax systems.
2. Stamp duty on property transactions - expect a tax of up to 3%
3. An increase in the GST - I don't expect this tax increase to succeed, least of all at at time of recession. Frankly the suggestion that it is a serious prospect I believe is intended to make people feel like they actual 'won' a concession, when in fact the government will look at the other taxation options.
These tax increases will be used to fund tax reductions for business. The question is - do these tax cuts make sense? Given my arguments above, I believe any revenue increases should be used to invest in NZ small business rather than big business who really only invest in primary resources. Resource producers stand the best chance of passing through costs in this recession, so they are not the group of investors I would be looking to support.
Some time ago NZ joined the chorus of governments which adopted libertarian policies. I consider myself libertarian, but one has to maintain a sense of reality. It I was a taxpayer with any voting power I would not sell an asset based on prices of $0.12/kWh, only to allow the new owner to raise prices to the marginal cost required to commission new generating capacity, which is $0.24/kWh. The reason is because the power companies can generate ample profits at $0.12/kWh, given the cost of generation capacity is zero for most hydro plant (which is 70% of total capacity). Privatisation was a bad deal for NZ'ers. That does not mean it always is; just in this case. This is hardly an incentive for business investment. Of course big business can negotiate harder by 'threatening' to build their own generating capacity.
Another case of bad policy was the decision by the NZ government some years ago NOT to support 'winners'. I understand the sentiments of not providing subsidies to business, but there other choices. Small business in most countries have difficulty raising capital. Its even harder in small markets like NZ. This country needs strategic industries. Students need an assurance of jobs if they are going to study such subjects. This country needs to support niche industries, whether its manufacturing of niche sporting equipment, whether its subsidising a cargo vessels to make regular low-cost shipments to certain markets, whether its a trade shared vision for trade. I see that 10 wine growers in Australia are gathering to promote their wines. NZ needs the same shared vision. The challenges are:
1. Ensuring accountability so the money is not wasted
2. Ensuring that its not a tax scheme but an investment scheme because I hate the idea of trampling on people's rights.
It is all to often forgotten that taxation is a breach of the taxpayers rights to determine their own destiny. I can understand the counter-argument that there needs to be shared expenses like road funding, say with a road petrol tax, rather than tolls everywhere. Such taxes should be user pays as much as possible, and I think people should be able to sue the government for relief from such taxes. People should not not funding schemes they have no benefit from. We don't want bad schemes funded. There needs to be a pay-off. We need schemes to have objective standards of value, so that people and judges can establish their value. This is the vision of this report.
I am reminded of the book 'Bad Samaritans' by Ha-Joon Chang. It looks at history and discovers that the industrial giants, whether Britain in the 17th century, the USA in the 19th century, Germany and Japan in the 20th century, all existed as a result of protectionism. Only when these industries had established themselves did the governments wind back the subsidies. This is not to suggest the model of these countries is desirable. In fact there are many better ideas to boost investment. One option might be a family-based subsidy for business. It needs more thought by myself.
I think there are many successful business people in the world who succeeded because of help from family and friends. The reason that some form of incentive is needed is because people have a tragic sense of live. They are inclined to be cynical about others, and thus people end up with no savings, no customers, no feedback and no service. Ultimately a more prosperous economy today tends to arise only because of government stimulus, though such stimulus arises for the wrong reasons, in order to maintain demand, to keep governments elected; even if it hurts the economy.
Upon completion of this book I will demonstrate a scheme which will provide for the most efficient use of funds. Give me time...so many other books to write. :)
1. It will fail to consider efficiency measures - it will focus on raising money rather than improving efficiency/productivity or cutting expenditure. e.g. From hospitals
2. It will fail to recognise where the prospects for economic growth come from. It will focus on cutting the corporate tax rates in order to attract large companies. The scope for expanding business in NZ does not rest on big business, it rests on small business. The reason I say this is because NZ is a very small market, and any decision to align with Australia is only going to reinforce the belief that any regional office in Australia (Syd/Melb/Bris) can service the NZ market. For most countries, NZ does not even justify a presence. This could actually be a strategic advantage for NZ small business.
There are likely to be two serious contenders for tax increases:
1. Capital gains tax on investment property - this would be consistent with the tax regime in Australia, and there is considerable appeal in aligning the tax systems.
2. Stamp duty on property transactions - expect a tax of up to 3%
3. An increase in the GST - I don't expect this tax increase to succeed, least of all at at time of recession. Frankly the suggestion that it is a serious prospect I believe is intended to make people feel like they actual 'won' a concession, when in fact the government will look at the other taxation options.
These tax increases will be used to fund tax reductions for business. The question is - do these tax cuts make sense? Given my arguments above, I believe any revenue increases should be used to invest in NZ small business rather than big business who really only invest in primary resources. Resource producers stand the best chance of passing through costs in this recession, so they are not the group of investors I would be looking to support.
Some time ago NZ joined the chorus of governments which adopted libertarian policies. I consider myself libertarian, but one has to maintain a sense of reality. It I was a taxpayer with any voting power I would not sell an asset based on prices of $0.12/kWh, only to allow the new owner to raise prices to the marginal cost required to commission new generating capacity, which is $0.24/kWh. The reason is because the power companies can generate ample profits at $0.12/kWh, given the cost of generation capacity is zero for most hydro plant (which is 70% of total capacity). Privatisation was a bad deal for NZ'ers. That does not mean it always is; just in this case. This is hardly an incentive for business investment. Of course big business can negotiate harder by 'threatening' to build their own generating capacity.
Another case of bad policy was the decision by the NZ government some years ago NOT to support 'winners'. I understand the sentiments of not providing subsidies to business, but there other choices. Small business in most countries have difficulty raising capital. Its even harder in small markets like NZ. This country needs strategic industries. Students need an assurance of jobs if they are going to study such subjects. This country needs to support niche industries, whether its manufacturing of niche sporting equipment, whether its subsidising a cargo vessels to make regular low-cost shipments to certain markets, whether its a trade shared vision for trade. I see that 10 wine growers in Australia are gathering to promote their wines. NZ needs the same shared vision. The challenges are:
1. Ensuring accountability so the money is not wasted
2. Ensuring that its not a tax scheme but an investment scheme because I hate the idea of trampling on people's rights.
It is all to often forgotten that taxation is a breach of the taxpayers rights to determine their own destiny. I can understand the counter-argument that there needs to be shared expenses like road funding, say with a road petrol tax, rather than tolls everywhere. Such taxes should be user pays as much as possible, and I think people should be able to sue the government for relief from such taxes. People should not not funding schemes they have no benefit from. We don't want bad schemes funded. There needs to be a pay-off. We need schemes to have objective standards of value, so that people and judges can establish their value. This is the vision of this report.
I am reminded of the book 'Bad Samaritans' by Ha-Joon Chang. It looks at history and discovers that the industrial giants, whether Britain in the 17th century, the USA in the 19th century, Germany and Japan in the 20th century, all existed as a result of protectionism. Only when these industries had established themselves did the governments wind back the subsidies. This is not to suggest the model of these countries is desirable. In fact there are many better ideas to boost investment. One option might be a family-based subsidy for business. It needs more thought by myself.
I think there are many successful business people in the world who succeeded because of help from family and friends. The reason that some form of incentive is needed is because people have a tragic sense of live. They are inclined to be cynical about others, and thus people end up with no savings, no customers, no feedback and no service. Ultimately a more prosperous economy today tends to arise only because of government stimulus, though such stimulus arises for the wrong reasons, in order to maintain demand, to keep governments elected; even if it hurts the economy.
Upon completion of this book I will demonstrate a scheme which will provide for the most efficient use of funds. Give me time...so many other books to write. :)
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