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[Music] Hello welcome along to the Property Academy podcast, I'm your host, Sebac Dynand. And this is the show that helps Kiwis go from zero to five investment properties so you could be financially free and stick around for the next 15 minutes because you're going to learn should New Zealand have a capital gains tax? The three strongest arguments for a CGT in New Zealand and the three strongest arguments against one. So welcome along to the debate. We are heading towards the election on the 7th of November. The capital gains tax is the kind of largest tax debate we're having at the moment. And we know that Labor has got a policy where they want to bring in a capital gains tax, which I've talked about on the show before, but today I really wanted to dig into the should. Should New Zealand have a capital gains tax at all? Now, Andrew and I have had many debates in the past. He thinks we should have one. I think no, we shouldn't. So what we're going to do is we're going to get three arguments each. Andrew, you're going to get three. I'm going to get three. And then you guys watching on YouTube and listening to the podcast, you get to vote at the end down in the comment section. Now, I should say that there are different types of capital gains taxes, right? So there could be one where it's just property getting taxed or it could be everything getting taxed like your increases in value of your shares or your businesses. Today we aren't going to talk about that comprehensive capital gains tax. So that's where everything gets taxed, your property, your shares, your businesses, everything usually accepts the family home. Now, Andrew, I'm going to let you kick it off with your first argument. Why do you think New Zealand should have a capital gains tax? I think all my investors are going to hate me for saying this. But I genuinely think that we should have one. And if you didn't reduce one, then you can tax those assets going up in value and you can offset that because you've collected more revenue now, you can offset that by reducing people's income tax rates. And right now, the top tax rate is $39 cents in the dollar. That's quite a hypercentage. And we do just take a huge amount. We disincentivise people from working harder and harder and earning more money. When, you know, if a property goes up in value, you have an act to really work for that quite the same way. So I think, well, if we take money out of that asset pool and we deliver that to the economy and we, and we can then reduce people's income tax and they can work a bit more and build their wealth, we'll have more control of building their wealth that way. I think that's a better outcome. And if we look at it that way, you can raise a lot of money through capital gains tax and offset that income tax. And so where revenue neutral? Well, I did see that the tax working group estimated that taxing more income from capital gains could raise $8 billion over the first five years. It's huge. And again, we're not raising taxes here. We're just redistributing how we're taking them. Okay. Now, the way that I think about tax though, if I can jump in here with my argument against the capital gains tax. If we think about taxing cigarettes, while we're doing that, we tax cigarettes, we want to make them more expensive so that fewer people smoke. If we think about alcohol, okay, we tax that because we want less drink, we want less drinking. Some can't treat tax sugar because they want people to eat less sugar. And so I think we're all comfortable with this idea that if you tax something to either increase the price or decrease the return from doing that activity, you get less of it. And so the way I think about this, well, if we want people to be wealthy, if we're going to tax wealth creation, you're going to get less wealth creation happening. And that same tax working group we just mentioned before, they did warn that extending a capital gains tax would both increase the complexity of our tax system and potentially bring in higher compliance costs because it's very easy to tax income, right? It's very difficult to figure out, well, okay, we're going to tax the capital gain. That's going to happen when somebody sells their property or when somebody sells their business. But there are sales costs involved with that. There are other costs as well. Okay, are we going to tax inflation as well on top of that? So this just becomes a lot more complex, where taxing income is very, very simple. I think we've already got this issue in New Zealand where our productivity is relatively low. It's been falling for the last four years. And now we want to take away some of the gains from investment. And again, it will be about a broad base capital gains tax. So this would disincentivise a business owner to buy a new piece of equipment or spend money on a new piece of technology that's going to make their employees more efficient because, okay, that increase in value of the business, some of that gets taxed away. So it's another disincentive to investing in that technology. I suppose my main point here really around capital gains tax is somewhat similar to what you were saying around income. Is that it changes behaviour. So people will hold on to some of their assets longer than they otherwise would because they don't want to sell it. They'll take fewer risks. They'll start fewer business. And I think that leads to a worse outcome for New Zealand. What have you got to say to that? If I were thinking about, if I just wanted to pay as little tax as possible, then I'd just pay myself a modest salary. I'd pay my bills out of the business. And then I'd sell my business for a huge profit at the end because I've built up all this wealth in my business. So I kind of think like actually, they're getting taxed now under this. No, but your argument is, oh no, all these business owners, you know, just struggling away. No, they can wrought the system because they just pay themselves less. They don't pay much income tax and then they sell their massive valuable asset and tax free. Okay, let's hear you seek an argument. Your love saved wrought the system, don't you? Oh, you love to wrought it. So I think the big thing is we've got to think about how far behind New Zealand is when we're kind of considering these things. So New Zealand is the outlier when it comes to the IECD countries because we're one of the only countries that still doesn't have a capital gains tax. 31 out of 38 members, just over 80%, they have a comprehensive capital gains tax. Well, they can figure out this complex system that you're saying is going to ruin us. And if you look at tax justice, RTO Rose Research, Australia, the US, the UK, Canada, Germany, France, Japan, they've all got capital gains tax. None of their economies have collapsed yet. The economy has got a collapse injury. Your business could destroy what I was saying. But what have we got here? What are some of the other countries you're talking about? Okay, Costa Rica, 15% flat rate. I think that makes it so easy, just a flat rate that you pay when you sell an asset. Okay, what else we got? And I do agree with you that there are some complex structures. Norways gains are 1.72 factor to 37.84 effective. Just make it easy, just make it a flat rate. And if you look back at the UK, so this year, the government's expected to take an almost $10 billion, which is about $20 billion, New Zealand dollars, just from capital gains tax. Now, their housing economy is not something we should chase after at the moment, but surely there's a middle ground. Now, I want to be really clear. I wasn't saying that it's so complex that you can't figure it out, right? But what I was saying is, if we've got such poor productivity and we are sliding behind, why are we wanting to add another disincentive in or why people would potentially not invest in their businesses? But what I really want to say here is I want to invoke the spirit of my still living mother and say, Andrew, just because everyone else does something doesn't mean that it's right. That is right. Very good idea. Because in investing, we often talk about being a countercyclical investor, right? So we're doing things that other people aren't. And so the way I see it here is, well, why would we want to be like some other countries? Like, do we really aspire to be Estonia? Or do we really aspire to be the Czech Republic, both of which have capital gains taxes? Why not aspire to be more like Switzerland, which doesn't, and is the very rich country, same with Singapore? The other thing that I just mentioned is, what are my favourite former ministers? Oh, here we go. Off to New Zealand government, as Peter Dunn, he was the revenue minister. He was the leader of United Future with a bow tie, right? Do you remember him? You've brought him up no less than once a week since the time I met you. So yes, I remember Peter Dunn. And it's not because I ever voted for him, right? It's just that I thought that it what he said made a lot of sense. And when talking about a capital gains tax, I remember him saying that the job of tax action is to raise revenue for the government's programs. It's not necessarily for the tax system to be perfectly fair. The sole purpose of tax is to raise revenue for the government's programs. And we currently do that through income tax because it's extraordinarily regular. People's income doesn't tend to fluctuate up and down wildly every single year. And so it's the same with GST. People spend pretty consistently and we can have reasonably open rates. It's very simple to tax income. It's very simple to tax spending. It is much more difficult to tax capital because you're not going to make a capital gain every year. If you buy an investment property and let's say you've done really well out of life and you've got five investment properties, you're not going to be selling one every year. Otherwise, after five years, you're going to run out. And the exact amount of capital gains that you've made depends on the market at the time. And so if you're thinking about, okay, we're going to move from a highly efficient way of raising revenue from the government, primarily through GST and income tax, to a much more complicated way. Well, is that really the best idea as opposed to just raising the revenue in a very simple way? way through income and spending taxes. I suppose my main point here is that the tax system is not necessarily there to be fair because life's not fair. The reason we tax labour and not capital isn't fairness, it's practicality and we've got a very simple and genuinely useful tax system in my mind. You keep using this word complicated, like it's so sophisticated that no one's ever going to be able to fit out. No, it's a good idea. I do think that the current system, we'll keep flipping between like two years and 10 years and five years, bright light, that's so much more complicated than it has to be. It should just be a blanket amount. But my last point is that the current system, it rewards holding assets and it punishes people going to work and punishes labour. And I tell you why I think like this. So the IRD did the high wealth individuals research project in April 2023. And they took a look at 311 of the wealthiest families in New Zealand. Medium wealth, by the way, was $106 million. Like these people are rich and most of the economic income each year, and when I say most I'm talking about 80%, it came from capital growth. Now the effective tax rate for these people was under 9%, it was 8.9%. The medium wage earner gets paid a salary which is fully taxed and the effective tax rate is kind of 20%. So how is that a reasonable way of collecting revenue? Andrew Nuckel, you know, as well as I do, that paper that you're referring to was complete BS because it completely ignored the family home for the average Kiwi, which is where a lot of us have most of our wealth. So it massively understates the amount of wealth generated by the medium wage earner. And it ignored the fact that it only looked at the period from, I think it was 2017 to 2022 or 2016 to 2021. So it included this massive increase in asset prices from COVID, most of which have decreased in many parts of the country now. So they're looking at a small period where the housing market boomed, but oh no, we're going to ignore the largest asset that the average Kiwi has. So in my mind, they rigged the dice, they loaded the dice right from the start, just so that David Parker could come out and say, oh look, there is a difference in tax rates. The other thing is you are very sneaky there if I can say so myself with the word economic income. No, no, no, there's only one type of income, which is what you get paid into your bank and they're saying, oh well, well, you know, they increase it in value of businesses and properties. Oh, that's economic income. Well, no, there was no income because nothing came into your bank account. And so I think, okay, you can come up with these fictitious percentages and tax rates based on imaginary income over a very small time period while we ignore some other factors. But actually, I appreciate what you're trying to do, but I'm not buying it. I'm surprised you're not buying it. You just probably don't want to pay your GST tax either. Now, my last argument I've got to say is that a capital gains tax is very, very easy to avoid, right? The way you don't pay a capital gains tax and the system is you just don't sell the property or you don't sell your business, you don't sell your asset and then you don't pay the tax. And so what we've seen is that a capital gains tax actively discourages people from selling their assets. And what that means is that capital and money and wealth can get stuck in the wrong places. So let's say you've owned a property for a long time, it's gone up in value and an ideal world you'd like to sell that to invest in a business. Well, if you've owned that for 20 years, it's grown in value, you know, selling that property if there's a capital gains tax in place could be a massive tax bill. And so you think, okay, even though I could have a better use for that money, I'm not going to sell that property even if a better investment comes along. And this is what what our economist called the lock-in effect and it's one of the probably the biggest criticisms of a capital gains tax internationally. There was one US study that estimated that it reduced investment efficiency significantly because the money, the wealth, doesn't go to where it's most productive. You decide you're not going to sell a business that you started to invest in something else. You decide not to sell your goal or your rental or whatever it happens to be to put it in to where you could get a higher return because you're trying to avoid the tax. And so it actually just makes the economy much less efficient. But one of the questions I would know from you guys watching on YouTube and the podcast as well, who do you think made the better case? Now, if you think Andrew one comment down and the Spotify comments for the YouTube comments Andrew one, if you think Ed one and you don't want to capital gains tax, comment down there. No, no, I see what you did there. No, if you think the Ed one is not about whether or not you want a capital gains tax or otherwise. You sneaky. Oh, you were sneaky before. But if you don't like capital gains tax, no, if you think that I want comment head one and we'll see where the community lands. And over the last 15 minutes, you've learned shouldn't you sell it to have a capital gains tax, the three strongest arguments for a CTT and you sell it to the three strongest arguments against one right less than that. But please don't forget to write a review and subscribe to the podcast really does help us get the message out to more people. Thanks for listening to the property Academy podcast. I'm your host, you're the night. 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