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What is wealthy in New Zealand?

All this talk about wealth taxes led Susan Edmunds, a regular writer in financial matters, to explore the subject. Her excellent article is at this link. 

The taxes proposed by the Greens would be as follows:

  • Under $1 million – Tax rate 0% 
  • Between $1-2 Million – Tax rate at 1%
  • Over $2 million – Tax rate at 2% on the value over $2 million

The Greens also propose that someone might be able to defer the taxes until death where virtually all the wealth is held in the property.

The question of whether a million dollars is wealthy requires some examination. One aspect of the question that keeps getting ignored is age and stage. Take these examples: 

  • My daughter is 20. It really doesn't matter that her net worth is negative and getting slightly worse right now: that's student debt. Trading money for a good education is a pretty good bet. The odds are that over her working life her degree will add to her income considerably. I asked her recently whether she would like access to the account we have with money in it for her uni education, she told me not to let her because she'd just spend it. Self-knowledge is a wonderful thing.
  • Consider a recently retired widow of 70 has just lost her husband. She owns a home in Auckland that is at about the median value - $850,000. Due to good saving habits and some life insurance she has a lump sum of $800,000 too. As a single person with wealth of $1.65 m she would be expected to pay the new wealth tax. This is how that works: term deposit rates are at 1.6% right now. Inflation is 2.5%. As her wealth falls between $1m and $2m, she would be taxed at at 1% on $650,000. The purchasing power of her capital (above the $1 million threshold) will now reduce by 1.9% a year - and she hasn't even spent a cent - add a withdrawal rate of about $40,000 per year to supplement her superannuation and wealth will decline quickly in the current low return environment (which looks like a sustained period). 

A big issue around wealth taxes (and capital gains taxes) is complexity, i.e. – identifying what is taxable and constantly having to value it. Then there is the question of having to find or release cash every year to pay for it (hence the reason most capital gains taxes are only payable on realisation).

In our business, views differ on what would be more efficient. Some prefer no additional taxes, some prefer a land tax to help address the current tax imbalance around property gains, while others prefer a capital gains tax. Still others say the focus should be on changes to reform tax to reduce carbon dioxide and other greenhouse gases. Both of the last two might help cool the housing market.

But I digress: people at different stages in life have different needs, if we don't take that into account, then we will miss the target of helping people that really need it. Of course there are people we should spend a lot more time and money helping. Regular readers of this blog will know my views on, say, helping those with mental health issues, preventing workplace accidents, and reducing suicide. We could do with better housing stock, preferably, by putting up a few more houses. 

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