Diana Clement: Tax crowds out vital debate

Elections are all about romancing investors' wallets. With the ballot-box battle under way, we've asked the leading parties what they are offering mum and dad investors. And if you're wondering how this will affect you, we've asked some leading commentators to cook up some opinions.

Labour

When it comes to the key issue of tax, Labour's offer to the nation's back pocket is a $1.3 billion extension to the Family Support and In-Work schemes.

The KiwiSaver account is the crux of the party's savings and housing front, offering a sweetener to those who open it and more benefits for first-home buyers. The party will also offer equity contributions for first-time buyers - which have to be paid back when a property is sold.

Investors in collective funds will no longer be at a tax disadvantage compared with those with direct investments, and income from funds will be taxed at the recipient's marginal rate.

The party also plans to index tax thresholds, meaning individuals slip into the next tax bracket only if their real income goes up ahead of inflation.

National

The crux of National's offerings to the private investor, says finance spokesman John Key, is running a vibrant economy and taxing people less - putting more dollars into our collective pockets. The total cuts are made up of a $2.4 billion tax package, $500 million in the families' package, a reduction in the company tax rate from 33c to 30c, and scrapping of the carbon tax.

National will also scrap the capital gains "tax grab" plans on investments in grey-list countries.

For property investors, National's housing spokesman David Carter promises there will be no state-funded tenant advocates under National. The party would also bring back the tenant's right to buy state houses and review the Building Act.

Greens

Unsurprisingly, the Greens' focus is on a tax shift to penalise consumption through an eco-tax. Whether or not investors' back pockets will receive a boost will depend on individual spending and consumption patterns.

The Greens would like to see non-residents banned from buying property here, unless they plan to move.

United Future

It plans to leave $2.5 billion in people's pockets through tax cuts, says finance spokesman Gordon Copeland.

It supports the KiwiSaver scheme as well as adding a child trust fund scheme, which would include sweeteners to encourage parents to save into children's accounts.

United Future proposes to sell 40 per cent of state-owned enterprises to investors and superannuation funds.

On the investment front, Copeland says the party believes in tax neutrality and will not treat grey-list investments any differently to locally based ones.

It will also remove GST from rates.

NZ First

It will remove GST from petrol - leaving $10 in the wallet of the average car owner every time they fill up.

Business tax rates will be lowered to 30 per cent on domestic earnings and 20 per cent on export earnings.

It will give tax rebates for those who take out health insurance.

It will raise the minimum wage to $12 an hour and will bring in compulsory superannuation.

On the subject of investment, it will create an internal savings and investment base as an alternative to foreign ownership, invest in key infrastructure and direct the guardians of the New Zealand superannuation fund to prioritise shares in local infrastructure companies.

It will protect property rights and "aim to ensure that interest rates trend down".

Act

It will cut tax rates to 25 per cent and 15 per cent - costing $5.7 billion.

It will provide for direct payment of beneficiary rent to landlords.

What the talking heads think

In the words of John McDermott, chief economist at the ANZ/National Bank: "There is a lot of huff and puff in each party's election manifesto, but little that will blow New Zealand's house down."

But nevertheless there are few outright election bribes for the private investor. The most obvious impact on the nation's purses will be income-tax cuts and related family packages.

But the issue that's eliciting a lot of noise from the investment community is the proposal in the Budget that investments in grey-list countries (Australia, Canada, Germany, Japan, Norway, Britain or the United States) be subject to capital gains tax from 2007.

The announcement by Labour in the Budget brought a barrage of protest. Economist Gareth Morgan describes the proposal as "crass" and based on "a rationale that is wafer thin". Even Labour has backed off from that position, saying: "We are trying to find a more rational tax treatment of overseas investments."

It's a Catch 22 situation, says Spicers' Jeff Matthews. No investor should have all their eggs in one basket - and that includes no one country. But such a policy would have Kiwi investors bringing their money home on the basis of tax treatment, not underlying returns.

Each investor's circumstances are different. But Matthews cites the asset allocations of superannuation funds as an example of where individuals' thinking should be heading. The average fund, says Matthews, has more than 50 per cent of its money in international equity-based and fixed-interest investments.

Therefore, the parties should be offering a level playing field where investors choose investments based on the underlying return, not because they enjoy a tax advantage or disadvantage.

Conventional wisdom says it's a bit of a no-brainer that sustaining a healthy economy into the future will have the biggest effect on individuals' net wealth.

"It is also easier to fund health and education spending if you have a bigger pie to carve up," says Matthews.

"Investors should be looking at what the parties are offering in terms of growth over the long term, not just the next six months or two years."

David Skilling, chief executive of the New Zealand Institute, says by concentrating on tax, the major parties have missed the boat.

"Their policy around savings is the critical issue," he says. "[The election campaign] has mainly been around tax cuts, and I am not sure that will result in any meaningful increase in savings."

The issue for most people is whether to save $20 a week or not. "It is not whether they invest offshore or onshore or what vehicle they use to save."

Skilling says New Zealand has the lowest household savings rate in the OECD. Experience from Australia, Britain and the United States, which have better savings records, indicates that countries that offer financial incentives such as tax breaks have better savings records. "People tend to procrastinate if left to their own devices."

Household income has gone up during the past five years, yet holdings in financial assets have not increased. Meanwhile, household borrowing has.

"That means we are borrowing to consume."

Although the KiwiSaver account is one such savings-enhancing promise, it doesn't get commendation all around. Morgan criticises the opt-in system, which means that employees join the scheme unless they choose to opt out. "Encouraging savings is good. But the history of opt-in schemes isn't good," says Morgan.

Investors who poured into endowments in the 1980s "lost their dough" and the funds industry, which will manage the KiwiSaver money, "has an illustrious track record in terms of gouging people's wealth", says Morgan.

Issues surrounding investment property have taken a back seat with little noise on the subject - one that affects 375,000 landlords directly, tenants indirectly and also homeowners who count much of their personal wealth and debt in their homes.

Auckland Property Investors Association (APIA) president Andrew King says Labour's review of the Residential Tenancies Act is a cause for concern.

"Of particular worry is the topic of tenant advocates. In Victoria, Australia, "advocates" receive $2.5 million each year to help tenants. The Victorian Property Owners Association says that most of this is spent on lawyers defending tenants in the Tenancy Tribunal, while landlords are not allowed to have legal representation. It would be grossly unfair if such a situation were to occur in New Zealand."

The APIA, says King, is in favour of the KiwiSaver scheme's incentives for first-time homeowners, believing it will not artificially inflate the housing market.

However National appeared to be offering more landlord-friendly policies than Labour. "They have pledged to improve aspects such as direct payment of accommodation supplement and reviewing the imbalance of the act."

New Zealand First was unlikely to provide any help to landlords as it is against tax reductions. It would like to reduce immigration and would increase the level of state housing.

Act, meanwhile, had always been an active supporter of landlords and sought to redress imbalances in the act that favour tenants.

* Due to a technical fault, Mary Holm's column will not appear today, but will return next week.