Tax credit can mean tax rate rise

By MARY HOLM

Q: In some North American countries, interest paid on student loans and your home mortgage is tax deductible. Does this apply in New Zealand?

Similarly, to encourage people to save for retirement instead of straining the taxation system, the Canadian Government promotes saving schemes where the contributions are untaxed up to a certain (generous) limit, and growth on the investment remains untaxed until withdrawal.

This is just what New Zealand needs, but as far as I know there is no such scheme, is there?


A: No and no.

Your second question is particularly timely this week. But more on that in a minute.

First, on the deduction of interest paid, I must say I was surprised when I came back to New Zealand, after many years away, to find that they don't let you do that here.

The New Zealand system doesn't make much sense. If you lend me money and I pay you interest, you must pay tax on the interest received. Government tax revenue rises.

Why should that happen, when as a whole we are not better off? I'm simply using your money, instead of you.

If, though, I could deduct the interest I paid you, your tax and my deduction would cancel one another out - more or less, anyway. So total tax revenue wouldn't be affected.

I should add that I don't think we should limit deductibility to just student loans and mortgages. All interest paid should be deductible.

There's a downside to all this. It would probably encourage borrowing on credit cards and so on, and often that's not a good idea. It also might push more money into housing, when we already spend too much on that.

Still, it's important for the tax system to be logical.

Turning to your second issue, the case for tax incentives to encourage saving seems to be strengthened by newly released OECD figures. They place New Zealand dead last, out of 19 countries, for household savings.

There's controversy about how saving is measured. We might not be as bad as we seem. Still, it's plain that we're not such conscientious squirrels as the French, Belgians and Japanese, in particular.

That doesn't mean, though, that introducing a tax break for saving would be good for New Zealand.

People tend to look at overseas schemes and say, "If we had that here, I would save more," without looking at the costs of the schemes.

One obvious cost is that tax revenue would fall. Assuming that we want the Government to continue to do what it does now, that loss would have to be made up somehow - perhaps by a rise in tax rates.

It would also cost millions of dollars to run a scheme, and to make sure everyone was sticking to the rules. Again, that money would have to be recovered from somewhere. More tax rises?

Other points:

* Saving incentive schemes always limit where you can invest your money. Usually, you can't put it into, say, your own business or your education.

And yet, without a scheme, that might be where you would have saved most effectively. Any programme that pushes money where it otherwise wouldn't have gone is inefficient. It slows economic growth.

* Rich people would be able to make use of a scheme much more than poor people. Is that a good use of Government money?

* Any incentive scheme would complicate our tax system which, by international standards, is pretty straightforward. Let's not give that away lightly.

It sounds as if you're new to this country, so you may not know that in 1992 the Todd Task Force on Private Provision for Retirement looked in depth at three options - improved voluntary saving, tax incentives and compulsory saving.

It concluded that tax incentives are "the least likely to achieve a sustainable improvement in New Zealand's long-term national savings." Improved voluntary saving was the preferred option.

On tax incentives, the task force's final report said: "International experience has shown that, from a private savings perspective, switching between saving vehicles and products is as likely to occur as new savings.

"There may be little new saving under [a tax incentive]. In this case, most of the cost of the incentive would be spent on rewarding people for doing what they would have done anyway."

I've read nothing to suggest things have changed since then.

Disclosure of interest: I worked for the second Todd task force, in 1997. Perhaps they brainwashed me.

Q: Following up on Money Matters two weeks ago, why should I switch banks to Jim's Bank when I don't pay any base fees now?

And I must be typical of thousands of superannuitants, war widows etc who have their superannuation paid regularly into their account, thereby having their banking fees waived.

I seldom go near a bank these days, so I don't need a local branch. I use the internet or the telephone to move money about, pay regular accounts like the power company by direct debit, and use Visa or eftpos to pay nearly everything else.

Philip Macalister on the next page of the Weekend Herald said that banks are deriving more of their income from fees as margins decline. It beats me how the new bank can survive in a climate of reducing margins on lending and an ageing population who will pay no fees to their competitors.

And I expect the established banks to hot up the competition once the bank is open for business.

What do we know so far? NZ Post says it will have reduced fees. But it will have to charge the same level of transaction fees as everyone else or it will go broke.

Staff wages and general business overheads will cost the same for everyone. Time was when the Government Stores Board could supply Government departments at discounted rates. But my experience of GSB Supplycorp is that it is no cheaper than purchasing direct from the supplier, and sometimes dearer.

Someone suggested it might use secondhand equipment. This is a recipe for incompetence.

If it uses another bank's ATM machines how can it reduce that fee? Why would its competitors give them a discount?

As a minor shareholder of NZ Post, by virtue of being a long established taxpayer, I believe that I am not being given adequate information to justify my board of directors investing very large amounts of my money in what looks like a shaky commercial venture.

I won't change banks.


A: That makes two of us.

Not everyone is so negative, though, as the next letter shows.

Q: This Money Matter is different from the usual question of "What should I do with my tens of thousands of dollars." Although talking about only a few dollars, I would appreciate your advice.

As a pensioner with no other income, after rates, phone power, medical, dental etc - fixed charges which I cannot reduce - I am left with a maximum of $56 a week for food, clothing, presents and fares.

I don't have a problem with this, but this shows how every single dollar means a lot.

Consequently, I am thinking of changing banks when the Post Bank comes to reality.

My question is this: Is it a separate bank standing or falling on its own merit? Or is it part of the Post Office and thus capable of being cross-subsidised, in which case the funds will be safe?


A: I think you can be pretty confident that your money won't go up in smoke.

At a recent press conference, Michael Cullen and NZ Post boss Elmar Toime gave their assurances that depositors' money would be safe.

To get something in writing, I went to NZ Post, which sent me the following: "The new bank will be established as a wholly owned subsidiary company of NZ Post with its own board of directors. It will publish its own accounts as part of the Reserve Bank's requirements.

"It will pay for any NZ Post services it uses, and will not be cross-subsidised.

"For sound risk-management purposes, the board of NZ Post examined a worst-case scenario when it considered the business case. Under that scenario, no customers of the bank would lose their money."

That's as good as you'll get at this stage. You can be certain, though, that the new bank will be watched closely. I reckon you'll get plenty of warning if security starts looking iffy, and you could bail out then.

As the previous letter-writer says, most people who get their NZ Super paid directly into a bank account don't pay bank fees. Check your situation.

And good on you for coping on $56 a week. You could teach most of us a thing or two about thrift.

* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail maryh@journalist.com. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information. Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.