How to end capital/income tax avoidance and save the real economy.

The real economy is of course the supply of goods and services to satisfy peoples’ needs and certain wants. In terms of income tax, capital gains are not taxable and income gains are taxable. The distinction is very real, for example the capital is the farm, and the sale of the farm is not taxable, and the income is the sale of the produce of the farm which is taxable. And anyway.

Because we have things like the Pandora and Panama papers, we can see huge amounts of tax revenue being lost to governments around the world by the wealthy trying to turn income into capital as one of the ways to avoid tax. Every dollar of income converted into capital saves 28% (New Zealand corporate tax rate). This huge return on investment is achieved by having a few smart accountants and lawyers to make sure you do it right; or probably so. We all know that.

This particular technique can be remedied relatively easily by simply removing the capital/income distinction for tax purposes for any non-individual entity. At this stage, any indoctrinated accountant tries to find his hair, that is to say, it is not without impacts; only one of them pays taxes. It makes sense to remove this distinction because, unlike a natural person, everything a non-individual entity does is aimed at protecting an economic asset or earning money in some form (capital or income). Thus, whatever a non-individual earns is truly income. This exposes the absurdity of treating a legal instrument, corporation or trust, etc., as a “person” for tax purposes. This honor of being called a “person” has been savagely abused by tax evasion. These entities are not mere extensions of people. Nothing exists at a distance in a natural person like shareholding, – the expansion and contraction of the entity, the extension and limitation of rights of action. Or having limited liability; as a person, try to tell your bank. To note; a “natural person” would retain the capital/income distinction. And all this within the framework of a flat corporate tax of 10% without any deduction of expenses from traditional income. This generates more income but with a much lower tax rate.

Thus, without capital/income distinction for a non-individual, the capital gain becomes income and taxable. This means that any asset sold by a business would become taxable income. But tax avoidance is much more than that. We are forced to consider that many items of capital that come into the business are also income, such as certain loans. (Brained accountants may need a defibrillator at this point – Impossible! Can’t work! Destroy the economy!). We can make some exceptions. Arm’s Length Third Party Loans, i.e. . based and registered in New Zealand to ensure the stability and robustness of our banking/financial market. Foreign banks present a risk of tax evasion.

To explain this a bit more. For example, a New Zealand company has a location in Australia. Management fees are paid and a loan is used to finance the rental; reduce taxable income in Australia and charges and interest are taxable income to whoever receives it. But if refunded to an entity in a tax haven, no tax. The New Zealand rental owner, rather than reporting taxable income, can send it back as a loan from the tax haven, so they are not taxable here because the loans are capital. And in New Zealand, the interest for this sneaky loan is deductible from New Zealand tax. This structure must be hidden. Then, the New Zealand owner does not hesitate to pay a high rate of interest, it is deductible from our taxes. These loans can be written off, which can create other tax opportunities.

There is also the issue that a purchased asset can be used by the business to manufacture goods and services. If we put 10% on these assets, it would increase costs and drive up inflation. An exemption would therefore be necessary so that these purchases are not considered income, for example, a non-individual importer of coffee obtains beans from abroad. This asset entering the business would not be subject to tax. Thus, the production test would be that the asset is consumed in the supply of the goods or services.

If the business buys a fixed asset to operate a business from the premises, it would be taxed in full on disposal, but should it be taxed on entry into the business? The answer is; Yes. Because we don’t want our economic wealth to be diverted into asset ownership as a path to wealth creation, which is currently being encouraged. Invest in the production of goods and services. Thus, the impact of the initial taxation is that either individuals will make the purchases, (a company? They will pay individual tax rates on their income). Or the company will simply rent the premises. Or get into a site development business for hire. Either way, taxation at the start and end discourages investment in fixed assets and reinforces that the path to wealth is the provision of goods and services to people and not the holding of assets. which is currently destroying our economy. This does not preclude holding assets, but you will pay taxes if you wish. The effect of double taxation encourages the idea that capital investments are longer-term investments, not intermittent investments for quick profits.

Certain other fixed assets that facilitate the delivery of goods and services by businesses could be exempt, if they were tangible assets. ex. Tables, chairs in a restaurant. But all transfers will be subject to tax. I have said before that to encourage employment in New Zealand; wages and salaries are deductible from income where we can track PAYE payments through Inland Revenue. A call center abroad would not get a deduction for wages and salaries.

Then there are all the other assets, shares of other companies, options, etc. These will be very difficult to hide as companies need them in financial accounts to attract investment and show how rich they are to stabilize loans. Therefore, it will be very difficult for companies to avoid tax on incoming or outgoing assets. The answer will be that companies will grow to minimize taxes, so there will be no stock exchanges or intercompany transfers that will be subject to tax. This is good because they will become more transparent and therefore avoidance will be more difficult to undertake. I have also written previously about equity market impacts.

Another result is that losses are not allowed. A wage earner and wage earner pays high tax a year in a good job; changes jobs and goes to low pay. Did they pay more the previous year? No, it doesn’t matter. They cannot spread the tax over more than one year. The same should be true for non-individuals. We should only tax the income and the gains and losses are borne by the individual or the non-individual. The business is their risk. Losses are not socialized onto taxpayers, as this sends the wrong market signal about risk taking. Without expense allowance, losses cannot occur. By removing the capital/income distinction, we will only tax gains, no losses are allowed. The losses demonstrate the privileged status we accord to corporations over ordinary people. The losses have encouraged tax avoidance practices that are undermining our economy.

Losses are probably the main reason Jacinda said no to capital gains taxes. They were only lies from the Treasury and the tax authorities. The idea of ​​a stock market crash causing huge capital losses that would wipe out all government revenue for a few years, which would mean massive borrowing to run the government. Everything lies because of the lack of imagination among the mandarins to imagine an economy different from the one in which they have been blindly indoctrinated. New Zealand has been underserved for some time. Asset-based economies like the ones we have now are unstable and have repeatedly needed massive bailouts, for example in 2008 and 2020; and Liz Truss in the UK. We have to change to survive and our mandarins don’t.

Current laws and policies fuel an economy set on the path to wealth around the holding of capital assets. Tax and property laws drive this. In response, insubstantial marginal economic enterprises have sprung up based on immigration which drives demand in the economy. And education is a profit-driven business, focused on educating people abroad. Are New Zealand’s economic interests really being served?

The change is relatively simple. It will be traumatic for large companies, but this trauma will open up huge opportunities for small, low-cost companies, as they will be more competitive. This does not take away the massive wealth that has already accumulated within large corporations, so they will have enormous reach and financial resources to adapt. But here are the steps to get our economy back on track to creating wealth through the provision of goods and services to ordinary citizens.

And these changes will completely alter the current incentive for businesses to worry about cutting wages to contain inflation and complaining about excessive government inflation as they blithely raise prices. Now they will have a huge incentive to ensure that ordinary people are paid well enough to buy the goods and services that companies need to sell to make money. Just like Henry Ford paid his workers well so they could buy his cars and run his factories. The whole dynamic currently fueling inflation will change. These changes will help bring back an element of a Keynesian demand-driven economy that works for the benefit of all classes as an economy is supposed to; to meet everyone’s needs and desires.

Sallie R. Loera