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Q+A: David Cunliffe interview transcript

Published: 12:47PM Sunday July 17, 2011 Source: Q+A

GUYON  Trevor Mallard sent out an email at 5.54 on Friday night, which found its way into various inboxes, as these things tend to do. He talks in that email about how well the message is being sold, and then he says, 'The key point for us is not to get dragged down into the detail of the capital gains tax. The public don't care, and we get boring.' Do you agree that the public don't care about the details of this tax?

MR CUNLIFFE Depends what you mean by 'details'. There's megabytes of spreadsheet modelling underneath the headline numbers. I'm happy to take anybody down into that if you want to, but I think what people really care about is how it affects them.

GUYON Ok, well, let's talk about that. I mean, the tax is supposed to take people and encourage then to invest in the productive sector. Why, then, does a capital gain on a business that someone has built up and sold, when that creates employment and jobs and entrepreneurial spirit, why does that get taxed?

MR CUNLIFFE The answer is really simple - because the capital gains tax applies across all sectors. It backs out of the tax system, um, distortions, which mean that people make their investment decisions for tax reasons. By treating different sectors equally, it allows people to make those decisions on the basis of the underlying economics, which is much more sensible.

GUYON But if you're trying to encourage people to set up businesses, why would you introduce a new tax?

MR CUNLIFFE Well, we have of course got the tax credits on innovative businesses or for innovative businesses, with the R & D tax credits, which is part of the same package. So there's a definite tilt going on here away from the tax-free status of property towards some tax concessions for innovators, and the overall effect will be to direct capital towards where it can do most good for businesses that are exporting, employing and creating, not people locking up hundreds of billions of dollars in real estate, where it's really not doing any good.

GUYON There are exemptions in your scheme, um, if you're aged of 55 and have been working in a business for more than 15 years and it's a small business. What's your definition of a 'small business'?

MR CUNLIFFE Well, the details of that will be a matter for the expert tax panel that we're setting up to decide. The current definition of a small business is based on the number of employees, and of course, that wouldn't work well across different sectors.

GUYON 20 or fewer?

MR CUNLIFFE Yeah, 20 or fewer. But...

GUYON But you're not gonna use that?

MR CUNLIFFE Probably not. Probably because-

GUYON So how do you do it, then? I mean, I fully accept, and I'm sure our audience will, too,  that you still need to work out some of the details, but in order to have costed this and to sell it to the public, you're going to need to know roughly who's exempt; roughly who will be exempt as a small business.

MR CUNLIFFE So, as I said, the definition will be left to the expert tax panel to finalise. On rough ballpark number, that exemption's a very very small factor, uh, relative to the total cost of the tax - less than 1%.

GUYON OK, but you've talked about- But people will want to know - the people who are actually in those jobs - because you've talked about an owner-operator, like a plumber or a tradesperson.

MR CUNLIFFE Sure.

GUYON But what about someone who, say, owns a small winery?

MR CUNLIFFE So the exemption is for an owner-operated business, or I think the fine print is including partnerships up to two-

GUYON What, say, I owned a-

MR CUNLIFFE &someone's who been in there for 15 years - if I can just finish, Guyon - uh, someone who's been in that business themselves for 15 years or more and is over 55. And the reason for having that relatively limited exemption is it's just not fair to change the ground rules on someone when they're close to retirement.

GUYON So would it apply to if I owned and operated a small winery and I had a lot of money, for example? I'm just trying to get a-

MR CUNLIFFE Well, potentially, it could do, but I think the rules would probably contain some combination of revenue, size of business and number of employees, something like that. But, as I say, let's keep ourselves on the principles here, which is we need to get money flowing where it can do the most good, and we need to back out of the tax systems - the distortions.

GUYON Tax systems are based on detail, when you actually try to implement them, though, aren't they?

MR CUNLIFFE Sure.

GUYON April 1 2013 is valuation day. Everything in the scheme - businesses, farms, the livestock on that farm will have to be valued on that day. Is that going to be a simple process?

MR CUNLIFFE Well, you know one of the great things about being one of the last countries in the world  to get a CGT is that you can look around the world and see how others have done it and do it in a way that's pretty user-friendly and will suit New Zealand's needs. So, for example, both Canada and South Africa have a valuation-day approach. What South Africa did was in order to make it easier to implement, um, they said, 'Property - that's fine. Take the latest registered government valuation. And for other sectors, here's a choice of three easy methods that the taxpayer can choose from.' So if it's a small business, you might take the average of book value over the last couple of years or have the choice to do a registered market valuation. Not too hard, and the idea is to make is as user-friendly as possible.

GUYON OK. Phil Goff said this week, and I'll quote him to you - 'The proposal to sell of New Zealand's assets was the proposal that changed our thinking.' Was this policy then directly developed as a response to National's asset-sales policy?

MR CUNLIFFE Well, I think the policy has been in the minds of many of us for some time, but I think what collectively we've decided is that both the global situation, as you saw on the previous take, and our local situation - if we're forced with the sell-off of state assets - has become so serious that there really is, to quote the government - there really is no alternative to tax reform that allows us to, one, pay down the government debt; number two, keep our strategic assets; number three, pay for the tax breaks that we're giving in our tax switch; and number four, fund the growth initiatives that we need to get this economy moving forward. So an essential package.

GUYON But why is it a choice? You've set this choice up. Why is it a choice between a capital gains tax and asset sales when you could argue that both methods-

MR CUNLIFFE It didn't need to be, Guyon. We offered the National Party the ability to have a bipartisan consensus on a capital gains tax. They turned us down.

GUYON But what I'm saying - I'm using your own language - you're saying that it's choice between asset sales and capital gains.

MR CUNLIFFE Well, it is now, because-

GUYON But why is that, when both measures could be argued to actually lift the productive economy? Your tax is supposed to shift money to the productive economy.

MR CUNLIFFE Oh, I see.

GUYON Asset sales are supposed to allow New Zealanders to invest in companies. So why is it either/or?

MR CUNLIFFE So let us take the, uh, the problem at two layers. Politically, it's a choice because one major party is saying, 'Sell the assets and cut costs. That's the way out of the hole.' And we are saying, 'Keep the assets, give tax cuts, fund growth and still get debt down - this is really important - still get to surplus the same year as under National's plan and get government debt down to zero earlier under our plan.'

GUYON We'll talk about those numbers.

MR CUNLIFFE Guyon, your other question is, 'Why the choice?' And it's pretty simple that if you sell assets, you'll lose far more over time from the lost revenue stream going to foreigners who now own them, than you would if you'd kept them. And that's why we think it's a really stupid idea to sell down half of our most productive Crown assets, let alone the argument that people will have to pay twice for stuff they already own.

GUYON That's a pretty strong statement, so let me quote a statement of your own from November 25 2010. Quote, 'We can unleash state-owned enterprises to create and grow new subsidiaries with private partners and shareholders.' Do you stand by that? Because it sounds like you're talking about private shareholders in the subsidiaries of state-owned enterprises.

MR CUNLIFFE The keyword there is 'new', and, uh, what that's saying is that the Crown will not sell down any equity in any existing SOE-

GUYON What's the difference, really? A subsidiary company, in principle, there's no difference. They're talking about having partial sales in a state-owned enterprise. You're saying, 'Oh, if you have a new subsidiary of a state-owned enterprise, then that would be OK to have partial privatisation.' In principle, it's the same.

MR CUNLIFFE No, it's not. And the reason that it's not is it doesn't result in any equity dilution of the parent of the subsidiary. It's been done before. Let me give you a nice-

GUYON How can you have shareholder and not--?

MR CUNLIFFE Excuse me, you've asked me a question, Guyon. I'm about to give you a clear example.

GUYON And I'm following you up on part of that answer. How can you not dilute the shareholding of a subsidiary if you have private shareholders?

MR CUNLIFFE Because what is occurring is a new asset is being created. Nothing of the existing asset is being reduced or diluted. Now, the example - classic one done in 2006, 2007 was Courier Post, which was a 50-50 new joint venture between New Zealand Post and DHL. It created new economic value for the taxpayer that did not exist before-

GUYON So that will be Labour's policy?

MR CUNLIFFE It is one option that we're looking at. I was flying a kite in that speech, and we'll just see how it goes.

GUYON You're gonna raise the top tax rate to 39c in the dollar at income over $150,000. Do you expect that to change the behaviour of those taxpayers in any way? Will it discourage that person to work and earn that much money, for example? Will it try to allow them to shelter their money in other areas which don't attract as much tax? Will it change behaviour?

MR CUNLIFFE Well, you know, I think what we're saying is that there were windfall gains to that top couple of percent in the last couple of rounds of tax cuts.

GUYON Yeah, I know, you're talking about fairness, with respect, there. I'm asking about behaviour, incentives. Will it change that, do you believe?

MR CUNLIFFE Well, it depends how they're making their money. And, as you've said, uh, this is one of a number of tax measures. If they're making their money by sheltering income in tax-free schemes, assets, trusts, uh, companies that are illegitimately protecting income, then I think what you'll find is we shift the boundary on some of those things and go after them much harder. So it will be very very hard to evade or avoid tax.

GUYON Will they work as hard?

MR CUNLIFFE Well, hopefully they'll work even harder for things that actually create value and make a positive difference.

GUYON See, why I ask this question is because you seem to be saying that it won't disincentivise people to work harder, but you've taxed them more. You're expecting a behavioural change from your capital gains tax, aren't you? You're expecting if I put a 15% tax on capital gains, then I'll dissuade people from investing in the housing market, yet you're expecting it to have no difference at the other end. You can't have it both ways, can you?

MR CUNLIFFE If I can put the argument back on you - If you're saying that the New Zealand economy depends upon people taking tax-free capital gains when in nearly every other country of the world a dollar earned is a dollar earned. You pay tax on your salary, I pay tax on my salary. We are not unhappy with that. Why should someone, and good on Sam Morgan and Selwyn Pellett for standing up and saying so - why should somebody who's made tens of hundreds of millions of dollars selling a business pay no tax whatsoever on that gain? It's not fair, it's not smart, and it's not the right incentive.

GUYON I'm sure you'll win that argument with a lot of people. Let me put another question to you about fairness. Why should you pay 39c in the dollar on income over $150,000, but if you've got assets in the family trust, like, for example, you do, you'd pay 33c in the dollar? Is that fair?

MR CUNLIFFE Uh, well, my family trust doesn't pay any income. It only has the house in it, so I've been really transparent about that.

GUYON But the trust rate will be 6c lower than your top rate.

MR CUNLIFFE And we said we'll be shifting the boundary on trusts through our anti-avoidance work so that trusts are increasingly treated on a look-through basis. So you're making a good question here, but there's two parts about it - number one, less than 2% of people are in that group above 150,000 - less than 2%. Relatively easy for the tax department to have a good look at those affairs. Secondly, it will be increasingly difficult for people to hide assets in trusts because trust law will change. We've made that really clear. We're gonna build on the work of the Law Commission, and we'll treat it more on a look-through basis.

GUYON OK, let's look at how you're going to use, um, some of this money. You're going to create a tax-free zone of the first $5000 of income, giving everyone, regardless of income, $10 a week.

MR CUNLIFFE Sure.

GUYON I mean, it goes to everyone. It goes to you. Do you need $10 a week?

MR CUNLIFFE  It's fair that if there is a tax cut that everybody gets it. And it's also-

GUYON You could argue that it's a waste of money to give people who don't need it $10.

MR CUNLIFFE Sure, that argument is out there.

GUYON Would you accept that?

MR CUNLIFFE No, I don't.

GUYON Why would you give a millionaire 10 bucks a week?

MR CUNLIFFE Because it helps buy into the scheme if everybody knows they are participating in it. There's good evidence overseas for this kind of tax reform that upper-income voters will buy into a scheme that they are part of.

GUYON What - for $10 a week?

MR CUNLIFFE Well, they see it as fairer, and, uh, that's just the basis of this. Of course it matters more to some of my constituents in New Lynn who are on a very low wage - a minimum wage-

GUYON So why don't you give them more money and not give the richer people anything at all?

MR CUNLIFFE Uh, well, because you get less buy-in to a scheme like that. That's the principle reason for it. This is very simple and easy to explain - everybody gets $10 a week. If  you earn less, it means more to you. Like fruit and vegetables - GST coming off right down to zero. For a working family, that makes a big difference because it means that healthy food is cheaper.

GUYON OK. Let's go back to where we started, um, and the lead-in story that Paul Holmes was doing the interview with. It's quite clear that there's a lot of debt out there and there's a lot of problems out there. On your own numbers, you need to borrow $2 billion more than National over the first two terms of Government - by 2018.

MR CUNLIFFE Well, let's see this in perspective.

GUYON Are you denying that?

MR CUNLIFFE Not at all. No, no. There is a slightly different shape in the curve.

GUYON So why would you want to go out into the international debt markets and borrow $2 billion more when credit's pretty tight?

MR CUNLIFFE Because we get to surplus in the same year, we pay New Zealand's total government debt down to zero faster than in National-

GUYON But you're asking for a grace period, aren't you? You're asking those credit-rating agencies and the international markets, 'Hey, give me a break for five years while I get the books in order.' Are they gonna do that?

MR CUNLIFFE Off a $180 billion GDP, a couple of hundred million in any given year is neither here nor there. And the rating agencies take a 10 or 15 year view of these things. Labour's plan is incredibly fiscally sound and tight. We are going to get to surplus the same year. The National Party's very frustrated here because they like to paint us as 'tax and spend'. This is not tax and spend. Direction of revenue from this tax package - 52% funding the tax switch, 40% going to debt reduction while keeping the SOEs, and only 9% actually going to any form of new spending or new investment.

GUYON So, just a last question here, cos we're running out of time fast. Are you saying that you won't commit to any new spending unless that spending is funded by redirecting or scrapping existing programmes?

MR CUNLIFFE I'm saying that our model is very very tight--

GUYON I'm not talking about your model. I'm talking about your future spending.

MR CUNLIFFE Yeah, and you're asking me-

GUYON Cos you've promised a lot - Working for Families, Kiwi Saver, paid parental leave, superannuation. Is that still all on the table or are you not going to be able to do that now?

MR CUNLIFFE If I can answer the question - the cost of superannuation, uh, refunding is already built into this model. And so is the cost of replacing the assets in full.

GUYON What about the new spending?

MR CUNLIFFE Well, I think you'll find there's a very very low spend-new spend there. As I say, only 9% of the total over time goes there.

GUYON About how much per Budget? Because, roughly, we've been working on 1.1 billion; National scrapped that. But what's your operating--?

MR CUNLIFFE And Guyon, we've got five more, four more months to go to the election, and we'll be announcing our spending initiatives as they come through. What I will re-emphasise is that this is a very tight, very fiscally prudent package that concentrates on reducing our debt to zero while keeping our assets, giving all New Zealanders a fair tax break and funding certain growth initiatives that will grow the pie for every New Zealander. And it's the sort of thing, frankly, that the current government should have been talking about for the last two or three years. They have been asleep at the wheel while the rest of the world is in trouble. Thank goodness we are actually breaking that frame.

GUYON All right, we'd better leave it there. But thank you very much for your time. I appreciate it.

MR CUNLIFFE Thank you.

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