We took TOP’s UBI for a test drive and it was found (seriously) wanting

Given all the bold claims surrounding it, we decided to put TOP’s UBI through its paces.  Unfortunately, the results were gravely disappointing. Not only will it fail to deliver on its promises but, in our view, this policy achieves the opposite to what is intended. We found that instead of reducing poverty and diverting money away from housing into more productive assets, the proposed program would:

1. See low-income earners, in most cases, no better off and;
2. Super annuitants unfairly targeted.
3. See most higher-income earners encouraged rather than dissuaded to invest more in housing. The net effect of the UBI + RFRM tax for them works as a tax cut with little incentive to do otherwise than invest more money in property.
4. Encourage the introduction of what is effectively a death tax by stealth.

 In May this year TOP announced its new and improved proposal for a Universal Basic Income (UBI) and the accompanying Risk-Free Return Method (RFRM) tax on assets. The promise accompanying its launch was summed up by TOP party leader, Geoff Simmonds, who stated:

“Though the RFRM tax is likely to have a calming effect on house prices, its main purpose is to spread the tax base wider and to encourage investment in productive assets that will grow the size of the NZ economy … our current tax system encourages investment in housing and diverts capital away from productive businesses that create exports and well-paid jobs.”

 The UBI proposal is that every New Zealand Citizen and permanent resident over 18 would be paid $13,000 p.a. and $2,080 p.a. would be paid to parents for those under 18. This would replace all other benefits and, where the current benefit is greater, the UBI would be topped up to match it such as for those on super. 

This it is claimed would be paid for by the billions saved on administration, charging a flat tax rate of 33% on all income and the RFRM tax on assets. The latter equating to 1% of the paid-up value of your property. Changes were calculated to broadly tax neutral overall.

 The reasoning behind this is to:

1. Remove the drivers for speculation in housing by taxing it the same as other assets. It is asserted that this will make it more affordable and unaffordable housing is the leading cause of poverty;
2. Remove the disincentive for those on benefits from working as entitlements reduce as they start to earn;
3. Reward unpaid work;
4. Allows people to start businesses and retrain if they need or want to; and,
5. Provide everyone with some degree of financial security during times of personal, natural, health or economic crisis.

Wow! If that were true, we would have ourselves a veritable silver bullet! Poverty and poor productivity all resolved in a single bound. Couldn’t wait to put this panacea through its paces. 

It wasn’t long however before we hit the first bump in the road. It turns out that the people we are most trying to help are in most cases no better off. 

The following scenario involves a single parent on a low income ($50,000) with 2 kids:

Hmmm, that’s disappointing, no improvement in their situation at all. Never mind, let’s truck on; after all, the ‘Big Kahuna’ is the impact that this program will have on removing the drivers for speculation in housing by taxing it the same as other assets. This, it is reasoned, will make it more affordable and it is after all unaffordable housing that is the leading cause of poverty. In addition, it is claimed that it will divert swathes of capital into productive businesses that create exports and well-paid jobs.

Let's first examine those 'drivers for speculation in housing' we are attempting to remove:

1.   The huge difference in the risk associated with an investment in real estate versus a business. One of the basic principles of investing is that higher risk demands higher returns. As an indication, an investment in a business typically demands a minimum return of around 33% p.a. Property on the other hand around 4% to 5% p.a.(through rent) plus a similar level of capital gain. On that basis investing in a business is more than 3 x riskier!

2.   The emotional appeal of owning your own property;

3.   Gross yield on the average rental is typically between 4% to 5%, which I as a renter would have to pay a landlord; and,

4.   Capital gains, conservatively circa 5% p.a. (tax-free)

 That's some list of drivers! How credible is it that imposing a 1% tax against those benefits is going to make me favour a far riskier, more expensive and considerably less emotionally satisfying investment in a business?

 Let’s examine how this actually works out in practice: take the median NZ household, which according to Statistics NZ makes an income of $102,000 and consists of 2 Adults and 1 Child (well 0.7 children actually but we’ll give the UBI the benefit of an extra .3 of a child to rebate).

 Assuming the average NZ homeowner has around 50% equity in their home, the RFRM paid would be calculated as follows (based on the current average value of a home in Auckland @ $1.2 million and elsewhere in NZ @ $550,000):

 $1,200,000/2 = $600,000 x 1% = $6,000 average in Auckland

$550,000/2 = $275,000 x 1% = $2,750 average elsewhere in NZ

As it turns out our UBI + RFRM combination significantly favours the higher income household in comparison to our lower-income earner in the previous example, who saw no added benefit. Our higher-income household is effectively given a tax cut, whether owning their home or not. This household is at least $5,120 better off while retaining their house and their inducement to give up homeownership is an additional tax cut of $6,000 p.a. The trouble with this trade-off is that they would have to pay rent, which according to my calculation would be $20,000 more expensive than the interest payments on their mortgage. See calculations following:

• In Auckland, the average rental would cost circa $600/week (as opposed to $200/week interest on my home loan) a difference of over $20,000 p.a. and outside Auckland;
• The average rental would cost circa $460/week (as opposed to $91 / week interest on my home loan) a difference of over $19,000 p.a.

 In other words, I’d be $14,000 out of pocket if I chose to forego homeownership.

 Things don’t change on higher household incomes either. 

 This time we developed our scenario above by increasing the household income to $150,000 with the same 2 Adults and 1 Child

 We also based the RFRM on the same assumptions, i.e. 50% equity in the home (based on the current average value of a home in Auckland @ $1.2 million and elsewhere in NZ @ $550,000):

 $1,200,000/2 = $600,000 x 1% = $6,000 average in Auckland

$550,000/2 = $275,000 x 1% = $2,750 average elsewhere in NZ

Here too we are presented with the same options. A $6,000 tax incentive to forego ownership versus a $20,000 incentive to invest in your own home. The only difference being a slightly lower tax cut. No prizes for guessing where that money is likely to be invested.

 Then there are the poor old super annuitants. They’ve saved throughout their lives to pay off their mortgage. On top of their other living expenses and rates they will now be hit with an extra bill of around $1,000 / month for living in Auckland. No matter says TOP, just roll it over and we’ll reclaim it through the settlement of your estate. NO THANK YOU!

 We agree that the affordability of housing is an issue. We also agree that the path to greater prosperity requires significantly greater investment in and development of productive businesses that create exports and well-paid jobs. 

However, instead of working with the hypothetical, we studied the world’s most successful small, advanced economies and why it was that they had been so much more successful in dealing with these key issues than New Zealand. Amongst our research was the work of economists, Shahid Yusuf and Kaoru Nabeshima, who in their 2012 book, Some Small Countries Do It Better, looked at three small countries (Singapore, Finland and Ireland) that since the mid-1980s have transformed their economies from middle-income countries to some of the richest in the world. In addition, despite far greater population density, 91% of the population in Singapore and around 74% in Finland and Ireland own their own home as opposed to 64.8% in New Zealand.

The common factors which led to the rapid growth of these countries were:

• Forging consensus on the long-term strategic economic direction with political opponents and key stakeholders: business associations, labour unions, the financial community and the education sector.
• Creating a “learning economy” to develop the country’s human capital by providing high-quality education at all levels with innovation as a deliberate by-product.
• Encouraging entrepreneurship by building a culture that rewards initiative and risk-taking and is relatively tolerant of failure.
• Building a networked economy by concentrating entrepreneurship around urban centres.
• Building competition and openness to trade.

Our economic plan is underpinned by these principles and the creation of a framework for the effective collaboration between the government, private sector, academia, innovative entrepreneurs and risk capital. A dynamic and fertile innovation ecosystem creating the conditions under which a prosperous, clean, green economy and its people will flourish.

Throughout the document, we have explained our reasoning and provided examples of both how each initiative will work, the benefits we expect it will achieve as well as examples and results from where similar programs have been applied.

Click on the following to view our full Innovation Policy https://bit.ly/3bCNpNE