Summit chance for negotiation ‘Cullen’s tax’ in crosshairs
On a scale of one to 10, what are the chances the meeting between North Korea leader Kim Jong-Un and United States President Donald Trump in Vietnam this week, or any subsequent meeting, will end with a clear and irreversible commitment to the ‘‘denuclearisation’’ of North Korea? Zero.
What are the chances this summit, plus lots of further negotiations, could substantially reduce the threat of war between the two participants in this week’s meeting in Hanoi, and also between the two Koreas? Quite good, actually.
Kim Jong-Un and his father and grandfather before him have devoted enormous time and money to providing North Korea with an effective nuclear deterrent against the US, which requires the ability to strike the American homeland. He may make all sorts of other deals, but he will never give that up.
North Korea doesn’t need to match US nuclear capabilities – the ability to deliver only a few nuclear weapons on American soil would be a sufficient deterrent – but Kim will be well aware of what happened to Muammar Gaddafi and Saddam Hussein, heads of state who both died precisely because they didn’t have nuclear weapons.
There is no deal available that would protect North Korea from US nuclear weapons, since they can reach the North directly from the US. No amount of local disarmament – the withdrawal of American troops from South Korea, even the withdrawal of American nuclear weapons from all of East Asia – could change that reality and the US is not planning to abolish its nuclear deterrent.
The only safe road to the future, therefore, is a political deal that greatly reduces tensions between the two countries while acknowledging a state of mutual nuclear deterrence will henceforward prevail between them.
Mutual deterrence is what has now obtained for a long time between the US and its two peer rivals, Russia and China. The huge asymmetry between the power of the US and North Korea does not lead to a different conclusion. Nuclear weapons are the great leveller: In practical terms, just a few are enough to deter, even if the other side has hundreds of times as many, which the US does.
It’s going to be a long negotiation, because few Americans are ready yet to accept that this is the logic of the situation. Many would even reject it on the grounds that Kim Jong-Un is crazy and might make a first strike against the US, although there is no evidence to support that belief. Being a cruel dictator is not at all the same as being suicidal, and a nuclear attack on the US would be suicide.
Trump almost certainly does not understand that the only successful outcome of this negotiation must be mutual deterrence. Indeed, most senior American officials, although far wiser and better informed than Trump, still do not accept that fact. But they will probably get there in the end and the negotiations will lead them along the path.
The Tax Working Group headed by Sir Michael Cullen has reported back recommending a form of capital gains tax.
Consistent with the group’s terms of reference, the suggested regime includes a general exemption for the family home.
In addition to being inefficient, capital gains taxes are often quite complex. Cullen’s tax would be no exception.
Consider how it would affect a number of hypothetical New Zealanders.
John and Alice live with their children in a house they own.
John is a supermarket manager and Alice has a small business as an inhome childcare provider.
They deduct part of their mortgage interest and outgoings from her taxable income which helps them make ends meet.
Because they do this, however, they will have to pay Cullen’s tax when they sell their home.
Justin and Dana also have a house and children. Dana has a well paying job as a dentist, which enables Justin to be a stay-at-home dad.
They have no need to use any part of their home for business purposes so will reap capital gains on their home untouched by the Cullen’s tax.
Terry is an IT contractor who worked hard to get on the property ladder.
Because house prices are expensive, he needs rent-paying flatmates. He dutifully includes the rent in his tax return and claims a deduction for expenses.
When he decides to move he will become liable to pay Cullen’s tax on part of the sale proceeds.
Nick has a Master of Fine Arts degree. It hasn’t led to a well-paying job but he is lucky to be supported by a family trust fund.
This has enabled him to buy a house and a number of paintings, some of which have become valuable in their own right. Nick decides he wants to travel the world on a voyage of selfdiscovery. He sells his property and art and incurs no liability to pay Cullen’s tax.
Tom and Alex have a starter home and buy a section planning to build their dream home.
Then Alex gets sick and they have to defer construction for a few years.
Because they didn’t build quickly enough, they become liable for Cullen’s tax.
Their finances have been strained by the illness and they have to hire an accountant to work out exactly what it is they owe.
Tracy and Jordan buy a section in the same development with similar plans.
Jordan is laid off but Tracy’s wealthy mother gives them an interestfree loan to allow them to build anyway. They do not have to pay Cullen’s tax.
Tia is a bright kid with a great idea and has established a start-up to make it happen.
She struggles to find a partner as Cullen’s tax has poured cold water on the already limited supply of angel investors in New Zealand, as capital gains taxes tend to do.
Her idea languishes and eventually she decides to start looking for a government job instead.
Tony is the CEO of a large corporation.
He has just authorised the purchase of patent rights that had the potential to disrupt his industry’s business model. In years gone by, the developer would not have given up their intellectual property so cheaply. The chilling effect Cullen’s tax has had on the venture capital sector gives them little choice, however, and Tony’s corporation has been able to smother a number of potential competitors as a result.
Sue and Tama decide not to purchase a home but to invest more in their business.
This is a big risk but, after a lot of sleepless nights, it goes well and they eventually sell for a modest profit.
In addition to being inefficient, capital gains taxes are often quite complex. Cullen’s tax would be no exception.
Cullen’s tax requires Sue and Tama to send a third of what they made down to Wellington.
Alex and Jules have a modest but adequate home and money left over each week.
They thought about investing in Sue and Tama’s business but decided to upgrade their house instead. This includes the installation of a swimming pool and various other improvements that move it beyond the ‘‘affordable’’ category.
A year later they sell for a very high price and do not have to pay Cullen’s tax. Julie is a chemical engineer in Wellington. She is prudent with her finances but just can’t afford a house there.
She buys a house in O¯ taki and rents it out. After about 10 years, she wonders if she could now sell and buy a Wellington property to live in. Because her O¯ taki property is a rental, however, Cullen’s tax is payable on its sale.
This reduces the amount available for the purchase of a personal residence, which is no longer viable.
Grant is the finance minister of a smaller OECD nation in the South Pacific. He has earned a government salary and benefits most of his life and can afford sound professional advice in the unlikely event he has a complicated tax question.
He feels quite pleased because he has socked it to the rich and made tax a lot fairer in his country.
Liam Hehir is a lawyer and Stuff columnist based in Manawatu¯ .