OnPoint by Keith Ng

Just a cute little story about the SAS from Other People's Wars for your Friday:

A military authorised book called NZSAS: The First Fifty Years describes this mission. It says that two SAS soldiers, hiding under camouflage netting on an open mountainside, were approached, just as one of them was awkwardly defecating, by a goat that nibbled at their camouflage and risked compromising them to the nearby goatherd. 'Extraordinarily, after quite a few picks at the tassels it decided it did not like nylon and moved off slowly back down the hill.' The real story, however, is that the goat did not move off and the goatherd did notice the camouflage net.

According to SAS personnel who were in Afghanistan at the time, two six-person SAS patrols were on a special reconnaissance mission, which entailed being dropped off by helicopter and walking across country to observe and collect photos of a potential target. The goat incident happened early one morning before they reached the observation point. When it was clear they had been spotted, the SAS soldiers rushed the goatherd and took his rifle, which most Afghans in the countryside carry. They told him to go home. The confrontation was quickly over but the mission was compromised. The SAS officers were highly embarrassed that, after pushing to be given missions, the first one had gone wrong; and even more embarrassed because the urgent extraction of the New Zealanders involved heavy US military resources.

...

When the SAS troops flew home to New Zealand a few weeks after [Operation] Anaconda they took with them, secreted in their luggage, a momento of the deployment. It was the goatherd's rifle, from that first, failed special reconnaissance mission. This now hangs on the wall of the SAS officers' mess at their headquarters in Papakura, Auckland, probably looking to any visitors like a grisly relic of some death-defying battle. It is a fitting symbol of the frustrations and pointlessness of most of the deployment: a weapon taken off a poor farmer, who was not New Zealand's enemy, on a mission that failed but would probably have been pointless anyway.

But it was a fitting momento in a positive way as well. Some US soldiers in the same position would have seen an Afghan with a gun and simply shot him to avoid the mission being compromised. German KSK special forces at Anaconda spoke to a German newspaper criticising the Americans for doing this very thing. The New Zealand SAS soldiers did not shoot the goatherd and they accepted the embarrassment of having to be pulled out. For the contingent who replaced them in Afghanistan, this difference between themselves and the American forces would become more and more obvious.

It's really kinda sweet.

(Yes. I really did just use the words "sweet" and "cute" in relation to the SAS. Please don't shoot me.)

The main point of Nicky Hager's new book, Other People's Wars, is that the story we have been led to believe - that Kiwi troops are in Afghanistan to do reconstruction and peacekeeping, and that this is distinct and kinda independent from the actual war that America is fighting - is just PR bollocks. Essentially, New Zealand soldiers played a part in US operations which blew shit up and killed people; New Zealand's reconstruction efforts in Afghanistan are "poorly planned" and "wildly exaggerated", but justifies their presence while they support US intelligence operatives working out of the Bamiyan base.

But the twist is that the source of the deception/obfustication (depending on how generous you are) wasn't politicians, but the military itself. That it "blurred" reports which went up the chain of command, kept ministers in the dark and undermined or ignored government directives.

A major theme throughout the book is the military media control and public relations.

That's the context in which Guyon Espiner asked Hager if he'd ever been to Afghanistan. Hager said no. "Well," said Guyon, "I've been to Afghanistan."

It started as a really interesting point. Espiner challenged Hager's assertion that the US intelligence operation in Bamiyan was somehow secret or hidden. When he was there, Espiner said, he asked about the civilians on the base and he was told, quite openly, that they were US intelligence operatives. This formed a view shared by many of the journalists in the room (i.e. The Press Gallery): We are part of an American war. It's not surprising that American agents are around.

So why should we care that CIA agents are operating out of Kiwi Base? An excerpt from the book:

Clearly, having CIA operatives inside the Kiwi base fitted poorly with the deployment's stated goals. Why would the New Zealand authorities risk the New Zealanders working at Kiwi Base, and the credibility of the New Zealand peacekeeping mission, by mixing them up with a CIA operation? After the suicide attack on the FOB [forward operating base] Chapman, the issue of CIA operations inside a provincial reconstruction team was widely discussed. The Times wrote that "PRTs have been criticised widely for endangering civilian aid workers by blurring the line between development staff and the military. 'Having CIA operatives in a PRT raises serious concerns fo us,' said a senior Western official in Kabul. We are hardly going to be encouraged to set up shop in dangerous areas if the insurgents get the message that PRTs come promising development but bring CIA agents.'"

I don't think that the CIA presence in Kiwi Base is completely unjustifiable, but it's at least concerning and worth looking into if, you know, it's your job to look into things. It's jawdropping that a reporter like Espiner could have been there, known about this, and just flat out considered it not worth reporting.

Instead, we get this "I've been to Afghanistan. I have seen some shit, man." narrative. Sure, I've been known to describe my work in Sri Lanka as "war reporting" - but only when I'm drunk and trying to impress a hottie. In reality, it's parachute reporting, at most. I didn't go areas where people were actually getting shot, because I didn't want to get goddamn shot. I didn't have sources in the army or people who trusted me enough to tell me secrets.

Arguably, a choreographed, chaperoned tiki-tour is even less than that. But because people like Espiner Have Been to Afghanistan, they can deliver the good news about our reconstruction efforts with sincerity and confidence. Because He Has Been to Afghanistan.

All Hager has to go on, on the other hand, are sections of a government review of NZDF's operation in Bamiyan, which was redacted on the basis that it would prejudice the security and defence of New Zealand:

The news was not good. 'The projects overseen by the [New Zealand Defence Force (NZDF)] through the [Provincial Reconstruction Team (PRT)] do not appear to be sustainable in any way and anecdotal evidence is that some have already failed.' This was also the case with the bigger US-funded projects overseen by the PRT... These 'fundamental errors in contract management and basic assessment raise questios about the competence of military forces to run aid projects.'

The report concluded that the NZDF was 'not an effective aid provider'. There was 'a huge lack of continuity [and] conflicting priorities...'

And so on.

More after I actually read the bloody thing.

(Update for readers in November 2011: This was written in July, in response to Joyce's claims about Labour's tax policies. It doesn't address subsequent issues such as KiwiSaver and NZ Super Fund changes. You can find that here.)

Labour says their policy will pay off $7.8b of debt by 2025. National says it'll add $15b of debt. That's $22.8b credibility gap.

Allow me to fill it in for you.

We already saw Labour's efforts last week, but over the weekend, David Farrar put this up on Kiwiblog, introduced with "Steven Joyce has put Labour's numbers through the Treasury calculator".

On Twitter, Farrar cited these same numbers as "numbers from Treasury". Let's hope he doesn't say the same thing in his columns or his blog, because that would be greatly misrepresenting these numbers and besmirching Treasury's reputation as neutral, competent public servants.

Joyce got someone to download a publicly available spreadsheet and punch some numbers into it. That's it.

(Those spreadsheets are horrifying abscesses of public finance. You barely want to touch the stuff that oozes out when you poke it, let alone stick your head inside. I did that some time ago. I say "some time" because there's a three week gap in my timesheet that started a month ago, when I started ripping one of these fiscal models apart. I managed to retrace my steps for two out of the three weeks, but the third week simply vanished. My mind may have blocked out the horrors I saw inside the endless LOOKUP() recesses.)

Wrong spreadsheet - $3.1b

Joyce reckons that Labour grossly underestimated the cost of their tax-free threshold, and overestimated the revenue from their new top tax rate. Unfortunately, Joyce used the wrong spreadsheets. In particular, he missed the bit which said:

Larger changes require more complex modelling than is shown here.

But that's just some nerdy ass-covering technical caveat, right? Well, Joyce punched in the numbers and came out with an estimate that costs will grow rapidly, doubling by 2025.

Let's think about how this would work in the real world. Everyone earning over $5000/year would get the benefit of the whole tax-free threshold. That's pretty much everyone in the workforce. So if everyone already gets something, how would more people get it?

The cost of a tax-free threshold only grows when new people enter the workforce.

So unless Joyce thinks there will be 3 million more people in the workforce in the next decade, this is a patently stupid and ridiculous result. Common sense would tell you that it is impossible.

This one goes firmly in Labour's favour.

Religious differences - $3.3b

Last week, I said it was Left dogma to believe that nasty tax dodgers can be squeezed indefinitely, and that more money will keep coming out. I contrasted it with the Right's belief that public servants can be squeezed indefinitely, and more efficiency will keep coming out.

What I didn't count on was that Joyce had another belief as well: We have reached Peak Tax Enforcement. He says that "The Government is already putting significant resources into this area" and decides that the amount of additional money you can get from tax dodgers is $0. Forever.

Labour's position here is just arbitrary and unfounded, but Joyce's position is kinda ridiculous. (Draw.)

(Actual Reason!) Behavioural Changes - $1.6b

Some people will be able to avoid the loss ring-fencing (can't be bothered explaining this) measures, so Joyce reckons it'll only get 50% as much revenue as it could in theory.

This one goes to Joyce.

Climate Change Denial - $4.3b

Joyce uses Nick Smith's estimates, which reckons Labour's ETS changes will net a mere $483m, rather than the $4.8b that Labour expects.

How much it costs to subsidise farmers' carbon footprint (and how much we can save by stopping it earlier) depends on how much carbon costs.

The Parliamentary Commissioner for the Environment commissioned a report on this last year.

If there's little international action on climate change, the report estimated that the price of carbon would reach $35/tonne by 2020 and rise to $50/tonne by 2030. If there is a moderate international commitment to reducing emissions, then the price of carbon would reach $50/tonne by 2020 and $100/tonne by 2030.

Australia has already set its carbon price at $29.55 NZD.

Punchline: Nick Smith's model assumes the carbon price to be $25/tonne and not to rise at all.

Unless climate change is a hoax, this is an unreasonable assumption.

I'm Out of One-Liners - $1.3b

Labour reckons (using "Modelling based on officials") R&D tax credits will cost $2.9b. Joyce uses the 2008 costs with some adjustments. Given that no information is available on Labour's methods, and Joyce's seem quite reasonable, this should go to him.

Whatevs - $1.7b

Joyce reckons the CGT is only worth $14.6b, rather than Labour's $16.2b estimate. Farrar calls this "roughly accurate". I agree – for a big fat unknown like CGT, any estimate is a rough ballpark, and a $1.7b difference between estimates is not worth arguing about.

Double Counting - $7.5b

Then Joyce adds on another $7.5b of interest on everything. That would have been fine, except that most of those things which accrued the interest are bullshit.

--

There's about $4-5b of legitimate gripes here. And it crystalises my view of Labour's tax package: Using CGT to pay off debt is a rock solid policy core, but everything else about the package is haphazard, with a lot of question marks and not much rationale.

At the launch, I asked Goff and then Cunliffe whether their debt payment track was a commitment, or whether it was simply what they would do if they had the money. Both avoided the question, and Cunliffe said he was confident that their estimates were so conservative that they would only have more money, not less.

National's attacks (even though the "$15b new debt" figure is plain ridiculous) raise important questions. I still don't know how committed Labour is to paying off debt; if forced to choose between paying off debt and tax cuts, what would a Labour government choose?

Until they answer that question, they're not a government-in-waiting.

The numbers add up – it's an actual plan. Half the money comes from CGT, the other half comes from the new top tax rate, bringing agriculture into the ETS earlier and other tax changes. Labour has mapped out an actual path back to eliminating our debt.

If I sound a little incredulous, that's because I am. Policy making in opposition generally amounts to trash talk – anything goes, because they don't actually have to implement it. That's what I thought the GST on fruit and veg was (and still do).

But Labour's pretty goddamn serious about this one. They are budgeting around – and I don't use this word lightly – conservative estimates of revenue from CGT. Few would have quibbled if they'd just used Tax Working Group figures. But instead, they revised it downwards to reflect a more pessimistic view of the property and share markets.

It's more than a credibility issue for Labour, it's a credibility issue for the plan – they've gone out of their way to prove that CGT is an absolutely credible way to bring our fiscal situation back in order.

The fact that this plan will bring about more debt in the next few years is (still) completely irrelevant. Let's get this message through: It's not a short-term problem. There is no short-term problem.

The fact that our debt in 2018 will be higher is virtually meaningless. Credit rating agencies are not going to freak out at a short-term hit on our debt, especially when it's perfectly clear that CGT will grow in a few years to put us in a better position. In other words, it's clear we're good for it.

People who go on about the short-term debt increases completely miss the point.

They miss the point because they never got what the point was in the first place, back in 2008. When the recession hit and people started to freak out, there was no plan. Not from Labour, not from National. They just changed the rhetoric: Instead of pork barrel spending and vote-buying, they called them “stimulus packages”, and instead of “I hate those dicks”, they called it “cutting back on waste in these tough times”.

Oh, and some mumbling about “brighter something today or tomorrow”, and “trust us not the other guy because he's, you know, whatever”.

Nobody in the world knew what was going on, or how bad it was going to get – it took time to figure out. What emerged in the these few years was the realisation that we weren't on solid ground at all, and that we'd been foolish to psych ourselves up for endless tax cuts and WFF handouts.

We needed to unwind all of that and plot a new path, based on a more realistic assessment of what we have – but it took asset sales to make this happen. Goff actually said that it was National's asset sales plan which “inspired” them to go the whole hog on this tax reform. And it's great – we finally have competing, credible long-term plans.

Labour's plans has some solid advantages. Aside from the emotive stuff about ownership, Labour's “medicine” is inherently delicious – that is, CGT is not just a way to generate revenue, it's also intuitively fair that those who earn capital gains pay taxes like everyone else. In fact, it's a downright travesty that they don't. But that's just shooting property investors in a barrel.

Parker made a much more nuanced and difficult argument:

1. The problem with debt is we have to pay interest to overseas creditors. This saps our economy.
2. CGT encourages Kiwis to invest in productive businesses, which means businesses don't have to borrow as much overseas.
3. Asset sales will result in SOEs in foreign ownership, with dividends going overseas, so it's just as bad as debt.
4. This is why CGT is better than asset sales.

It's a sophisticated argument that underwrites their “Own the Future” slogan. It makes sense, except that the exemptions included in this package will really undermine these economic arguments (but they still have the fairness argument, which is MIGHTY).

In fact, there's a lot of sickly sugar that's been added to the medicine in this package. For starters, I'm still not a fan of the GST exemptions. But let's think about the whole package itself. CGT has captured all the attention, but it only accounts for half the revenue. The other biggest contributor is the hike in the top tax rate. And only a quarter of the revenue in the package is going to pay off debt – the rest is going back towards tax cuts. Between the new tax bracket and the tax cuts, there's a damn big "tax switch" going on, independent of the CGT.

The point is that CGT raises enough revenue to pay off debt without asset sales, and it's fair. It's about, you know, Pwning the Future.

The other stuff – tax free thresholds and GST cuts – is just... there. No reason, just some money sitting on the table, you know the drill. But all their posters say “Own the Future”, so when they talk about it, the only thing that comes out is CGT. This other stuff is like a Trojan Horse that they build, then park in the garage while they go knock on the front gate – it's a little weird.

I guess they still don't believe that you can win an election without throwing money at people. Well, to be fair, nobody in this town does.

 

Appendix 1 of 2: Costings

The CGT revenue modeling was done by BERL, using Tax Working Group and IRD data, and winding down the property appreciation assumptions. Their assumptions for the growth of the property and stock markets was more conservative than the TWG's.

The dodgiest part of the costing would be their (Labour's, not BERL's) “anti-avoidance measures”, which assumes they can recover $300m of tax defaults and dodgers every year, as if National/Dunne aren't trying to squeeze the same stone. It's the Left's version of the Right's belief that you can constantly squeeze more productivity out of those public sector slack-arses.

 

Appendix 2 of 2: WTF

"Small business assets, up to a maximum of $250,000, sold for retirement, where the owner is above a certain age (e.g. 55) has held the business for 15 years and has been working in the business, will be exempt [from CGT]."

This would, presumably, be passed as the Tax Exemption for Working-Class Self-Employed Too Young To Love Winston But Maybe Too Rich to Vote Labour Despite Thinking John Key is a Banker Prick Act.

Allow me to soften you up a bit here - this is not a Labour idea, nor some "full-scale attack on enterprise" dreamed up by people with tall poppy syndrome. This was recommended by the Tax Working Group - a group commissioned by the National Government, stacked with lawyers, accountants and consultants from the big firms, backed by Treasury and IRD.

(Correction: The TWG came out against it. They said in their report:

The most comprehensive option for base-broadening with respect to the taxation of capital is to introduce a comprehensive capital gains tax (CGT). While some view this as a viable option for base-broadening, most members of the TWG have significant concerns over the practical challenges arising from a comprehensive CGT and the potential distortions and other efficiency implications that may arise from a partial CGT.

However, the paper produced for the TWG by academics Leonard Burman and David White was broadly in favour of the CGT, saying that it would:

..sharply curtail the incentive for individuals to invest in tax shelters. With a 38% top income tax rate and a 0% capital gains rate, a tax shelter that could transform $1 million of ordinary income into capital gain is worth up to $380,000 to create. With such huge tax incentives, the investments that produce capital gains do not even have to be particularly productive. Thus, many resources invested in such underperforming assets may be wasted.

It would also bolster support for the income tax. A tax system riddled with loopholes, where billionaires can pay lower average tax rates than their secretaries, invites disrespect and undermines voluntary compliance.

Treasury said:

A capital gains tax would improve the progressivity of the tax system, and.. improve the efficiency of the tax system by more comprehensively taxing economic income. The impacts of lock-in, loss ring–fencing, and design and transitional issues, should not be overestimated. The primary question is whether a CGT, in conjunction with personal tax changes, could lead to overall efficiency and fairness gains despite some mechanical issues.

And IRD:

On balance, Inland Revenue argued that the advantages of a real-world CGTwould not outweigh its disadvantages.

Correction ends. Sorry for the wrongness.)

It was recommended by the OECD in 2000. CGT is the norm among OECD countries – New Zealand is one of the few not to have it.

Forget about the money. The narrative that this is all about paying for Labour's promises is besides the point. Even if we didn't need the money (we do), this is still a good idea because...

You don't want the government picking winners, right? If you believe that markets make good choices, that also implies that government should not be distorting those choices. Yet, this is exactly what the lack of a CGT does. It means that one kind of activity (i.e. Working) is taxed, and another (i.e. Generating capital gains) isn't. This should be a deal-breaker for people who believe in capitalism: The government should not be distorting the market in this way (and Roger Douglas concurs). This should be all you need, but here's the punchline...

It's not picking a winner. It's just letting some random loser win. The government taxes tobacco because it wants fewer people to smoke; it taxes petrol because it needs to fund roads. Why does it tax income from work but not capital gains? It's kinda hard.

What kind of excuse is that, given that we can learn and copy from virtually every other country in the OECD?

There is no positive reason for it. Try finishing this sentence: “It's good that we don't have a CGT because...”. If a CGT existed, nobody would argue for it to be scrapped.

“It'll take 15 years” is not a bug, it's a feature. It's not a capital tax, it's a capital gains tax. We start counting the gains from the day the tax is introduced, it's just not collected until the asset is sold.

That this tax is not collected immediately is a completely irrelevant argument. We are not in a “we need to get $1.5 billion in the next 24 hours or S&P will kneecap us all” situation. This argument is a red herring.

It's a flat tax. By broadening the tax base, it provides more breathing room to flatten the system, but more directly, it is flat. You should love this as you would love any other flat tax.

(Nerd-note: Well, if there's a CGT-free threshold, then the average rate technically goes up as income goes up, but the marginal rate is still flat.)

You are the key. Let's face it, Labour's chances this election is fairly poor. The question is what we do with good policy ideas.

I have little doubt that Key and English considered it long and hard after the Tax Working Group. Maybe they took GST because it was easier and saved asset sales for this year because it was more important to them. But now that Labour's picked up CGT, it's forced National to come out against it – even though it could have easily gone the other way, with National campaigning on a CGT and Labour harping on about the cost of living, shoulder-to-shoulder with the Federation of Property Investors.

As much as I like to dream that we make our own political reality, we do, and we've made it pretty stoopid. Since I don't imagine that we'll get an epic show of bipartisanship and working for long-term interest of the nation, I'd like to just implore those on the Right not to paint themselves into a corner.

Weasel. Weasel like it's worth billions a year. Weasel like there's a cut to the top tax rate in it. Give National enough room to maneuver and change their minds in the next three years.

Please don't poison a good policy – because if National gets reelected, they're the ones who'll be hamstrung.