New Zealand will remain one of the few developed nations in the world not to have a capital gains tax (CGT), after the Labour-led Government yesterday ruled-out implementing such a measure. From Interest.co.nz:
The Government will not introduce a Capital Gains Tax having failed to reach a consensus, with coalition partner NZ First opposing the move.
Prime Minister Jacinda Ardern said on Wednesday that she still believed there were inequities in the tax system that a Capital Gains Tax could have helped to resolve but it was clear many New Zealanders did not believe in a CGT. She’s now ruled out a CGT under her leadership in future.
“All parties in the Government entered into this debate with different perspectives and, after significant discussion, we have ultimately been unable to find a consensus.”
Taxing capital gains would have improved equity in the tax system by allowing for income taxes to be lowered. After all, why should workers be taxed at full rates on their income while wealthy owners of capital avoid paying tax? A CGT would also have improved incentives to invest in productive businesses rather than unproductive real estate.
Alison Pavlovich – assistant lecturer with Massey University’s School of Accountancy – argued the case well earlier this month:
Missing from the debate is the fact that a capital gains tax should reduce income taxes for most New Zealanders…
The debate strikes at the heart of two essential elements used to assess the quality of a tax: equity and efficiency.
In order to be equitable, a tax should treat people with similar economic situations in a similar way. This is called horizontal equity. Equally, taxation should fall more heavily on those who have the ability to pay. This is referred to as vertical equity…
Not taxing capital gains results in a failure to achieve both horizontal and vertical equity…
Currently, in New Zealand, some income is taxed and some is not. The income that is taxed is typically derived from personal services (“hard work”) and from investments of capital (interest, rent and dividends). The income that is not taxed is typically derived from market movement, such as capital gains on assets…
On the whole, we have a counterintuitive approach to taxation in New Zealand where we tax “hard work” and fail to tax gains that accrue passively. Two people in similar situations are taxed differently. A person who invests in a small business that produces goods and services pays tax on all their profits, while another who invests in property that accumulates passive gains, does not.
In a world where the accumulation of capital through passive gain is increasingly being held by a smaller group, the need to tax those gains is becoming more urgent…
Contrary to popular belief, land investment, in itself, is not a productive activity. The land is there regardless of who owns it. Someone may conduct productive activity on the land, such as farming or building houses, but the ownership itself does not produce goods or services. A capital gains tax would reduce distortion in investment choices, not increase it.
If tax applies to gains on investment in assets as it does to business profits, it will encourage investment decisions based on where the greatest return can be made, not where tax-free gains are derived. The lack of capital gains tax has been distorting investment decisions for decades.
What a shame the property vested interests won out at the expense of the broader New Zealand economy.
