Media Release - 14 July 2011
Clare Farrant
Senior Communications Manager
Ernst & Young
+64 274 899 700
+64 9 300 7065
clare.farrant@nz.ey.com
Capital gains tax
14 July 2011
Labour's proposals to tax capital gains and increase the top personal tax rate for those earning more than $150,000 per year might address perceived fairness issues but at what cost?
And will these perceptions of fairness trump economic reality?
Hardest hit by Labour’s proposals will be the top 10% of households who already contribute more than 70% of our personal taxes.
New Zealand is dependent on foreign capital and overly dependent on its top income earners who pay the highest percentage of personal tax. Can we afford to alienate these groups? The issue could be more fundamental to our future than MMP.
Labour has given voters a clear choice between the two major parties: capital gains tax verses no capital gains tax.
Serious questions remain unanswered: the most important being the economic impact.
And what does Labour plan to do with the extra $2.27 billion the tax is forecast to raise?
As Finance Minister Bill English told Parliament this afternoon: “More taxing and more spending will grow the government but not the economy.”
This sobering assertion is reinforced by the fact that since 2005 government spending has been New Zealand’s biggest growth industry, rising by 50% in the past six years, while our export growth in real terms has diminished since 1994.
The IMF, the OCED and even our own Treasury have been cited as supporters of a capital gains tax. But the potential downside is much greater than perceptions of fairness.
Our legislation already brings into the tax net areas that would be considered to be capital gains – for example, gains from debt instruments, redundancy payments, property gains from rezoning, dealers etc.
Also at issue is whether the lack of a capital gains tax has impacted on our investment in housing. New Zealand’s home ownership ratio (percentage of homeowners as a proportion of the household population) is 73% compared with 66% in the UK, 60% in Canada and more than 60% in the USA.
But the reality is more complex than these figures suggest. For example, in New Zealand, home ownership represents 70% of household savings, while in the USA the figure is 30%.
Is this caused by tax distortions or a lack of compulsory savings plans, or are we simply poorer?
Let’s not forget that property owners already pay an effective capital gains tax in the form of rates – rates that are determined by the value of the property and not the services provided.
If houses lose value because of a capital gains tax mortgagee sales may increase, the availability of rental housing may reduce and rents may increase.
Not allowing tax depreciation on building has already reduced the economic viability of investment properties.
Since 1966, various committees have expressed support for taxing realised capital gains. In spite of this, it has never been introduced.
Conceptually it is difficult to argue that a capital gains tax would broaden the tax base and iron out some of the anomalies.
Politically, the perceptions of fairness will taint the position either party takes.
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