The absence of a capital gains tax in New Zealand impacts on the coherency of our overall tax policy, write Lisa Marriott and Max Rashbrooke
Capital gains tax. It’s a topic that comes around every election year and 2017 is no exception. Sometimes it’s a scaremongering tactic used to warn voters off considering rival parties. Sometimes it’s presented as a serious policy option that can and should be implemented. As always, the reality is probably somewhere in the middle.
What is a capital gains tax? Tax, somewhat confusingly, does not treat all gains the same. Instead, gains are treated as revenue or capital. It may be helpful to use an analogy well known by students of tax. Think of a fruit tree. For tax purposes the tree is capital and the fruit is revenue – that is, the fruit is taxable as income when sold, whereas any gains from the sale of the tree are capital and in New Zealand are not taxable.
In New Zealand, revenue generated from capital assets – property, land, buildings or even trees – is taxed as income. This might be in the form of interest, dividends or rents, among others. However, with the exception of certain items specifically outlined in legislation, no tax is payable when capital assets are sold.
Why might we be concerned with this? One reason is that capital assets are held mostly by those who hold the greatest wealth. In New Zealand, the wealthiest 10 percent own more than half the country’s wealth, while the poorest 50 percent have less than five percent. Wealth – as it is used here – refers to capital assets. Therefore, the absence of a capital gains tax is a huge tax concession for the wealthiest in society.
Another reason we might want a capital gains tax is that the tax system is our primary mechanism to fund expenditure. To the extent gains from capital items are not taxed, our tax system is excluding a key component of potential revenue that can contribute to helping the poorest in society or investing in other goods and services. This expenditure makes our society an even better place to live.
The myths surrounding capital gains tax contribute to its unpopularity. Perhaps the most obvious is the suspicion that peoples’ homes will be taxed. Typically, an owner-occupied home is not included in a capital gains tax. There has been no indication a capital gains tax would include the primary home. Indeed, the new ‘bright-line’ test (which is a capital gains tax) introduced to help curb the booming Auckland property market does not include the family home.
A capital gains tax is a tax on the gain component. That is, it is not the entire proceeds of the sale that are taxable, only the gain made above the initial purchase price. And usually capital gains tax is lower than the top income tax rate – typically by around half.
Most other countries have some form of capital gains tax. Following Inland Revenue’s own approach to tax policy – referred to as “broad-based, low-rate” – New Zealand should have a capital gains tax. The philosophy is that the tax base is broad, which means rates can be lower. The absence of a capital gains tax impacts on the coherency of our overall tax policy.
What might look a capital gains tax look like? The policy detail is important. What is included or excluded? Would a tax be just on land – and would it include other assets such as shares, boats or works of art? What about your stamp collection, vintage clothes or antiques? What happens if you only have a small amount of capital gains? What happens to capital losses?
Now really is the time to have an informed discussion about whether we want or need a capital gains tax.
Professor Lisa Marriott and Max Rashbrooke will be giving a public talk about ‘Capital gains tax: Bogeyman or crucial reform?’ as part of Victoria University of Wellington’s Spotlight Lecture series, 12.30–1.15pm on Wednesday 20 September at Lecture Theatre 1, Government Buildings, Pipitea Campus, 55 Lambton Quay. To register, email firstname.lastname@example.org with ‘Capital gains tax’ in the subject line or phone 04-463 7458.