Andrew Dickens: What is fair about a Capital Gains Tax?

Andrew Dickens,
Publish Date
Monday, 25 February 2019, 12:21PM
A capital gains tax won't be fair to the backbone of our economy, Andrew Dickens writes. (Photo / Getty)

The capital gains tax debate rumbled on over the weekend.  Maybe it’s something in the weekend air but there seemed to be more opinion writers in the weekend media who wanted a Capital Gains Tax than there were during the week and there were some common themes amongst them all.

They all banged on about the concept of fairness saying how is it fair that not all income is taxed. Fairness is an easy argument but it cuts both ways.  If you want to go down the fairness avenue then you end out asking yourself why is it fair that some people are asked to pay a larger percentage of their income than others.  How is it fair that someone paid up to 70 grand effectively pay 20 per cent of their income but over that anywhere up to 33 per cent.

Fairness is a weak argument for a capital gains tax but it’s also a stronger argument against a progressive tax regime.

The other weakness of the weekend’s argument for a CGT was the use over and over again of the residential property market as the driver.  Some opinion writers even thought that the family home should not be exempt.

Now that’s an interesting idea because I don’t know about you but I’ve never found any real capital gain from buying and selling the family home. Because when I’ve sold the family home I’ve had to buy a new family home in the same market and strangely enough the house I’ve had to buy has had the same capital gain.  It’s about relativity.

With hard work and financial management I can see capital gain from investment property but there’s two things there.  Firstly rental income is subject to tax so the government gets some cash and secondly there’s already a capital gains tax on that sector with the brightline test.

Where their fairness argument really comes unstuck is on small and medium sized businesses.  That sector seemed barely mentioned in their articles but that’s the sector that going to get hit the hardest.

Small enterprises are firms with fewer than 20 employees. They make up the majority of businesses in NZ and are the backbone of our economy. They employ 29 per cent of our workforce and contribute over a quarter of our GDP.

These are the people who take a risk.  Generate revenue.  Pay tax on that revenue.  Pay GST on that revenue.  The people who hire people through that revenue and pay them wages which the government taxes. But then at the end of the day when they sell the business to retire and it has grown it over $5 million then the government will say thanks very much for a lifetime of work and take a third of that money away from them.

What people forget is that owners of small businesses don’t really pay themselves. In fact, one business mentor I’ve spoken with said that any small business owner that pays themselves a salary is not worth supporting. Their pay is whatever the profit is and particularly in the early days those margins are negligible.

Why we would penalise the backbone of the economy is beyond me. And I was watching the news last night and they were talking about a recent MYOB survey of small business owners which shows just how much pressure they’re under.  Nearly a third (31 per cent) report experiencing a mental health condition since starting or taking over their business.

Of those who have been affected by a mental health condition, more than half (59 per cent) say they experienced depression, while two-fifths (41 per cent) say they had anxiety.

MYOB country manager Ingrid Cronin-Knight says small business owners tend to put a lot of pressure on themselves to perform, maintain their business, pay staff and earn a living, which can lead to increased levels of stress and anxiety.

Add a capital gains tax and take a third of their money when they try to quit and you have to ask yourself what's fair about that.

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