ZB ZB
Live now
Start time
Playing for
End time
Listen live
Listen to NAME OF STATION
Up next
Listen live on
ZB

All taxpayers might be in for good news this week

Author
John Roughan, NZ Herald ,
Publish Date
Mon, 18 Feb 2019, 1:25PM
Photo / Getty Images
Photo / Getty Images

All taxpayers might be in for good news this week

Author
John Roughan, NZ Herald ,
Publish Date
Mon, 18 Feb 2019, 1:25PM

COMMENT

Just three more sleeps before we see a capital gains tax proposal. I'm excited. At long last the days may be numbered for easy, excessive, socially damaging and economically unproductive investment in houses in this country.

Oddly, Sir Michael Cullen's tax working group doubts that tax-free capital gains contributed much to the explosion of house prices this century and doubts a tax will make much difference now. Well, we may see, because the group's interim report last year was fairly definite that we should be taxing "capital income" from all assets much the same as we tax other personal earnings.

In fact, the interim report suggested it will recommend capital gains be taxed at the receiver's top personal income rate - which would be fairly radical but eminently fair. It might also mean that when the final report is made public on Thursday we might be offered income tax cuts, not just at the lower rates but the top rate too.

Admittedly, Cullen's previous form would not normally encourage that hope. As soon as he became Finance Minister in 1999 he lifted the top rate to 39c in the dollar despite inheriting a healthy budget surplus from Ruth Richardson and Bill Birch. But much has changed since then. When National came back in the middle of the global housing-related financial crisis it too set up a tax review, which learned that only half the people with incomes at the top rate were paying it.

That working group was also looking at capital gains tax but its final report shied away from it and National simply increased GST to enable it to reduce the top income rate to 33c. Imagine if John Key's Government had introduced a capital gains tax in 2010 rather than waiting to 2015 to devise a "bright line" test when the horse had bolted?

One reason to hope Labour might now reduce the top income rate is that it is now fairly well realised that economic liberalisation has greatly widened the gap between returns on capital and payment for work.

Another reason all income tax payers might get some good news on Thursday is that the Government would need to sell a capital gains tax package to voters at next year's election and capital tax could give it an annual $6 billion to reallocate.

Furthermore, we have been assured any such package would be "revenue neutral" which, given the surplus Bill English restored, it should be.

But the best reason to lower the top tax rate is that 33c is too high. Cullen's group doesn't think so, its interim report told us income taxes here are low by international standards. But tax is painless for most people because they never see the money. It is not until you do some extra work in your own time that you realise how high a 33c tax rate really is.

Would it discourage you from making the same effort again? That's the big question we will need to answer if we are offered a comprehensive capital gains on all business investment, not just property.

Capital for investment is the lifeblood of an economy. People who have it or raise it and can generate more of it are the people who create jobs for greater numbers of people, produce the goods, services and entertainments we enjoy, make the economy competitive and resilient, and pay the taxes that feed the public sector.

Would energetic, enterprising people still borrow money or put their savings at risk to employ themselves, would they have the same incentive to build up the business and become responsible for employing others, if they were going to lose a third of its value when they wanted to sell it? Business lobbies will say no - but they would say that.

I wish a capital gains tax could be confined to residential rental property. Strictly, that offends a core principle of liberal economics that government should not discriminate against any private investment decisions but multiple house buying has done the country no good and a lot of harm.

We have a generation growing up with either no prospect of owning their own home or carrying mortgages they might never pay back unless we get a period of high inflation. Heaven forbid.

My generation listened too long to the canard that capital gains are not income. When investors cash in those gains they plainly are income and should be taxed like income. If the rate for both can be more reasonable so much the better.

Take your Radio, Podcasts and Music with you