Written By: - Date published: 7:53 pm, February 21st, 2019 - 129 comments
Categories: capital gains, tax - Tags: environmental taxes, inflation, progressive taxation, speculation, tax cuts, tax working group, water tax
Everyone who’s talking politics right now is talking about what’s in the Tax Working Group’s recommendations, mostly the capital gains tax. Let’s talk about some things related to the recommendations, but not their proposal specifically, although it’s a decent start that I would wholeheartedly support, and we should be mopping the floor with National MPs who oppose it, especially by quoting their assets at them.
First though, let’s discuss a couple things in the proposal: Counting capital gains against the existing income tax brackets is inherently fair, make it progressive without giving you two sets of brackets to maintain, and treats capital income exactly the same as non-capital income. It earns a chef’s kiss.
Secondly, water taxes and other environmental taxes that we can then spend on repairing environmental damage or on conservation? Yes please, there’s nothing complicated to explain here, it is good, and necessary for us to continue as a tourist destination.
Back to the topic at hand, Bridges and his cronies are trying to paint a more comprehensive capital gains tax (remember, we already have multiple taxes on capital gains, including the Bright Line Test introduced by his own government) as an investment killer, which it is not. It is exactly the opposite: it is a speculation killer, and we should be asking real questions about the portfolio of anyone else spinning this line. Real investment does not involve buying something low and selling it for a higher price a few days later after it’s gained (back) value. Investment is usually about holding onto something because it’s useful or profitable to you just by owning it, like say, land. Taxing realized gain (that’s the more sensible of the two recommendations the Tax Working Group proposed, where we only tax the sale of capital goods) encourages people to hold onto shares, productive businesses, rental properties that are making money, and so on, so long as they can bear having their capital tied up in their investments.
One really obvious e.g. NZME sold the Herald's old site on Albert Street for (IIRC) something north of $40 million. Don't tell me they're disinterested observers of a CGT on commercial property slaes.— Craig Ranapia (@CMRanapia) February 21, 2019
It also evens up the ridiculous situation where someone working for a renovations company would have their customer paying GST to pay them, their boss paying company tax, and would pay income tax themselves on their salary, but could be renovating a home to sell for profit themselves on their own time and only pay GST on the goods and services they bought to do the job, effectively making a profit on their work tax-free.
But National is right about one thing. The exemptions proposed by the Tax Working Group leave ridiculous holes. We should close them. It’s wrong that a $5million dollar home, whether it belongs to an accountant, a union-busting director, a politician, or a business owner, somehow doesn’t get taxed because it’s a family home. Let’s tax it, and use that money to discount other taxes, or to nationalize the ambulance sector, or to partially fund NZ Super, or a million other things that will be worth the tradeoff.
They’re right that it’s ridiculous that selling an art collection would be free from a capital gains tax. Let’s tax it. Hell, let’s set a reasonable threshold, and tax the real realized gain on every asset over it.
Contra to the Labour Party’s silly tendency to issue bottom lines to placate centre-right “swing voters” who aren’t reassured by their bottom lines anyway, this should include the family home- what we should simply do is let you offset the value of any new home you buy if you would otherwise have not owned a home after the sale from the profit. (You’d probably want a cap, like say the 75th percentile in house price, or the average house price in Auckland, on how much you can offset, so that selling a mansion to buy a mansion would still see you paying tax) If you sell a $5million mansion and move into the suburbs, you should pay taxes on that. If you sell up in Auckland and move into the regions and make a few hundred thousand off it, you should pay taxes on that, too, even if you owned a modest home before. If you sell a modest family home and move into a more expensive one or one of the exact same price, you should pay no capital gains tax, as no actual gain was realized. If we need to offset any extra capital gained this way, that’s fine, we can cut other taxes or invest in other spending that’s good for everyone, particularly the least well off. (as closing the gap for them is also good for everyone, says basically every social scientist ever)
Also, contrary to the TWG, we should tax capital gain after inflation. It’s a bit ridiculous to say that something’s gained value because money has lost relative value. It makes the maths slightly harder, and means you need a higher tax rate to get the same revenue, but it’s simply a fairer system.
The point of changing the tax system should be to remove loopholes accountants can drive trucks through, and discourage speculation in exempt classes of investment. This means setting the rule in a way that’s as simple as possible- and including everything over a small price limit, say $5,000 or $10,000, is pretty simple, and would exclude most people’s private property.
National may think they’re onto a winner here in fighting a CGT, but I’m pretty certain they’ll have egg on their face if they want to argue against an income tax cut to try and defeat a capital gains tax that targets investment items for the already-wealthy. Those are terms even New Zealand First will be tempted by. The only things to argue about are the practicals, and those can easily be tighetened up in the case of exemptions. It might even cost us money net in its first year running due to having to value everything, but it should be worth it in the long-term.