Acknowledgement by John Key that a capital gains tax only makes sense if it includes residential property is acknowledgement that we’ve got taxation of capital in New Zealand all wrong. I couldn’t agree more with that observation.
Coming on top of Labour’s promotion of a capital gains tax going into the last election, as well as the endorsement of those taxes by the Greens, suggests we at long last we have a cross-party agreement that taxation of capital in New Zealand is a mess.
There are problems with each of the ideas as floated so far;
- Exempting capital invested in residential property is nuts. Of all the capital types it’s the one that soaks up the most investment and therefore fixing its taxation status will have by far the most significance in terms of making tax equitable and eradicating the tax break’s impact on speculative property demand.
- Rather than taxing capital gains it’s better to have a low and predictable tax on the value of the capital. Each and every year this is paid irrespective of whether its value goes up or down over the year – just like property rates.
A low and predictable comprehensive capital tax would close a major tax loophole, enable a flat income tax regime, restore equity to our tax regime and form the base for reform of social welfare. That political support for such progress is like getting blood from a stone is more to do with the personal risks for politicians doing the right thing, than it is about the policy reform not being overdue.
As we outlined in our book The Big Kahuna, relying on higher and higher regressive GST, and ignoring the huge and growing omissions in income tax, will exacerbate the already burgeoning inequities in disparity between rich and poor and continue to inhibit the efficient allocation of capital investment and with that, GDP growth.
Mr Key’s highlighting of the ability of Parnell to doge a capital gains tax is absolutely correct. But such a reality shouldn’t prevent sensible and comprehensive reform of taxation so inequities and inefficiencies are at last corrected.