Before the appalling event in Christchurch 11 days ago, the Government looked to be in big trouble over the capital gains tax recommended by its advisory group. The Prime Minister was looking rattled on the subject, and frustrated that her party was being blamed for decisions it has not yet made. Now she can return to the tax debate with the country's admiration for the way she has led its response to terrorism.
She has gained a great deal of political capital and she will need to draw on it if the Government decides to adopt all or any of the recommendations of the Tax Working Group. It promised to announce a decision in April and, considering the heat of the debate sparked by the Working Group's report, the Government will want to declare its position earlier in the month rather than later, possibly next week. For that reason, each day this week the Business Herald is taking a close look at the practical details of what the Working Group has proposed.
The group, led by former Finance Minister Sir Michael Cullen, did the Government no favours by recommending a tax on all business assets, not investment housing alone. When the Labour Party put a capital gains tax into its platform at the past three elections it was as part of its policies to contain house price inflation. But the Cullen group concluded that the tax would make little difference to house prices and proposed that all business investments face a capital gains tax for the sake of fairness.
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Capital gains on the sale of an asset would be treated as income in any other form and taxed at the seller's marginal rate. This would give New Zealand a high capital gains tax by international comparisons and, as experts told us yesterday, it could be a severe discouragement to those contemplating starting or expanding a business.
To many, it also seems unfair that those who build up a business should pay income tax on the increase in its value when they come to sell it. As small business owners point out, they often take minimal income out of the business in its early years when they are working long hours to get it established. They may be paying themselves less than they are paying those they are providing with employment.
In those circumstances, capital gains can be seen as postponed income and should be taxed as income, tough, as our report yesterday outlined, for many sorts of business as there are practical difficulties in assessing the capital gain. First all the assets would have to be valued, not just the land, plant and equipment but the brand and reputation of the business.
For property alone the exercise could be straightforward, property is already valued regularly for local government rates. But for businesses that depend on a brand, skills and goodwill, the tax looks more trouble than it is worth.
A selective tax on investment property would make rental housing a little less attractive and more savings might be put into productive assets.
Taxing those productive assets does not seem such a good idea.