A top economist says a capital gains tax would lead to higher living standers for Kiwis, but is warning it would also slow the economy in the short term.

Westpac chief economist Dominick Stephens is also picking house and farm prices to fall, if a capital gains tax (CGT) takes effect.

On Thursday, the Tax Working Group recommended the Government adopt a CGT which would bring in more than $8 billion of revenue over the next five years.

The family home would be exempt, but investment properties, shares, business assets and farms would be subject to a CGT from 2021.

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It was also recommended that the Government use the $8 billion from the CGT to cut income tax for middle and low-income earners.

Stephens said the combination of the proposed tax cut and the implementation of the CGT would "lead to higher long-run living standards for New Zealand".

He said one of the biggest impediments to the New Zealand economy in recent years has been what he calls "skewed investment choices" due to an uneven tax system.

"[The Government] taxes the income earned on investments very heavily, but [it] taxes the capital gain earn on investments hardly at all."

In other words, people's paychecks are taxed according to their income level but if someone sells a house for a large profit, they haven't had to pay tax on that gain.

It wasn't until 2015 when the National Government brought in the "bright-line" test, where if a house was sold within two years, the seller would have to pay capital gains.
The current Government last year extended that to five years.

Despite this, Stephens said for years the tax rules have meant people have been investing in housing as it meant the gains were tax-free.

The Tax Working Group's CGT, Stephens said, would help skew investment away from housing.

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"Introducing a CGT should level the investment playing field, leading to more diverse investment choices."

He said a CGT would reduce what property investors would be willing to pay for a property, which would make home ownership more affordable for regular Kiwis.

This would, however, slow the economy, he added.

"A CGT would reduce house and farm prices… that tends to effect consumer confidence and lead to lower spending.

"So introducing a CGT will slow the economy, through the transition period."