The bulk of the revenue expected to be gathered from the proposed Capital Gains Tax will come because the Tax Working Group has not made allowances for inflation.

This is according to lobby group the Taxpayers' Union, which this morning released a report which took aim at the proposed tax's failure to adjust for inflation.

In February, the Tax Working Group (TWG's) released its recommendations which included a broad capital gains tax (CGT).

The Government will soon outline which, if any, of the report's recommendations it seeks to adopt.

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The Taxpayers' Union report said more than two-thirds of the proposed tax's forecast revenue can be attributed to the effect of taxing "paper gains".

In other words, the Government would be getting more money through taxing the on-going process of inflation, even when asset holders – such as a someone with an investment home or a bach – aren't getting richer.

For example, the report said a $500,000 rental property could face a real capital gain of almost 56 per cent when sold after 20 years, as a result of the compounding effect of two per cent inflation over that period.

This is much higher than the 30 or 33 per cent mooted by the TWG.

In the TWG's final report, it recommended there be no adjustments for inflation.

"The gains would be taxed at full rates, with no discount and no allowance for inflation."

Its rationale for this is because no other form of tax is indexed for inflation, a CGT should have to be either.

The Taxpayers' Union executive director Jordan Williams said if the Government fails to fix this aspect of the report, a CGT will be a "cynical revenue grab".

"This tax will hit New Zealanders at a far higher rate than advertised, it would thieve from those who are not necessarily getting richer and it would reward politicians who fail to control inflation with extra revenue," Williams said.

TWG chairman Michael Cullen, whose contract was extended by the Government to "defend the integrity of the report", has been approached for comment.