Federated Farmers: Capital Gains Tax not smart

Capital Gains Tax not smart By Mark Ross As part of its election campaign the Labour Party has been pushing inclusion of a Capital Gains Tax or CGT.

The way that CGT is promoted in the media it sounds like a game-changer. It isn't.

Interim research findings from the New Zealand Institute of Economic Research (NZIER) highlight that a Capital Gains Tax would not be ag ood addition to New Zealand's tax mix, especially from af arming perspective.

The NZIER findings indicate that the CGT would do little to improve the efficiency and effectiveness of New Zealand's tax system.

The main reason for this is that it would be riddled with exceptions and unresolvable design problems and for that, it would raise little revenue.

In principle, it appears to broaden the tax base thus making for am ore efficient tax system if additional revenue was used to lower other tax rates.

However, there are no current proposals for such an offset and the tax will not raise much in the way of revenue.

While the Labour party expects the CGT would bring in $3.7 billion (or 3 per cent of total tax revenue) by 2026, the real number is likely to be half that amount.

Labour expects to raise $1.3 billion from the farming sector.

A more realistic estimate is that the tax would raise an ominal $590 million more in revenue in 15 years' time.

Labour's numbers do not take account of 'lock-in' - that people will choose not to sell to avoid taxable gains.

While the tax would take time to ramp up, it would reduce current farm values.

NZIER estimate the loss in value will be between $2.4 billion and $7.6 billion (-1 per cent to -5 per cent).

Other asset owners would not face tax on their capital gains -chief amongst them are people who own their own home.

This is politically predictable but economically costly as it retains a key distortion between asset types.

Home affordability is unlikely to improve either. Housing costs rise and fall with the relative costs of land, construction and transport or supply-side costs.

These would not fall with a CGT. NZIER conclude that there is no such thing as a perfect CGT and design choices bring both costs and benefits.

Victoria University's Tax Working Group considered these costs and benefits and concluded that a CGT of the kind proposed by the Labour Party would not be an efficient and effective option going forward.