The recommended capital gains tax would not have as much of a positive effect on living standards as has been suggested, according to a top economist.

The tax, recommended by the Tax Working Group last week, would disincentivise many small businesses in New Zealand, economist Cameron Bagrie said.

This comes after Westpac chief economist Dominick Stephens said he expected the mooted CGT would raise overall living standards.

Speaking to the Herald today, Bagrie – the head economist at Bagrie Economics – said if living standards were measured by Kiwis' incomes, then the impact of the CGT would be more negative than positive.

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This was mainly down to the way small businesses would be hit by the tax.

Under the proposed rules, if someone worked from home they could choose not to pay a CGT but they would have to forgo claiming any deductions on their at-home business.

If they want to claim the deductions, they would have to pay a CGT.

"SMEs working out of home [would] get hit," Bagrie said.

"They either have to sacrifice home office costs or face a capital gains tax on part of their property."

The most recent data showed that more than 180,000 SMEs in New Zealand turned over $100,000 a year or less, last year.

"I would expect an awful lot of those businesses would be operating out of home,"
Bagrie said, adding that it would probably impact hundreds of thousands of people.
"If they have to sacrifice those expenses – that's going to be a big deal."

He thinks a CGT should be implemented, but it should be across the board and include the family home, offset by income and corporate tax cuts.

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"Politics ruled that option out which means it would end up hitting the rest of the economy harder with one of the highest capital gains taxes in the world.

"I struggle to see how that is going to deliver a higher standard of living."

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".

This was because it would help skew investment away from property speculation.

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

Today, Taxpayers' Union executive director Jordan Williams said Stephens was wrong to claim the CGT would improve housing affordability.

"Stephens' views that this sort of CGT will reduce the cost of housing aren't just out of the mainstream, they are totally inconsistent to economic theory and the observations offshore. There is something more going on here," he said.

"The IMF has found that Australia's primary residence exemption has encouraged a debt-fuelled house price surge.

"It appears Westpac is cosying up to the Government in making bogus claims that the same wouldn't happen here."