KEY POINTS:
The apparent cursory dismissal by Prime Minster, John Key, and his deputy, Bill English, of the Treasury proposal to introduce a capital gains tax may be to my advantage tax-wise. But for issues like this it is useful to put our personal interests aside.
If one looks at the whole picture objectively, taxing earned income and completely exempting capital gains seems to be neither fair nor sensible.
Why should one person pay tax on the $50,000 a year they earn from their job, while their neighbour gains the same amount tax-free from selling shares that have appreciated in value? In the end, a dollar is a dollar, no matter where it comes from.
The case where land, or some other asset, has increased in value, not because of any improvement by the owner, but because the demand for it has increased, seems even more lopsided. It is basically the community that has added the value. Yet under our tax laws the owner not only gains all the benefit, but often also pays no tax.
For example, 25 years ago the area around the Botany Town Centre in Auckland's East Tamaki was farmland. Since then the land has increased in value many times over. This is not because the land has changed, but because the council decided to develop this area and thousands of people now live in the vicinity.
If a capital gains tax were introduced, it should allow other tax rates to be cut, while maintaining the same overall revenue stream. One option, a rollback in GST, would benefit low-income families, making them less reliant on government support.
Current New Zealand tax law has become rather complex and convoluted in attempting to deal with not having a capital gains tax, while trying to stop too much potential tax revenue from leaking out through this hole.
To work with it, individuals and companies often need to spend considerable resources on financial and legal assistance.
Properly done, the introduction of a capital gains tax offers the opportunity to cut through this complexity by making it totally clear what is taxed and what is not.
Although not all countries have a capital gains tax, many now do. These include Australia, Britain, the US and Canada.
I was living in Canada when their capital gains tax was introduced in 1972. The whole process took place without any apparent difficulties or significant public opposition. This was because the Canadians did several things right.
First, they did not make the tax retrospective and they gave plenty of warning that it was coming. All you needed to do was to value major assets as at the date of its introduction.
Second, they recognised that people's dwellings needed to be treated differently. When you sell a house, you generally need the proceeds to buy another one.
Hence they decided that taxing capital gains in this instance was not appropriate.
And third, they only taxed gains that had actually been realised, while allowing certain exemptions for farmers and small business owners.
The idea of introducing a capital gains tax in New Zealand is not a new one. Most notably, it was investigated by the Ross Committee, a team of government-appointed independent experts, in 1966.
Although they concluded that there was a strong justification for taxing capital gains, and although the subject has come up several times since, we have made no progress in the intervening 40 years.
Rather than being something that is cursorily discarded, the idea of introducing a capital gains tax needs to be seriously looked at with the aim of achieving a fairer, simpler and more efficient overall tax system.
The new Government is in an ideal position to take this on. They are at the start of a new term. They have a strong majority position. And the current difficult economic conditions make it an appropriate time to investigate new options.
If John Key and Bill English just set the Treasury recommendation aside, then I would surmise that they are either placing more weight on trying to keep their supporters happy than on working towards a fairer tax system, or they don't understand the issues. That would be unfortunate and a great opportunity missed.
