Capital Gains Tax: Show us the money

In the second of our series, the EY executive director says a capital gains tax is not the revenue bonanza portrayed.

Labour says its tax will raise an additional $1 billion a year by 2020/21. The Greens initial claim is that its variant will raise $4.5b a year "over time". Big numbers, but still small in terms of total tax revenues nearing $70b.

These numbers just don't add up.

Last year, the Treasury released its modelling of the potential dollars at stake as part of its work on New Zealand's long term fiscal position.

The Treasury's got no ideological axe to grind on capital gains - in fact, it's cooler on the tax than often supposed - and helpfully sets out assumptions on where the money's coming from. That's almost all from property transactions. Excluding the family home, then, like Labour, the Treasury estimates the tax would raise $1b by 2020/21.

But the Treasury assumes full taxation at the highest rate (currently 33 per cent). Labour's plan is for a concessionary rate of 15 per cent, meaning that revenues should halve too.

It's not impossible to bridge the gap, as the numbers change depending on assumptions made by the modelling gurus. Treasury assumes a consistent 1 per cent "real - that is, above inflation - appreciation rate for property, 2 per cent inflation and turnover based on Quotable Value statistics.

Labour's model hasn't been disclosed, but it's not impossible to see how it could get to the magic $1b mark.

The Greens' $4.5b long-term target (from their "Capital Gains Tax - A Smarter Tax" paper) is another story.

And it's interesting to contrast that with its latest short term fiscals, which slavishly pick up Labour's much lower revenue estimates, starting with a token $25 million in 2015/16.

But using Labour's figures makes no sense unless the Greens don't believe in their own policy. The Greens intend to allow for inflation - so only tax real gains. That's a much smaller tax base than Labour intends.

If Russell Norman buys a rental property for $500,000 and sells it one year later for $515,000, supposing that general inflation accounts for two-thirds of the gain, the Greens say he'll only pay tax on a gain of $5,000. Under Labour's model - which the Greens' short term costing follows - he would pay on tax the full $15,000 (albeit at only 15 per cent).

Allowing for inflation as the Greens say they'll do reduces the revenue to only $300m each year by 2020/21 using the Treasury model. That's a long way from $4.5b.

The Greens says the specifics will be worked up by an advisory panel should they be elected. That's one tough job for the panel!

Overseas experience supports caution in this regard. Capital gains taxes do raise some revenue - say one-to-two per cent of total taxes in the countries like South Africa, Canada and the UK - but there's no pot of gold at the end of the rainbow.

The first part of this series can be read here.

David Snell is an executive director at EY. He previously worked at Treasury.