Tax to stop ‘bad’ behaviour dents level playing field
Whoever heard of a new tax being introduced that is not expected to raise any revenue? At least not enough revenue to be worth IRD factoring it into its revenue projections.
That seems to be the situation with the new "bright-line" capital gains tax that was confirmed in the 2015 Budget.
It may seem paradoxical, but a tax that is designed to raise no, or very little, revenue is not necessarily all that strange. And it certainly doesn't mean the tax is ineffective.
After all, the 2010 Budget introduced a big increase in tobacco duty, to deliver on promises to National's Maori Party partners to do something to discourage smoking. If this raised no extra revenue, arguably the Government would have considered it a major success – cutting tobacco consumption by the same percentage by which it had raised the tobacco tax rate.
This is a classic example of so-called "preventive taxation" – a tax that is levied with an explicit objective of changing taxpayers' behaviour away from what is perceived as "bad behaviour".
But is that what the new "bright-line test" capital gains tax (CGT) is all about? The answer to this question is much less clear.
If you believe the rhetoric about "speculators" driving up house prices in Auckland, and if you think this should be discouraged, then a CGT with a bright-line test that raises no tax at all would arguably have achieved its "preventive taxation" objective. A high tax penalty makes speculative housing activities so costly that all speculators get out of the market. Bingo!
Of course, even with this preventive motive, the projected failure to raise revenue may simply indicate that IRD expects a shift in investors' holding period for property (from less than, to more than, two years). In this case, there may be some temporary effects on house prices and 'speculation' as intended, but the main effect is likely to be a re-characterisation of property income to keep it outside the CGT regime's two-year window.
In practice this might mean a three or more year window, depending on whether IRD can convince the courts that someone selling a property after not much more than two years nevertheless should be caught in the CGT "trading in property" net. But, whatever the effective bright-line turns out to be, this kind of behavioural response to the new tax would more likely signal tax avoidance than any real change in behaviour.
The more common argument made by those who favour a CGT here is about "levelling the playing field" of taxation of housing versus non-housing investment.
The usual argument is well known – housing is undertaxed relative to non-housing both through mortgage tax relief for geared property investments and untaxed capital gains on house price appreciation. But, this argument is far too simplistic.
As the Productivity Commission pointed out in its 2012 Affordable Housing report, the major tax advantage for housing is for owner-occupied housing through untaxed imputed rental income – and no-one is suggesting taxing this, nor applying a CGT to owner-occupiers.
And there are various other ways in which capital gains on housing are taxed, even without a formal CGT. For example, a small business owner who builds her business up from almost nothing and sells it for $1 million is untaxed, directly, on the gain. But any buyer valuing the business at $1 million does so because of the profit stream they expect to earn from it – a stream that is subject to personal or corporate income tax. Regardless of whether property is, or is not,tax-advantaged, the bright-line test CGT will raise the tax on property relative to other investments. So, the new bright-line CGT should perhaps be more accurately labelled a property tax than a capital gains tax.
Last, but definitely not least, the new bright-line CGT adds yet another twist to New Zealand's increasingly complicated regime for taxing capital income and savings.
The 2010 Tax Working Group noted that different forms of capital were now being taxed at quite different rates and called for greater coherence. That never happened. Instead a patchwork of property-impacting tax changes were introduced in 2010. Now we have further reasons to be concerned: for taxes on investment it seems we have more "undulating scrub" than level playing field.
Norman Gemmell holds a chair in public finance at Victoria University.