Capital gains tax debate heats up
BY GARRY SHEERAN
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A capital gains tax could raise $2.7 billion a year and possibly more to pay for future income tax cuts, and be much fairer to lower-income families than a rise in GST.
Auckland University tax policy and law professor Craig Elliffe makes the claim in research for an article for an international tax journal as a team of experts considers advice to the government on tax reform.
The government-sponsored tax working group, a committee of 14 private sector and academic experts led by Victoria University commerce faculty dean Bob Buckle, was set up in May as a sounding board for tax reform.
After its last meeting 10 days ago, Treasury's professor Norman Gemmell said increasing GST by 2.5 percentage points to 15% would raise $2b in revenues which could be used to reduce income taxes.
But Elliffe said a capital gains tax could raise $1.36b in revenues, based on US experience where 2.43% of total tax revenue was raised from such a tax. And that figure could be at least doubled once the indirect benefits of a capital gains tax in securing the wider tax base was added in.
He said the US, along with the UK and Australia, had told an OECD survey in 2007 that capital gains taxes were indispensable parts of their tax systems "because of the protection it gave them on their income tax base".
"People pay taxes because they believe other people pay taxes," said Elliffe. Under New Zealand's present tax system, it was wrong that a salary earner would pay $38,000 tax on a $100,000 salary, while a $100,000 realised property gain would pay no tax.
"The [tax] game we have been playing as a country is Monopoly, and the dice have been loaded in favour of the knowledgeable and/or well advised," he said.
Elliffe, who is not a member of the tax working group set up by Finance Minister Bill English, said the regressive nature of GST was not its only drawback. It could also deliver a significant blow to an economy either in, or recovering from a recession.
In December the British government reduced its consumption tax (VAT) from 17.5% to 15%, which resulted in a 2.1 billion increase in retail turnover over three months an increase more remarkable given the economic context of the time, said Elliffe.
While he acknowledged it was unlikely GST would be increased in the short term in New Zealand, its regressive nature remained a drawback at any time.
Unlike Elliffe, Council of Trade Unions secretary, and economist, Peter Conway, is a member of the working group, although his inclusion came only belatedly after he had protested at what he considered a lack of balance in the composition of the group. "I was nervous about the direction this tax review would take, especially on tax equity issues," he said.
Besides Reserve Bank and Treasury representatives, and Victoria University, there was stock exchange chief executive Mark Weldon, economist Gareth Morgan, investment banker Rob Cameron and a slew of tax partners from big accounting firms.
As a result of his concerns, Conway, along with Auckland University economist Susan St John, was invited to the working group, "and to be fair, the material we have been given is very transparent on equity issues", said Conway.
"At the same time, I feel much more nervous about increasing GST than introducing a capital gains tax, because the people I represent are much more likely to be disadvantaged by a rise in GST," he said. Conway said it was argued at the working group that GST was not as regressive in its impact over a long period of time. "I am not aware that will be a lot of comfort to the people I represent," he said.
It was also argued that wealthy people pay more GST because they consume more. "The point is, however, that lower income earners are paying a far larger proportion of their income on GST," he said.
The debate over either increasing GST or introducing a capital gains tax looks set to intensify. English told the Sunday Star-Times the only measure effectively off the table for the working group's consideration was stand-alone tax cuts. Tax revenue was down and spending had increased. Personal and maybe corporate tax cuts were desirable in the medium term to boost productivity, but the total tax take must not fall as a result.
That means either a rise in consumption tax (GST), or some extended form of capital gains tax as the only realistic options to compensate Treasury coffers.
New Zealand has long debated and rejected a capital gains tax, introduced by the US and the UK in the 1950s, by Australia in 1985 as well as by most OCED countries.
Treasury Secretary John Whitehead recently called for its introduction "at the risk of being chased down by an angry crowd with pitchforks and flaming torches". No stranger to sharp points himself, English said Treasury's support for a capital gains tax was nothing new.
Conway's "reading between the lines" was that "despite the government apparently ruling it out, there is probably a better chance for such a tax than ever before".
English said: "The government remains sceptical we will need a lot of persuading on that one."
- © Fairfax NZ News
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