Thursday, 14 July 2011

Capital Gains

Labour has finally announced its capital gain tax, after slowly leaking the details to TV3 to maximise publicity. The guts of it are:
  • a 15% Capital Gains Tax on property, shares with exemptions for the "family home" and houses in the CERA zone;
  • Increasing the top income tax rate to 39% for every dollar earned over $150k;
  • Introducing a 0% income tax rate for every dollar earned up to $5k (aka a tax-free threshold);
  • taking GST off "fresh fruit and vegetables".
Labour claims their policies will result in a shift of investment in unproductive speculative parts of the economy (i.e. real estate) to productive parts of the economy. Personally, I believe some form of CGT (or perhaps land tax) is inevitable in New Zealand. Considering the OECD and IMF have both pointed capital gains is a major gaping hole in our tax system, it seems difficult for anyone to argue against it. But as the tax working group has pointed out, CGT has still got to collaborated correctly and done for the right reason. The right reason is to rebalance the economy. I'm not convinced Labour's policies will do that.

As Bill English points out, the proposals are really about paying for Labour's spending plans. But if Goff really wanted to encourage investment in productive parts of the economy, then he wouldn't increase income taxes for those most likely to invest, or include shares in a CGT.

In short, the move to CGT should be revenue neutral to encourage a shift in investment from property to productive investment. Implementing CGT won't be easy, and as the Australian experience shows, a partial CGT could distort the economy further. 

As for the other parts of Labour's package today, I am a fan of a tax-free threshold (i.e. a 0% tax rate). However, Labour knows that doing so benefits the wealthy - because under our progressive tax system, the wealthy pay proportionately the most income tax. A $5,000 threshold seems far too measly. My preference would be for a threshold three-times that amount, around $15,000. This would mean that many beneficiaries won't be taxed, and keep every dollar they earn. However, this policy would mean having to cut spending in other areas.

GST off fresh fruit and vegetables is nothing more than a token tax policy. It's doubtful that decreasing the price of a banana from 57c to 49c is going to increase its consumption greatly. In fact it's symbolic of the proposed changes that Labour chose to make this added complexity to GST a leading policy.