The taxing task of making a capital idea less toxic to voters

The Labour-led  Government   wants  a   capital  gains tax — why else   would  it have a  Tax Working Group spending  months studying  how to  frame  it?

The problem for Finance Minister  Grant Robertson is  that it could be politically  toxic,  as   David Cunliffe  found when he  campaigned on it.  So  he’s  now  seeking a  final  recommendation  from the  TWG  which makes  taxing  capital gains politically  acceptable — at least to a majority of voters.

It will take all  the political  cunning  of the old master,  Sir Michael Cullen, to come up  with the  answer Robertson needs.

After  receiving  the interim  report, the Finance Minister  along with his colleague  Revenue  Minister Stuart  Nash — and backed  by Cabinet —  called  on the   TWG  to “consider”  a  package  which  reduces  inequality   and increases   fairness  across  the tax system  and  housing  affordability.

That’s a tall order:  certainly a  test   for Sir Michael  and  his colleagues  in the TWG.   Even  if   it  can be framed, the   question  is whether it  can be  “sold” to the  electorate.

One   possible  solution  would   be   to  propose  significant  reductions in   income tax  rates, particularly  at  the  lower  end  of  the current scale.  In effect  the aim would be a  revenue-neutral package.

In theory, the broader the tax  base, the lower  rates can be. The TWG’s interim   report  notes  a realisation-based  CGT   would take years to build  substantial  revenue flows.

The TWG  set out two models   in  its interim  report for a broad-based CGT.  Sir Michael said “the key issue” it had looked at was tax on capital income, but said it was not a “no brainer”.

He warned the TWG might be unable to reach a unanimous view, even when it publishes its final report in February, and said it was possible it might not come to “any conclusion at all” —though emphasising he thought that was unlikely.

Robertson and Nash,  in their letter to the TWG,  asked it  to examine whether a tax on realised gains or the  risk-free rate of return method of  taxation (or a  combination of both) is the  best  method  for extending a   potential  capital  income tax   on specific assets  “with the goal of ensuring NZ’s tax system is fair and balanced”.

The risk-free  rate of return  method, whereby a  deemed return on assets  is taxed  as it  accrues, was recommended  in the Rob McLeod   tax review  but  was smartly dismissed  by  Michael Cullen, who then was Finance Minister.  One of the issues  with that method  is  valuation in the absence of a market transaction.

The advantages of the broader taxation of capital gains are “fairness, equity”:  people with the same income would pay the same amount of tax.

In NZ a very high level of capital assets are held by the top 10 or 20 per cent of the population:  Sir Michael  says  that is the main reason why the NZ tax system is less “redistributive” than in most developed economies.

As expected, the TWG has recommended against changes to GST or offering small businesses a discounted rate of company tax.

Environmental taxes such as taxes on petrol and diesel were the “second major issue” the TWG had considered, Cullen said, but the TWG had only looked at the issues in principle.

“Short-term opportunities” included expanding the Waste Disposal Levy, strengthening the Emissions Trading Scheme, and advancing the use of congestion charging, the TWG said.

The TWG  has until  February to come up with the  answers  the ministers want.  Then  any changes to  the  tax  system   would  be  subject  to  the legislative process—and who knows  what  Winston Peters will have to  say  at that point?

Still,  Labour   would have  something to campaign on—providing  the TWG  succeeds  in  framing something   which is  “fair”.

One thought on “The taxing task of making a capital idea less toxic to voters

  1. Whether a tax system should have a purpose of being “redistributive” is question many might ask if they thought about it. For me taxes are required to run the business of the nation that is not funded by direct contributions.


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