A free ride on fairness

The debate around Capital Gains Tax goes further and further by the day. Now the question of fairness in the tax system overall has been raised and of course all taxation is unfair. But that aside, for all that Jacinda goes on about CGT being fair, what is fair about being able to sell artworks tax free but not your rental property? Why is it fair to sell a racehorse but not your small business? Who decides what is fair and what is not? And the biggest question of all, to my mind anyway, is why is it fair to have an Auckland apartment worth $1 million exempt from the tax because it is a family home, whereas a lifestyle block in Manawatu worth $350,000, which is not a farm but is also a family home, attracts the tax?

The system, as it is proposed, does not seem fair to me at all. quote.

When it comes to unintended consequences, a capital gains tax will create a few.

New Zealanders would only see a difference when they buy New Zealand shares.

There would be no change in tax when we buy foreign shares and the tax would not apply to foreigners buying and selling shares in our companies. end quote.

This is because gains on foreign shares are already taxed by the FDR rules, which were also introduced by Michael Cullen. The argument back in 2008, however, was that the government got its tax take on NZ shares by tax on dividends. So now, Cullen is proposing effectively to tax NZ and Australian shares twice? What was that about fairness? quote.

This means that you (or more likely your KiwiSaver manager) will be encouraged to put your savings into overseas companies.

As a natural consequence, shares in our companies will be cheaper for foreigners to buy.

Suddenly, though, the report looks like a Government supported by a party that calls itself NZ First is looking to screw the scrum towards encouraging foreign ownership of many of our largest and most strategically significant companies.

end quote.

Will Winston realise this? He has already been caught spouting on about fairness, echoing both Jacinda and Cullen. This could be a disaster for our local sharemarket. quote.

If fairness is about reducing income inequality, then CGT might seem like it is perfect.

Almost by definition, those who will pay are in a position to pay it.

If the money is redistributed in income tax cuts, that might feel fair, especially to those on the receiving end.

The idea that I will get the same income tax cut as someone who really needs it seems like a rather strange kind of “fair” to me. end quote.

Indeed… particularly when you remember that about 40% of wage earners pay no tax at all. quote.

In certain key respects, the form of CGT being proposed favours the type of saving we do more than enough of (owner-occupied homes) and discourages the types of saving we need more of (building more homes or starting businesses).

Support for CGT seems ingrained in the idea that people who own homes (and especially people who own rental properties) have been getting a free ride from rising house prices.

But CGT which excludes the family home will do next to nothing to fix this. end quote.

CGT has certainly not fixed rising house prices in Australia, Canada or the UK… but it will do so here? quote.

When you break down Treasury’s estimate of what CGT will raise ? $8.3 billion over five years ? a major chunk is based on the assumption that house prices will continue to rise faster than inflation, effectively forever.

Not only will rising house prices be paying for your income?tax?cuts, the Tax Working Group report has acknowledged warnings that CGT is likely to increase rents.

end quote.

If house prices do not continue to rise, or if landlords decide to hang on to their rentals (or sell before the tax is introduced), then the revenue from the tax will be reduced. If the government has given tax cuts on the back of tax revenue they never receive, they will be in trouble. quote.

CGT will certainly not destroy entrepreneurialism, and there other ways which the coalition is looking to encourage investment in research and development.

But taking billions of dollars out of the hands of business investors and giving it to those who are likely to either spend it consuming or invest it in housing would, all else being equal, run against the Government’s stated goals of a more productive and sustainable economy.

Soon enough, the Government will have to explain how that matches with its dogmatic insistence that it amounts to fairness.

Stuff end quote.

Can’t argue with that.