Key considerations missed by the Tax Working Group

I suggested to the Minister of Revenue that the Tax Working Group was overly constrained by its terms of reference and didn?t take into account some key considerations. One was what would be best for improving New Zealand?s terrible productivity and one reason for our poor productivity is continued low capital investment.

The Tax Working Group also didn?t take into account behavioural economics ? which shows people are not rational in their economic choices and put much less weight on events well into the future. This is particularly relevant to capital gains that might not be taxed for 20 or more years in the future so property investors are likely to take little notice of a CGT.

The long time period also means taxing such capital gains could be highly inequitable when gains due only to inflation are all, or nearly all, taxed at the top tax rate.

The Tax Working Group was correct to point out the inequity between people getting taxed on some kinds of investment earnings such as interest but not on realised capital gains. However, capital is over-taxed in New Zealand by international standards and further taxing capital will likely worsen rather than improve productivity.

The inequity of not taxing capital gains really only bites when the asset generating the capital gain has generated little or no taxable income (or even a loss) over the period it was held because it was purchased with borrowed money. Limiting the deductibility of borrowed money would do much to correct this inequity. This limitation could be gradually eased in to allow businesses and landlords time to adapt by starting with limiting deductibility to 95% of the money borrowed, and gradually decreasing it by maybe 5 percentage points every two years.

On the other side of the ledger, other forms of savings need to be taxed less. One way this could be achieved and longer-term savings encouraged, would be to lower the tax rate on Kiwisaver funds to a flat 15%. There could be an early withdrawal tax on higher income earners to ensure there isn?t an incentive to submit bogus hardship claims for early withdrawal.

A related issue is the concentration of wealth in high-value urban land. Taxing this land more highly would encourage it to be broken up into smaller plots and allow councils to raise more money for new infrastructure.

My final suggestion therefore, is to change the Rating Act to allow for rates to be calculated like income tax, on a progressive basis rather than just uniform and targeted uniform (flat) rates. For example, residential properties with a value of over $1,500,000 that might currently attract a uniform rate of 0.3% could instead be rated at 1% on the value exceeding $1,500,000. A property with a value of $3 million could therefore go from paying rates of $9,000 a year to $19,500 (4,500 + 15,000).