Key Recommendation: Introduce a comprehensive tax on all capital gains based upon the following parameters:
- Capital gains will be taxed upon realisation.
- Primary residences will be exempt from capital gains taxation.
- The capital gains tax will be indexed to inflation from date of implementation.
- The death of an asset’s owner would trigger capital gains tax.
- The tax should be ‘grandfathered’ from the date of introduction.
Whilst these recommendations do not provide a panacea to the difficult questions around the implementation of a capital gains tax, they are intended as guidelines for future policy work and implementation by the government and the civil service. This report has explicitly avoided offering a rate of taxation as the authors believed that this is something that is the responsibility of a democratically-elected government to discuss and for which a mandate from the populace is sought.
Capital gains taxes vary in design around the world. What doesn’t vary all that much however, at least from an OCED perspective, is their existence in most developed economies. New Zealand’s outlier status is harming its international reputation as the home of an efficient tax system. Despite New Zealand’s national myth’ of an egalitarian society, rising inequality continues to undermine the government’s key goal of increasing human flourishing. This report has examined how the introduction of a comprehensive capital gains tax, as opposed to the grab bag of concessionary rules we have now, might improve the integrity and efficiency of New Zealand’s economy and its tax system as well as helping to reduce the inequities present in the current regime.
One of the key findings of the report is that the ultimate success of a capital gains tax depends on its initial aims. As with any government policy, we must respect the limits of government policy for achieving perfection just as much as we embrace the positive role that government can play in making our society a better place. Whether or not one thinks that the implementation of a capital gains tax will be a success or not speaks as much to one’s political and economic beliefs as it does to empirical analysis.
This being said, this report has found ample evidence that New Zealand’s current laws around capital taxation are both unfair and reduce the integrity of the tax system and New Zealand’s economic efficiency. The comparative institutional analysis with Australia shows how a CGT can dramatically increase the progressivity of the tax system although, as noted, the actually effect on economic efficiency is often intangible and therefore elusive to policy analysts.
Therefore, while this report has made some preliminary recommendations on what the author believes is the best design of a CGT for New Zealand, more work is needed. Future policy analysts and others working in New Zealand’s financial public service, think-tanks, and other stakeholder groups would do well to build models based around these recommendations in order to further understand the possible consequences of policy implementation. Finally, although arguably most importantly, further reports would do well to forge a narrative for the introduction of further taxation. It is beyond the scope of this report to engage in political rhetoric and narrative building. However, it must be acknowledged that in the real world there are few things less popular than a new tax. Indeed, any future policy maker or politician daring enough to attempt the introduction of a capital gains tax must do so armed not only with analysis, such as is contained in this report, but a willingness to construct a defining reason for its existence.