Why a CGT?

If New Zealand wishes to catch up with Australia, increase its productive sector, and remain competitive in the global market, it needs to not only increase household savings, but also make sure that this saving and investment is geared towards productive domestic investment.  The Tax Working Group, for example, found that the $200 billion invested in rental properties has actually produced a negative tax return.[1]

From an equity perspective, investment in property is heavily tilted towards New Zealand’s highest income earners. Thus the lack of a capital gains tax undermines the progressivity of the tax system.[2] Figures 1 and 2 illustrate the distribution of potentially taxable non owner-occupied housing in New Zealand and its mean value by income deciles.[3] The graph shows clearly how capital gains are skewed towards the highest income earners, thus undermining the horizontal and vertical equity principles of the tax system.


Figure Two

Since New Zealand’s tax system underwent significant changes in the mid-1980s, New Zealand’s ‘broad base, low rate’ system has become the envy of much of the developed world. And yet, in terms of CGT, as one of only three countries in the OECD without a CGT, New Zealand has always been an outlier.[4]

New Zealand is one of only three countries in the OECD that does not levy some sort of capital gains tax.

A CGT is generally said to support the integrity of the tax system by reducing opportunities for tax planning and tax avoidance. Its absence thus undermines the integrity of the tax system.

This fact has been realized by policy makers, think-tanks and politicians over the past twenty years. Initial plans for a capital gains tax, mooted in the dying days of the Fourth Labour Government, were scrapped by the incoming National Government in 1990. Since then, several major studies on New Zealand’s tax system have approached the issue.[5] Box 1 summarises several of the major tax reviews since the late 1980s.

Box 1: Past scholarship on capital gains tax in New Zealand

1989: Plans for taxing capital gains and allowing deduction for losses, based on standard tax policy criteria of equity, efficiency and certainty, were shelved when the Fourth Labour Government was defeated in 1990 General Election.

2000; 2011: The OCED recommends the introduction of capital gains tax in New Zealand in order to reprioritise investment choices and to cool the housing bubble.

2001: Labour government commissioned McLeod Review favours continuation of the ad hoc approach to dealing with capital gains issues as they arise.

2010: National government’s Tax Working Group advises moving away from a comprehensive capital gains tax in favour of closing depreciation loopholes.

 

 


[1] Alex Fensome, “Labour Stays Positive about CGT,” The Southland Times, August 11, 2011.

[2] While the nature of a the existence of a progressive tax system is accepted by most, the definition of how much progressivity is enough (or too much) has been one that has been raging for 100 years and looks unlikely to stop soon.

[3] Inland Revenue Department and New Zealand Treasury, “The Taxation of Capital Gains Background Paper for Session 3 of the Victoria University of Wellington Tax Working Group,” 21, 23.

[4] Radio New Zealand ‘Morning Report,’ “Australia Happy with its Capital Gains Tax,” 7 July, 2011.

[5] David Caygill, Consultative Document on the Taxation of Income from Capital, (Wellington, N.Z.: Government Printer, 1989); OECD, “Economic Surveys: New Zealand, April 2011,” http://www.oecd.org/document/34/0,3746,en_2649_34569_47611554_1_1_1_1,00.html (accessed 29 July, 2011).; New Zealand Treasury, “Tax Review 2001: Final Report,” http://www.treasury.govt.nz/publications/reviews-consultation/taxreview2001/taxreview2001-report.pdf (accessed 8 October, 2011); Victoria University of Wellington, “Tax Working Group”.