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Is a capital gains tax justified?

… and so the battle continues as to whether or not New Zealand should introduce a capital gains tax. Today labour released its tax policy – a capital gains tax was at its centrepiece. The proper income tax treatment of capital gains has raised much debate and controversy amongst New Zealanders for many years.

Any good tax system or tax policy requires equity (equality), certainty, convenience and efficiency. Given a capital gains tax has the convergence of these key tax policy criteria, I believe the case for the introduction of such a tax is justified. What is your view?

6 Responses

Elizabeth on July 14, 2011 at 3:22 pm

There is a very interesting video interview with Craig Elliffe at:
http://tvnz.co.nz/breakfast-news/labour-s-tax-policy-expert-backs-4-59-video-4303038

Jonas He on July 15, 2011 at 10:37 am

Hi Daniel,

I personal think that CGT is a good system from economist’s perspective. From tax perspective, will the CGT overwrite some of the existing implicit capital tax especially in land provisions. Here are some examples:
1. People who purchased land with intention to resell
2. Disposal of Land that is affected by rezoning or other law changes
3. People who are associated with builders/developers & dispose their
capital a/cc land

Currently, these are taxed on the taxpayer’s marginal tax rate or the holding vehicle’s fixed tax rate. If there are rate differences between income tax rate & CGT, loopholes will be big.

Kind regards,

Jonas

Alun Hassall on July 15, 2011 at 5:21 pm

CGT is (in part) a tax on inflation.

If my investment property increases in value by 9% but inflation is running at 4%, then my real increase in value is only 5%, yet Labour would tax me on the 9%.

Indeed, the higher inflation is, the higher any capital gains will be. Is this an incentive for a Labour government to allow inflation to run high?

Daniel Hunt on July 17, 2011 at 11:55 am

Thanks for your comment Alun.

It is frequently argued that capital gains, in whole or part, merely reflect a hedge against inflation and for that reason should not be taxed or should be the subject of special treatment. That is, it is argued that only “real gains” should be taxed.

For example, an asset acquired three years ago for $500,000 may today have a resale price of $546,364 – a gain of $46,364. But if in those three years there was a general increase in the price level of 3% per annum, the gain would appear to be illusory. If the owner of the asset spent the $46,364 on consumption, he would, in terms of real value, finish up with less capital and less income. Of course, this is a simplified example and in ascertaining whether or not there has been a real gain or loss, a number of other factors must be taken into account.

Maybe a capital gains tax should only apply to those gains which reflect a “real” increase in wealth. However, it may be difficult to distinguish these “real” gains from other so called capital gains…

Elizabeth on July 29, 2011 at 8:33 am
Bip on August 25, 2011 at 3:07 pm

I’m trying to put CGT in perspective here.
Lets say I have a rental property that is negatively geared. I need to prop it up by say $5000 a year out of my pocket. Over 10 years lets say I put in $50000 of my own money. I then sell the property after 10 years. Make a capital gain of say $50000. The govt would then want to tax me on that gain, even though in essence there is no gain as I forked out my own $50K in the first place. Simple scenario. I don’t think they have thought about the cost to the investor over time. New Zealand is one of the few countries left without this capital gains tax for small mum and dad investors. I say let it be and tax politicians with an extra tax.

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