We all know the issues: children going to hungry, lines at food banks, families sleeping in cars
Our tax system should be the central tool in fixing these problems. Sadly the best we can hope for following the Tax Working Group’s recommendations is that these problems will continue to get worse; only a bit more slowly.
For the past twenty years the rich have been getting richer and the poor getting poorer. The reason isn’t stagnant wages as some claim, but housing. For twenty years wages have been increasing, but rents have been increasing even faster. People have more money in their pocket than ever before, but a bigger chunk of it is going to their landlord.
We often talk about the haves and the have nots, but the story of the last two decades in New Zealand it is about the “have houses” and the “have not houses”. This is driving a wedge between the rich and the poor, but also between the old and the young.
The Tax Working Group was supposed to make our tax system fair. Sadly the Government tied their hands at the outset, ruling out the biggest tax loophole we have – the “family home”. If you don’t believe me, the officials behind the Tax Working Group said so in one of their reports.
The result was depressingly predictable: a “comprehensive” Capital Gains Tax. Comprehensive that is, apart from the largest group of assets in the country (42%): the family home. What can we expect from such a change, if it is ever enacted into law?
What Can We Expect from A Capital Gains Tax?
House prices might come down a bit, as landlords sell up, before recommencing their unstoppable rise. House prices are predicted return to an annual 3% increase. Of course house prices will rise when ¾ of the value of your housing stock is exempt. Besides, how else will a Capital Gains Tax make any revenue for the government if asset prices don’t rise?
Meanwhile rents will rise as the remaining landlords look to get the same return. All in all this does little if anything to reduce inequality.
This is why Capital Gains Tax (excluding the family home) has failed to reduce house prices and inequality in Australia. Incidentally, Australia was second to last (just ahead of New Zealand) in the recent housing affordability survey. This isn’t even a second best policy, it is a second to last policy.
If we care about poverty, the best a Capital Gains Tax does is raise a bit of revenue for the government to spend. We have to hope like hell that money gets spent on the real problems facing the country like child poverty, rather than middle class welfare like free tertiary education.
Businesses would get hit also. This is bizarre, because businesses already pay tax on profits. Capital gains for businesses only happen if the prospect of future profits increase. So paying tax on capital gains is double taxation. Besides, it reduces the incentive to invest in businesses (which produce jobs and incomes) rather than sticking all our money into housing.
As a result, under a CGT Kiwis will probably end up sticking even more of their money into housing than ever before, particularly the family home. This is known in Aussie as “the Mansion Effect”.
How Could a Capital Gains Tax be Better?
Easy, include the family home.
Levy the tax every year, not just when the asset is sold (as that provides a disincentive to sell).
Time travel back 30 years and put the Capital Gains Tax in place before all the capital gain happened.
Also, it would be better to exclude businesses as the minority report stated, as they already pay tax on their returns.
Could we do Even Better?
The Opportunities Party proposal is that all assets (including the family home) have to pay as much tax as a bank deposit would. This would happen each and every year, not just when the asset is sold. This would mean all assets pay a similar amount of tax – no more loopholes. It could generate enough revenue to reduce all income taxes by one third making 80% of people better off. Such tax cuts could be focussed on low income earners in particular.
Meanwhile investment in productive assets would grow – there would be a real incentive to invest in businesses that created jobs and incomes.
That is the real way to reduce inequality.
Geoff Simmons is an economist and Leader of the TOP Party.