I know it’s wishful thinking to expect real analysis in political debates but, honestly, whether it’s time to introduce a capital gains tax in New Zealand is an issue which deserves more than the usual ping pong game of political rhetoric.
The refrain of the most vocal advocates is how a CGT will discourage real estate investment and encourage investment in other sectors where capital is much needed. The refrain of the most vocal opponents seems to be “it won’t collect as much as its supporters say it will”.
New Zealand’s current tax system exempts most capital gains from tax. Capital gains from investments in shares, businesses, real estate, art work, gold, jewellery, and antiques generally are not taxed. To argue this state of affairs is responsible for a skew in favour of investment in real estate and away from the sharemarket, for example, hardly seems to stack up. In fact, there is a group of rules in our existing tax laws which are aimed solely at taxing some capital gains from real estate investment. No such rules exist for investments in shares, businesses, gold, art work or antiques. If anything, our current tax system discourages investment in real estate when compared to how it treats other capital investments.
The rumoured capital gains tax apparently is not intended to apply only to real estate. Sensibly it’s proposed to apply to gains from selling shares, businesses, art work, gold, jewellery and antiques (and any other appreciating asset). So quite how it’s going to suddenly change the behaviour of real estate investors is beyond me.
I think the focus on real estate is unhelpful when discussing whether we should have a capital gains tax here. Surely most people are more likely to be influenced in their investment decisions by their perception of likely return rather than tax? It seems to me the absence of a broad based capital gains tax hasn’t driven investment behaviour into a particular asset class any more than the presence of such a tax will.
This is not a real estate versus shares debate. When we decide whether we should have a capital gains tax we need to consider fairness, efficiency of the tax system, economic benefits and effectiveness.
The question of how much a capital gains tax will raise is certainly relevant to whether it is worth the administration costs
of implementation but to a great extent is a design issue when considering the effectiveness of the tax.