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Gareth Morgan says taxation of capital in New Zealand is a mess and that John Key's recent comments indicate most political parties now agree. Is he right?

Gareth Morgan says taxation of capital in New Zealand is a mess and that John Key's recent comments indicate most political parties now agree. Is he right?

By Gareth Morgan*

Acknowledgement by John Key that a capital gains tax only makes sense if it includes residential property is acknowledgement that we’ve got taxation of capital in New Zealand all wrong.

I couldn’t agree more with that observation.

Coming on top of Labour’s promotion of a capital gains tax going into the last election, as well as the endorsement of those taxes by the Greens, suggests we at long last we have a cross-party agreement that taxation of capital in New Zealand is a mess.

There are problems with each of the ideas as floated so far;

• Exempting capital invested in residential property is nuts. Of all the capital types it’s the one that soaks up the most investment and therefore fixing its taxation status will have by far the most significance in terms of making tax equitable and eradicating the tax break’s impact on speculative property demand.

• Rather than taxing capital gains it’s better to have a low and predictable tax on the value of the capital. Each and every year this is paid irrespective of whether its value goes up or down over the year – just like property rates.

A low and predictable comprehensive capital tax would close a major tax loophole, enable a flat income tax regime, restore equity to our tax regime and form the base for reform of social welfare.

That political support for such progress is like getting blood from a stone is more to do with the personal risks for politicians doing the right thing, than it is about the policy reform not being overdue.

As we outlined in our book The Big Kahuna, relying on higher and higher regressive GST, and ignoring the huge and growing omissions in income tax, will exacerbate the already burgeoning inequities in disparity between rich and poor and continue to inhibit the efficient allocation of capital investment and with that, GDP growth.

Mr Key’s highlighting of the ability of Parnell to doge a capital gains tax is absolutely correct.

But such a reality shouldn’t prevent sensible and comprehensive reform of taxation so inequities and inefficiencies are at last corrected.


*This article on John Key and Capital gains tax in New Zealand was originally published on Gareth Morgan's blog, and is reprinted here with permission.

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i agree but only if there are no exemptions for anybody otherwise it will become a farce and only lining the pockets of accountants and their mates lawyers.

I agree.  It's just so bloomin' obvious - in other words why do we all bemoan rates as a tax so much?  Because they cannot be avoided.  As long as PAYE and GST are correspondingly lowered - I'm all for it.   In no small part because it would be fascinating to observe the societal adjustments which would be made in response to the Big Kahuna (both tax and welfare reform) being implemented.  There is so much wrong on both sides of that ledger presently - that radical readjustment is the only policy with promise in my opinion.

There's a capital gains tax in Aussie and that certainly hasn't helped stem the investment in residential property - Sydney is one of the most unafordable cities in the world - far exceeding Auckland.  So I woudn't be counting on lower houses prices if such a tax was introduced.  But count on higher rents for tenants - as another cost for a landlord must be at least partly passed on.
And like Key said (if the taxation was on realisation) you may just find that those Parnell residents don't actually sell.

But the point Gareth makes is that it should not be a capital gains tax - rather a capital tax - gains, no gains or losses - just a simple comprehensive capital tax.

Taxes like to grow. Always have.
Gareths tax may start at a tiny % rate - but somewhere down the line a welfare funding shortfall may see (small) percentage increases to the (becoming ever-more huge) tax revenue. Too easy.
I also have some reservation about Gareths own view of the world. Many years he lived in a bus. And then he became the happy millioneere. One extreme to the other. Not enough time spent in the middle.
In fact his proposal could force long term cash-poor investors to sell up - to short term speculators. Gareths proposal could accidentally fuel the very thing he hoped to kill off.
Needs refinement.

Couldn't agree more, with all of your points.
A capital tax would be a kick in the guts for those of us in the middle trying to build some net worth the baby boomers got so easily.

"Taxes like to grow. Always have."
Is that why taxes are now the lowest they've ever been at any point in history?

I have been a taxpayer for 35 years , and have observed that the Government does not spend my money as carefully as I do .
For that reason I am opposed to any new or additional tax , but concede that all income should be treated equally

Talk, Talk, Talk, Talk
The French don't muck around
tax hikes on absentee landlords and non-resident property owners
Wealthy Britons with holiday homes in France have been hit with steep property tax hikes as part of socialist president Francois Hollande's bid to plug an £8billion hole in the country's budget. The increased levy on income from rented property and capital gains tax on sale profits could cost second-home owners thousands of pounds more a year. The richest households and big corporations have also been hit with a raft of new taxes announced by left-wing prime minister Jean-Marc Ayrault this week

Yes and how do they say it iconoclast ?  "Don't tax me, don't tax you, tax the man behind the tree". Hollande is guy who intends to put the top tax rate to 75% and REDUCE the retirement age. This guy has, and will do more, have his biggest tax payers deserting the country.
No one should quote this guys policies, he is single handedly making the situation far worse. Dumb, dumb, dumb

I could almost go along with this as long as there is a credit against land tax payable for local body rates already paid.  The rates are already a tax on the asset, just used to fund a different part of the overall cost of government. It would not be reasonable to be taxed twice.
May be local body rates could be abolished and local authorities would receive funding from central govt out of the overall tax pool. That might sold the problem of crazed local body politicians raping and pillaging.

Why can't we totally simplify the WHOLE system?
1: No income tax (PAYE) at all, NO IRD department other than bare minimal related to business 
2: 40% GST of all goods and services EXcluding ANY government levies (rates/ACC) etc
(consumption tax relative to personal spending and income will now fund all public services)
3: 10% Company tax (encourage business growth)
4: NO RWT (encourage local savings and investment)
5: Remove ALL benefits related to income and children (KS, WFF, DPB, UB) and return to self responsibility and direct family support (invalids, sickness, and accident are exempt)
6: A blanket "secondary property tax" based on annual inflation, subject to all second owned property (residential and business) that will be used to extinguish all council rates
(to discourage ALL future council debt build ups and property bubbles)
7: NO Pension 

The tax take is already sufficient, what we need to be doing is cutting back on government expenditure.

Tax capital not the gain. Define this tax as on  the asset and not on the ownership.
It should be quite within the tax system to limit the actual tax paid by an individual to their actual earned  income.  That would avoid making oncessions on the rate while protecting those who cannot earn enough to pay the capital tax. Thus if I owned a $1m house while on the National Super the tax on the house could be remitted in part.
Capital taxation would also not allow concessions under double taxation agreements and could cover both all NZ assets and also the overseas assets of NZ residents. Also it would be quite simple to tax any assets that had not been declared with a penal rate for the undeclared period.

All problems will be solved upon the return to NZ of the politicians who are on the Speakers tour of Europe.

" Kate:  But the point Gareth makes is that it should not be a capital gains tax - rather a capital tax - gains, no gains or losses - just a simple comprehensive capital tax"
Why don't we make it a stamp duty for the buyers, like what they have in Australia. The higher you buy the bigger amount to pay.. with some exemptions on first time buyers below a set amount.  And "first time buyer" they meant that someone who is buying his/her first home ever and not just in Australia...

A stamp duty would miss the point.
What is needed is a tax that is imposed annually, every year, just like income tax and local body rates.
Once only taxes of necessity have to be at a high rate to generate any worthwhile revenue.
It also has to be comprehensive and be on the item not the person and include all locally held assets plus overseas assets of NZ residents.

The Friday Pile Of Jokes, puns, innuendos and out your end ..........ohs!.
Lets pile on the TAXES. (They started today....Petrol, Carbon, funny munny rates...etc).
The biggest expenditure is piles of WASTE.
The Biggest expenditure is waste of resource.
The Biggest expenditure is waste of time and effort.
The Biggest expenditure is waste of Money and Investment.
The Biggest waste is compounded by the need to have so much owed to so few by so many..
Maybe if we did not have Piles of Debt, we might not need piles of Money to pile on those with Piles.
After all, The money's going down the toilet.
The Bwankers are stealing Piles,
The Poll-lies are talking Piles of Shite,
They then pile in,  even fly in, have a meeting, fly out with more Shite piled on top of Shite, then want to TAX it and muck spread it all around, sum more.
They even Abbreviated the Pile to ECB, so that the PILES could remember who they owed more Piles to.
The Euro is a Pile of Merde,
The US dollar is a Pile of Turds,
The Pound is a Sterling bunch of Piles,
And as for the Poles, the Spanish, The Greeks, The Ities et al, their piles are shrinking as we speak, 
So some good must have come from all this Pile of Talk, Pile of Shite, Pile of Insanity.
The IMF, must be making more PILES for the ECB to pile on the Piles of Shite, as the Pile grows larger and larger.
The joke is...The PILE keeps getting larger...daily.
Someone is gonna have a really sore bottom, when the SHTF.......ONE DAY.
No small wonder I have PILES of paper to wipe these asses from my sight, but not this site.....its electronic and ........magnetic and also a waste of time and resource.
If I sit here much longer, I will Burnhard, more......Piles....... of through-put.
And no...big blue....If you want my TIP...
It will not all be fixed when the Poll-lies return, the Piles will just turn to the Foreshore and Sea Bed, making more PILES, for Sum, but not for ALL.
They will lay waste to this Fair and Pleasent Land and make Piles of Tippings.
Unless they ship it to Kiribasi....and Pile it up there....of course....
"Needs must...when the devil drives".

Why do they bury Lawyers 12 feet deep?
Because deep down they are really good people.

Hi Gareth, a number of people I know share your economic ethos and have enjoyed your input over the years, including myself, and hope you end up being a prominant voice in NZ socioty.
I am at odds with interest rates that I believe make no economic sence?
It is obscene that Savers are punished and Borrowers rewarded for the global credit crunch.
Is this not the wrong message, behaviour being instilled and exasperating further debt and erroding the NZ dollar.

A land tax or capital tax is nasty.  It means you can never own your own home with any certainty.  If you ever loose your income stream (job, health etc.) you lose your home.  Great for the wealthy like Gareth, but sucks for those who rely on a wage for their income.

Lets have a progressive total wealth tax, say  20% pa for people with 20million or more pa abating to 0% @ total wealth of 3 mill, given that nobody can morally claim to be worth more on the basis of hard work alone
There is already a wealth tax on housing, called rates it is...And insurance And maintenance
Why target houses selectively, which would tend to compel people to gamble with Gareth and the like giving him/them 1% management fees or more whether the managed fund managers stockmarket gambles are successful or not?
Can Gareth and co explain exactly how you create new wealth merely by buying an existing share??(any more than a house)and if no new wealth is being created(exclude bubbles), how can the average shaeholder make any money. As if there is no new net wealth creation one shareholder can only win at the expense of another.
Clearly the major benefactors are the Gareths and the sharebrokers.

So its true Gareth you are a commie,next you will be telling us your a member of the green party