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So what’s the deal with a capital gains tax? Let’s talk tax.

So let’s be real, aside from the odd accountant, taxes aren’t a very interesting issue for most kiwis, let alone young ones. They’re the thing we just kind of ignore off the top of our pay cheque or the extra cost on your weekly grocery shop. They’re not very interesting, but that said, they can have massive effects on how we operate as a country and our day to day lives.

If you missed it, there’s been a lot of talk recently about a capital gains tax (CGT) after the government’s Tax Working Group presented their report in late February. The report, along with a number of other recommendations, put forward the idea of a comprehensive capital gains tax in New Zealand.

The first thing to deal with here is what is a capital gains tax? In simple terms, it’s a tax on the sale of assets. For example, if you start a business, grow it, develop it and sell it at a profit, you will be asked to pay a CGT on the money you earnt from the sale. If we take a property example, say you save up to purchase a home, live in it, rent a few rooms to help service the mortgage, then sell it, you will be required to pay a CGT on any profit.

Now on surface level, this seems relatively straightforward, but it’s the law of unintended consequences that we need to be careful of.

Taxes act as a disincentive to do something. The government places taxes on cigarettes and alcohol for a reason, right? They want to disincentives people from drinking too much or picking up smoking. Well, with a CGT what are we disincentivising? 

As a tax on assets, we’re disincentivising two things: 1) Investment in assets and 2) The sale of assets. This will have a number of direct effects, but let’s run through a couple of scenarios.

A CGT makes it less attractive for individuals and businesses to directly invest in NZ, whether that be in property, other businesses or IP. When you know there is already a risk of not making any profit from your investment, and suddenly any profit you make could be taxed at 33%, investors are turned off putting their money down. Instead, they will look to either invest in exempt assets, such as fine art (yes, seriously, art was recommended as an exemption) or a boat. Neither of these are productive assets that provide houses for people to live in or capital to grow a business, but are now more attractive for investment under a the proposed CGT.

In the long-run, we’ll see more investors holding their money, diverting their capital to non-taxable assets, or investing overseas. We will see a slowing economy with less capital for growth available and a housing market gasping for more investment to keep development driving forward.

So how will disincentivising the sale of assets hurt kiwis? Well simply put, if you don’t sell an asset, someone else doesn’t have the chance to buy it. Let’s take the housing market again. Under a CGT, property investors are more likely to hold their rental properties and keep earning a rental income, rather than selling. Coupled with reduced investment in housing development, as explained above, we will see less houses being listed on an already overly competitive housing market. It’s just another one to add to the list as to why young kiwis can kiss the dream of owning a home goodbye…

From a purely idealistic position, I oppose new and higher taxes. You should keep more of what you earn, not have to hand it over to the IRD. Kiwis deserve the opportunity to work hard, take risks and grow their piece of the pie. We should respect people who put their money where their mouth is and start their own business, slog it out and at the end of the day sell it at a profit. That’s the kiwi dream, isn’t it?

Well I’ve got a fairly simple proposition for you then: if we agree working hard and taking risks to build a better life for you and your family is the kiwi dream, should we really be taxing it?

 

Sam Stead
President | NZ Young Nats 

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