Its headline message was that macroeconomic and fiscal restraint is needed. Treasury recommends a return to fiscal surpluses by 2026/27. It considers that both spending cuts and higher tax revenues will be needed.
On tax, Treasury’s “first best advice” is to address the following two “structural issues”:
- The “non-alignment” between the company tax rate (of 28%) and personal tax rates (of up to 39%); and
- “The lack of a comprehensive capital gains tax”.
Subsequent governments have wrecked that alignment.
Treasury’s second point is more surprising. The problems with a comprehensive capital gains tax are practical, not ideological:
- How are year-to-year gains and losses in intellectual capital and in many other hard-to-value capital items to be valued? Valuations will be costly to defend.
- What is a capital gain when inflation is taken into account? Which price index is to be used, and why?
- How are widows and others going to get the cash to pay the tax without selling the family home, farm or business?
- Will Inland Revenue pay out symmetrically for capital losses? Probably not, but a failure to do so reduces the incentive to invest in risky assets.
In any case, we do not have fiscal deficits today because revenues are low. In 2016-17, tax revenue amounted to 27.5% of GDP and the government was in fiscal surplus. Treasury forecasts a substantial deficit in 2023-24 despite forecast tax revenues of 29.1% of GDP.
The real problem is that forecast core Crown spending for 2023-24 is a staggering 5.7% of GDP higher than in 2016-17.
Today’s fiscal problems are the product of wasteful and ill-justified spending on a grand scale.
Treasury can hardly tell the public this bluntly. It needs to be seen to be politically neutral.
Dr Bryce Wilkinson is a Senior Fellow at The New Zealand Initiative, Director of Capital Economics, and former Director of the New Zealand Treasury. His articles can be seen HERE. - where this article was sourced.
4 comments:
Of course we need a capital gains tax! It’s a nonsense that I pay no tax on so much of my stock market and real estate earnings while my children pay excessive income tax. Bryce your “practical” issues are trivial.
Destroy investment incentives with capital gains tax and you destroy opportunities and growth in a wider sense.
I have searched for stats on capital gains taxes as a percentage of (unfortunately, GDP as that's all they do) in the UK, US and Australia. In Oz, they amount to around 0.6% of GDP, the US averages around 1% over a decade, of which 3/4 is on share market gains and the UK, including inheritance taxes, is closer to 3%. The fact it's been very hard to use the web to find even this shows how little work or interest there is in CGT. But these are official figures, and roughly translated into 'extra' personal income tax, for the Govt average receipts as opposed to the payer, might add 1 to 1.5% in Oz, 2% in the US and 3% in the UK. One reason yields are so relatively low are the rates of tax set and the exemptions, driven by political jostling. Perhaps a start on discussions might be set by sorting redistribution of tax incidence from 'extra' receipts and considering a range of 'targets' for these changes.
Another aspect of CGT is that it would be cash negative for a number of years due to the high cost of setup and administration and the fact that next to nothing will fall within its scope for a number of years ie until property has been bought and sold.
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