But is this really the case? And if it is the case, what follows?
The case is problematic. It is based on a stylised OECD study that does not take into account issues of loopholes, realised versus unrealised gains, inflation-adjustments and IRD refunds for capital losses.
A related point is that New Zealand does not appear to be the location of choice for many rich people worldwide. And our regime is hostile to foreign direct investment.
Even so, proposals in the public media for broader capital gains taxes, wealth taxes and/or heavier land taxes are in vogue.
Too many of these proposals are one-sided. The pros and cons need to be assessed before reaching a conclusion. Successive expert tax taskforces have done this.
The difficulties are real. All tax proposals need to consider the costs of collection and undesired and unintended consequences.
Taxing capital heavily is problematic because it is particularly mobile.
Less will be invested in New Zealand the more penal the tax system. Higher pre-tax interest rates for borrowers in New Zealand are an unintended consequence.
Students quickly learn the more general point in first-year university economics. The burden of a tax does not fall fully on the person paying the tax.
Taxes aimed at “soaking the rich” will rebound on others to some extent. This is why tax policy experts tend to favour taxing capital income less heavily than labour income.
Of course, that last point does not rebut the case for a more comprehensive capital gains tax. The problem is the host of practical difficulties including the political reluctance to tax the unrealised gain on a family home or farm. All the partial trade-offs are uncomfortable.
Taxes are distorting and burdensome, but they are a necessary evil. They have to be too high if wasteful spending is too high. To raise taxes to fund wasteful spending is a double blow to living standards.
Spending is the issue. Treasury projected in 2018, that government spending in the 2024-25 fiscal year would be 28.0% of GDP. In Budget 2024 it projected it will be 33.4%. That difference is the real problem.
Even so, proposals in the public media for broader capital gains taxes, wealth taxes and/or heavier land taxes are in vogue.
Too many of these proposals are one-sided. The pros and cons need to be assessed before reaching a conclusion. Successive expert tax taskforces have done this.
The difficulties are real. All tax proposals need to consider the costs of collection and undesired and unintended consequences.
Taxing capital heavily is problematic because it is particularly mobile.
Less will be invested in New Zealand the more penal the tax system. Higher pre-tax interest rates for borrowers in New Zealand are an unintended consequence.
Students quickly learn the more general point in first-year university economics. The burden of a tax does not fall fully on the person paying the tax.
Taxes aimed at “soaking the rich” will rebound on others to some extent. This is why tax policy experts tend to favour taxing capital income less heavily than labour income.
Of course, that last point does not rebut the case for a more comprehensive capital gains tax. The problem is the host of practical difficulties including the political reluctance to tax the unrealised gain on a family home or farm. All the partial trade-offs are uncomfortable.
Taxes are distorting and burdensome, but they are a necessary evil. They have to be too high if wasteful spending is too high. To raise taxes to fund wasteful spending is a double blow to living standards.
Spending is the issue. Treasury projected in 2018, that government spending in the 2024-25 fiscal year would be 28.0% of GDP. In Budget 2024 it projected it will be 33.4%. That difference is the real problem.
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.
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