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Capital Gains Tax v Wealth Tax
Q: You pointed out that Australia has prospered not only because they have been selling iron ore etc to China but because back in the mid-1980s, the Government of the day introduced a Capital Gains Tax as well as compulsory superannuation. Extra costs when buying property were also imposed.
I recollect that when the Capital Gains Tax was introduced, any property owned at the time of the introduction of the tax would have been exempt.
The tax was made to apply only to property purchased after a certain future date. It seems to me that the only way New Zealanders are able to make money is by buying houses.
Plenty do this and it is relatively easy to get loans and sit on a property for some years and wait for the capital gain. The Greens appear to favour a wealth tax and Labour a Capital Gains Tax. It would be good if you could point out the difference between the two types of taxes. Many people do not understand the difference. Thank you for your interesting and thoughtful articles.
Kind regards, Jan P.
A: Thanks Jan. Good question. A lot of the comments I get about a Capital Gains Tax suggest that people have it confused with a wealth tax. It is important to remember that the Capital Gains Tax – or CGT, as proposed by Sir Michael Cullen’s Tax Working Group in 2019 – exempted the family home. And (as you refer to in Australia) the tax was not retrospective. The tax was to be applied only to gains made after April 2021, so it wouldn’t penalise older people who had held property for longer periods.
As it happened, 2021 would have been a pretty good time to introduce the tax as capital gains from housing have been almost nonexistent since mid-2021. In other words, no one would be paying much tax yet. We’d have had extra time to get used to the idea.
When people did make profits on their capital investments, they would have been taxed at their upper-income tax rate.
The profit aspect is a key difference between CGT and a wealth tax.
Wealth taxes generally are levied on the total value of an individual’s assets, such as cash, real estate, investments and other valuable possessions, regardless of whether those assets generate income. It is sometimes calculated as a percentage of the net worth of an individual or household, usually assessed annually.
As proposed by the Green Party in the 2023 election, New Zealanders would pay a wealth tax of 2.5% on assets over $2 million owned by individuals, or over $4m on assets owned by couples.
Broaden the base
Both policy ideas were balanced with income tax cuts (or significant bracket adjustments) at lower wage levels. The Cullen plan was designed to be tax-revenue neutral for the Government, while the Green Party policy did raise some income taxes at upper levels as well.
That goes to another fundamental difference between the two ideas. Wealth taxes are very much targeted at dealing with social inequality. On that basis, they represent a classic left versus right approach to taxation. Wealth redistribution is a stronger driver of the reasoning for wealth taxes (it’s in the name I guess).
Discover more
A Capital Gains Tax tends to have supporters on the left and right (they have many supporters in the financial market). While they can be structured to deal with social inequality, the primary argument for having them is to broaden the tax base and encourage investment to flow more efficiently to the productive end of the economy.
The likes of the International Monetary Fund and the OECD keep pointing out that New Zealand governments are overly reliant on income tax for revenue and that this will become an increasing problem as our population ages. We’ll have fewer workers to pay taxes and more retirees to support with superannuation. That’s why all the experts keep telling us to look at a Capital Gains Tax. We’re going to need one eventually, so it seems to me better that we introduce it gradually – as the late Sir Michael suggested.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
