Brian Fallow: Slippery slope to capital gains tax

The people who write our tax laws really need to make up their minds. Do they want a capital gains tax regime or not?

Yesterday's package of proposed reforms to the tax treatment of investment suggests that they do - and that they don't.

Capital gains tax on investment in NZ companies via actively managed funds is to be eliminated, as long urged by the savings industry and endorsed by Craig Stobo's review.

But that measure sugar-coats the bitter pill of a new capital gains tax on outbound portfolio investment into countries which are traditionally exempt and which receive about 70 per cent of such investment.

New Zealand is unusual in not having a capital gains tax.

In principle it is not clear why a person should be taxed if he increases his wealth through working, but not if he increases his wealth through owning a property or the right form of financial asset.

Some years ago then-Reserve Bank Governor Don Brash, appearing before Parliament's finance committee, made the case for a capital gains tax on investment properties.

The MPs shrank back in their chairs as if to distance themselves from this politically radioactive proposition.

But to broaden the tax base through capital gains in exchange for a lower tax rate on incomes and/or consumption is an arguable proposition.

Creeping, piecemeal moves towards more capital gains tax without any such trade-offs, on the other hand, are objectionable.

Where does it end?

In five years time will we hear the argument that it is distortionary and economically inefficient to have a capital gains tax on foreign equity investment but not the local kind, so we should extend it to the latter?

And then will we hear the argument (again) that it is wrong to tax capital gains on financial investment but not residential property?

It is a slippery slope.