Should we tax income, capital gains... or wealth?
OPINION
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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.
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 per cent 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).
Capital gains taxes tend 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 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 what all the experts keep telling us to look at a capital gains tax. We’re going to need one eventually, it seems to me better that we introduce it gradually - as the late Sir Michael suggested.
Fresh fruit and vegetable prices keep falling. That’s the good news on the inflation fight this week.
They fell another 2.6 per cent in April and are now down 13 per cent in the past year.
The bad news was that overall food prices rose 0.6 per cent in April, with the average pushed up by big spikes in chocolate, potato chips and olive oil.
Monthly figures are volatile so it is worth looking at the annual trend. Food prices increased 0.8 per cent in the 12 months to April 2024.
The latest increase followed a 0.7 per cent increase in the 12 months to March 2024, so a slight uptick but nothing too serious. At the same time last year, food prices had increased 12.5 per cent.
It’s a reminder that inflation is falling - especially for basic goods (it is stickier for services).
However, don’t expect huge celebrations as it returns to normal warns Nobel Prize-winning economist and New York Times economist, Paul Krugman.
In a column this week he highlighted the fact that rising prices seem to get far more headlines than falling prices.
He cited a new report by Ryan Cummings, Giacomo Fraccaroli and Neale Mahoney, writing for the website Briefing Book.
Titled “Bad news bias in gasoline price coverage”, the report showed there are far more TV news reports about petrol prices when they’re high than when they are low.
He noted that the work didn’t cover food prices but expected the same trend would hold.
“Everybody heard about soaring egg prices in 2022 (mainly caused by an outbreak of avian flu); I know for a fact many people weren’t aware that prices plunged even more rapidly in 2023,” Krugman recalls.
I’m no economist but I am a news media veteran and I can confirm that is definitely the case. The data is clear. Stories about price rises massively outrate stories about price falls and that inevitably guides headlines and placement.
Chocolate feeding frenzy
I touched on olive prices last week. Extreme weather conditions in southern Spain have massively diminished the harvest, causing retail prices for olive oil to double in the past few weeks.
I’m not so sure about the potato crisp price spike that Stats NZ alluded to, although a quick Google search confirmed global potato prices have been high.
The spike in cocoa prices has also been well covered and weather-affected harvests in Africa have been blamed.
But the New York Times offers up a fascinating look at the trading frenzy that followed the initial spike in cocoa bean prices early this year (you can read it here).
“For much of the past decade, the price of cocoa in one key global benchmark hovered around US$2500 ($4150) per metric ton. Last year, after poor harvests in West Africa, the price began to creep up - rising to US$4200 a ton by December, a threshold that hadn’t been crossed since the 1970s.
“Then the financial speculators began to pile in - betting prices would rise further. They pushed the price above US$6000 a ton in February, US$9000 a ton in March and US$11,000 a ton in mid-April. Since then, the price has swung wildly, falling nearly 30 per cent in just two weeks before bouncing up again. By Thursday, the price was US$8699 a ton!”
Finally, there’s been a bit of good news for the British economy, which bounced out of recession in the first quarter with 0.6 per cent growth.
Despite the quarterly increase, the British economy has barely grown over the past year. Like New Zealand - and much of the rest of the world - it has been battling high inflation (now down to 3.2 per cent) and interest rates at 16-year highs of 5.25 per cent.
Prime Minister Rishi Sunak said the economy had “turned a corner” in its post-Covid rebalancing, but Labour said this was no time for a “victory lap”.
It’s a big year for UK politics, with an election expected to be held sometime in October-November. After nearly 15 years in power, countless scandals, a now-unpopular Brexit and five different Prime Ministers, the odds looked stacked against the ruling Conservative Party.
The Financial Times election tracker has the current polling at 43.5 per cent for Labour and 23.5 for the Conservatives. Not helping the Tory cause is the populist right-wing Reform Party which has 12 per cent, even though it is unlikely to win enough seats (the UK electoral system is still first-past-the-post) to open up coalition possibilities. The Liberal Democrats, who do have a traditional electorate base, are polling just 9 per cent.
But if anything can save Sunak, it will be the economy.
He will be hoping that rate cuts come to his rescue. Current market expectation is that the Bank of England will deliver the first cut in August.
The New Zealand Treasury has warned the Government that a politically toxic cocktail of spending cuts, effective tax increases and even the sale of state assets might be needed to beat the books back into order while delivering on its spending promises, writes Herald deputy political editor Thomas Coughlan.
The report highlights the tight squeeze the Government is in as it tries to manage politically contentious spending decisions and rein in the deficit. As I noted in my Herald on Sunday column, it is certainly facing a concerted attack from economic and political commentators on the right as they attempt to make the case for more radical austerity measures. I also mentioned that tax cuts (or bracket adjustments) don’t help the cause, but that they’re happening, they’ll be baked into the Budget equations from here... so we’ll all need to move on.
The number of tourists coming into the country rose by close to one million over the past year, which is good news. But of course, this is an economics column and it is famously the dismal science.
In that vein, I can’t help but notice that the sector (once the country’s largest export dollar earner) is still 17 per cent down on pre-pandemic levels. It was worth $17.6 billion in export dollars in 2019.
So we’re still down about $3b. That is a big hole in our GDP.
It looks worse if you consider that we’re only benchmarking back to the start of the pandemic. It’s not unreasonable to assume that without Covid and the border closures, we might have seen a bit more industry growth across the past four years. We’re probably closer to 25 per cent down on where we might have been without any disruption.
A surge in the number of arrivals from China has boosted growth in the past year. In the year to March, there were 3.18 million visitor arrivals, up by 984,000 on the corresponding period in 2023 but still well short of the 3.87 million who came to Aotearoa in the year to March 2019.
If there is an optimistic way to look at that hole in our GDP, it might be that it leaves plenty of room for improvement. As long as tourism continues to recover, it should add momentum to economic growth once we finally get out of this inflationary, high-interest-rate cycle.
The news that the departure of New Zealand citizens exceeded 50,000 last year got all the headlines this week. But the total net migration figure (see above) is also finally starting to decline. That’s a relief. Economists have noted that while the migrant influx did initially ease labour shortages and inflationary pressure, it is likely now doing the opposite and causing inflation.
But we still have a way to go before we can say normal service has resumed. The latest figure - a net gain of 111,000 people in the year to March - would have been considered outlandishly high if it were suggested at any time before last year. Just 12 months ago, Westpac economist Michael Gordon made headlines for suggesting we were on track for an annual net migration gain of 100,000. Net migration eventually peaked at 139,000 in the year to October 2023. At the height of what was considered a historic boom under John Key, net migration peaked at just 70,000 per year.
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.
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. He’ll try to answer in Inside Economics, a new column published every Wednesday.
New Zealand’s low productivity really is a serious problem.