Editorial: CGT taxing our tolerance

Tax Working Group chairman Sir Michael Cullen outlining the details for their proposed capital gains tax during his briefing at the Treasury in Wellington

Some have welcomed the prospect of a capital gains tax levelling an allegedly unlevel playing field. Some have warned that it will stop the economy in its tracks. The great majority, perhaps, are just a little uneasy, wondering what it will mean for them personally.

For most of us, a capital gains tax on property won't make any difference. Most New Zealanders are not landlords, and are not in the habit of shuffling excess income into dark corners where the IRD won't find it. They will have nothing to fear from a capital gains tax on property because they will never have any such capital gain to tax. But the pursuit of 'fairness', which the government is using to sell the rationale for introducing a tax, seems likely to go much further than that.

If some of the Tax Working Group's recommendations are adopted, it will affect almost every person in this country, for better or worse.

The question of whether or not the existing tax system is fair is largely based on the assumption that many of us are doing very nicely thank you, and must be compelled to share rather more of our wealth, acquired at the expense of others, than we currently do, even those of us who have heeded successive governments' exhortations to make provision for our old age rather than relying upon the next generation of taxpayers.

TWG chairman Sir Michael Cullen was most insistent during his nine years as Minister of Finance that we should not depend upon receiving increasingly unaffordable superannuation when we retire, and should be taking more responsibility for our own post-retirement income. He never bothered to explain how we should go about doing that.

The obvious answer is to bank part of our income, but it's been a long time since that was a viable option. Interest rates for many years have been paltry. Deduct the previous year's rate of inflation, and pay the tax on the gross interest, and there is very little left.

Putting excess income into a savings account is not the way to financial independence in retirement.

For many the investment of choice has long been real estate, which clearly irked Sir Michael but all but guaranteed some sort of realistic return. That might have changed a little since the advent of KiwiSaver, but now the TWG says even that should be taxed — again.

Every KiwiSaver pays tax on the income that goes into their account when they earn it, and will pay at least 15 per cent tax on those savings when they finally spend them. But that's not enough. The TWG recommends taxing the profit on shares that are bought on their behalf by whoever invests their money for them, even before those shares are sold.

How does that work? How can it be fair, or rational, to tax income that will not be realised until the asset is sold? And which might eventually be sold at a loss? At the very least, any such tax should, if it is to be fair, allow for the value of those shares falling. If it is fair to pay tax on profit, it is fair to claim tax back on losses. Apparently that's not going to happen.

For that matter, if it's fair to pay tax on capital gains acquired via investment in rental properties, it would be fair to allow the continued claiming of tax rebates on losses. We've already been assured that that isn't going to happen.

Then there is the proposed tax on second properties held within the family, effectively a tax on baches at the beach. Those who own such properties can expect to pay an annual tax calculated on their capital value. This isn't so much a tax on wealth as a tax on perceived wealth.

Those who have a place at the beach are not necessarily wealthy, and if they are, why should a tax apply before they sell, if they ever do?

We can also expect a tax on family properties greater than 4500 square metres, which will capture a good many rural residential properties. These are people's homes, but again these people are perceived as having an unfair advantage over those who do not have them. A $10 million family home in Auckland won't attract capital gains tax, but a $300,000 lifestyle block at Takahue, with an orchard, vegetable garden, a house cow and a handful of sheep will.

Farms, we are told, will not necessarily pay capital gains tax until they are sold out of the family, but it won't be forgone. Rather it will quietly accrue, until the day comes when it is sold outside the family. It is not difficult to imagine a farm effectively losing all value to the vendor who sells it after a couple of generations of family ownership.

Meanwhile works of art and jewellery, which one imagines are not unattractive forms of investment for the seriously wealthy, will not be subject to capital gains tax. How fair is that?

We are told that a capital gains tax will be revenue neutral — what the government raises will be returned via lower rates of income tax. Believe that and you'll believe anything. The recommendation is that the threshold for the lowest band if income tax be lifted by around $12,500, while the rate for the next band should be lifted. That would probably account for the PAYE reduction of around $16 a week for the average income earner.

This is not about devising a fairer tax system. It is about the redistribution of wealth, taking from the so-called rich and giving to the so-called poor. It is a further enhancement of a social welfare system that has done enormous damage to this country over the last 50 years, and will do much more damage in years to come.

It will certainly encourage those who work hard to make better lives for themselves and their children to give up or leave, or at least ship their investments overseas.

If the government really wants to create a fairer tax system, it should firstly lift the PAYE income tax thresholds. National undertook to do that before the 2017 election, and was accused of promising its rich mates tax cuts. Bollocks. Those thresholds haven't moved for years. The top rate of 33 per cent still kicks in at $70,000, which used to be worth a hell of a lot more than it is now.

We are nearing the point where the average income earner will soon be paying the top income tax rate. That isn't fair. And adjusting the thresholds would instantly benefit the lower-paid.

More importantly, the government should be addressing the 'black market,' a thriving sector of the economy that pays no tax at all. The tax value of that economy, basically cash under the table and a system of bartering, has been calculated by some as worth $6 billion a year. That should be enough even for the current government, whose appetite for increasing tax revenue seems insatiable.

But that won't happen. Perhaps it's too hard. Perhaps it's invisible to those who say they want to make our tax system fairer. In fact it is the most unfair aspect of our tax system.

Wage and salary earners, anyone who has a bank account or a retirement fund, has no choice but to pay what the government demands. The same should apply to those who earn their living by means that demand an honest declaration of earnings.

Once the government has shut down the black market, perhaps we could then talk about increasing taxes for those who are already paying more than their fair share. The way we're going the government won't be happy until we are all taxed to the point where we depend upon its largesse, with our money, for our survival. And that is probably the ultimate goal.