Dialogue: Proposal to tax assets should gain currency

By JOHN ROUGHAN

For years now I have been receiving unsolicited mail from somebody who wants to re-invent taxation. Wouldn't we all?

The man's periodic dispatches always run to several pages of type, consisting almost entirely of recent news extracts and quotations. Apart from underlining many a phrase and making them shout in capitals or bold type, he obviously believes the extracts speak for themselves.

His wish, if I understand it, is to finance government entirely from royalties on all resources that industries use or pollute.

There is a tidy attraction in that, especially if at heart you believe all wealth originally and rightfully belongs to everyone in common, and that if we have to allow people to appropriate resources for their private enterprise we should tax them with a vengeance.

If you come from the other side of the fence, believing that resources have little value until somebody brings their ingenuity and energy to bear on them, you will be wary of discouraging the effort.

It would be wonderful not to tax productive energy at all if there was another reliable source of public finance. Most people can suggest alternatives - activities they would happily tax because they consider them unproductive or destructive.

Greens would tax greenhouse gases and all consumption of resources they consider unsustainable. The Alliance would like to tax financial transactions, especially in foreign exchange, to stop speculation in the currency.

Just about everybody has it in for tobacco, alcohol, gambling and petrol.

But the trouble with punitive taxation is that the more successful it is the less it returns.

Here, it is unsuccessful in that it has failed to discourage users. It is also grossly unfair, according to the committee that has just reviewed the tax system for Finance Minister Michael Cullen.

The report of the committee, led by accountant Rob McLeod, rather neatly scotches the idea that tobacco taxes, for example, are justified by the costs smokers place on public health services.

Since the average lifetime smoker's life expectancy is seven years shorter than others, the committee calculates that the value at age 65 of the annuity to fund the average smoker's national superannuation is $57,000 less.

Many would think that ample, it says, to finance public health costs attributable to smoking. The Prime Minister does not much like this report. Nor do most people, for reasons closer to home. I'm getting to that.

Since we are probably stuck with taxing "goods" rather than "bads," the best that designers of a tax can do is to see that it makes everyone pay their fair share, that it does not cost too much to assess and collect, and does not inadvertently favour some investments over others.

On all those counts, the McLeod committee has found New Zealand's taxation remarkably good.

That goes for income tax from individuals and companies, which supplies almost two-thirds of state revenue, as well as GST, which produces the bulk of the remainder.

But not for the first time, a thorough tax review has found two glaring holes in the income taxes - income in the form of capital gains on company shares and property escapes the net.

It is simply unfair, as well as economically damaging, that those who build wealth in the form of capital gains do not face the same tax as those who declare incomes.

And the exemption of property has left about 70 per cent of the wealth of New Zealand households tied up in their homes. In other developed countries the figure is about 50 per cent.

The McLeod committee has decided a tax on capital gains, such as most of those countries have, is too costly and complicated to be worthwhile.

It suggests, instead, a simpler method of taxing income from capital. It would tax assets such as shares and equity in houses at the rate of return on risk-free government bonds, minus inflation. Right now, that would be about 4 per cent.

The committee believes the majority of households could easily afford that and for those such as the elderly, with high equity and low cash incomes, there could be exemptions or special arrangements. It invites suggestions.

Within 24 hours of publishing its report it had received plenty, most of them apoplectic. Dr Cullen's stomach for the debate did not survive the first morning of talkback radio.

From those who paused long enough to rationalise their response, we heard that home-ownership is a Kiwi icon, even a cultural imperative, established by forebears who escaped landlords to settle on these lonely distant isles.

Well, fine, but what if untaxed home ownership is crippling us? Since the last time a form of capital gains tax was proposed for housing, 1990, we have seen years of near nirvana in the productive economy, from 1993-1996, turn to dust because we piled into real estate and the Reserve Bank had to counter the inflationary risk.

A good deal of that investment was borrowed to buy rental properties purely for the untaxed capital gain. The investors knew the rent would not cover their borrowing costs. They could claim a tax loss in to the bargain.

Suppose more of the wealth attracted into untaxed real estate at that time had been put into taxed funds that invest in taxed businesses producing taxed products and taxed jobs.

Not only might national wealth be increased but the extra tax revenue would probably lighten the load overall on the tax-paying homeowner. I say might and probably. Nothing is certain about investment, except that overpriced bungalows are never going to earn the nation's keep.

The economy is looking up again, but this time with exchange rates that makes us much poorer in the world. Probably more than ever we need all the efficiency we can generate. Maybe when knees stop jerking we can give this suggestion a thought.