Tim Hazledine: No-exemptions CGT is efficient and fair

Tax Working Group chairman Sir Michael Cullen outlines its details for a proposed capital gains tax during his briefing at the Treasury in Wellington in February. Photo / Mark Mitchell

COMMENT

Paying your taxes is a bit like growing old. It's not much fun at the time, but it sure beats the alternative.

Really? Yes, really. The alternative to paying up to a third of your income in tax in a civilised, prosperous, first-world country like New Zealand is to move to Afghanistan or Myanmar or Chad or Libya — there's plenty of choice here: countries where corrupt and incompetent governments can neither collect tax fairly nor put it to good work providing education, health and other publicly provided services; countries in which most of the people who get rich are criminals.

Taxes are the handmaiden of a prosperous and civilised life. It is a blessing, not a burden, to be able to send off some of your income to a government that you know will spend it on public goods, tolerably efficiently, fairly, and honestly.

Of course we can differ about where public expenditure is most useful. We might even, as I do, wish we could afford to pay less tax in total, given that much expenditure, in particular on health, social welfare and the police, is really just an imperfect palliative for problems that would not exist if people were better able to look after their own interests. But taxes, like death, ain't going away.

So who should pay tax and how much? Here, as so often, the matter was best put nearly 250 years ago by Adam Smith, the Scottish philosopher who founded modern economics. Smith wrote: "The subjects of every state ought to contribute towards the support of the government in proportion to the revenue which they respectively enjoy under the protection of the state."

And Smith was in favour of the proportion increasing for higher incomes, that is, what are now called "progressive" tax rates.

So, the more wealth you have, the more you've got to lose if someone takes it from you. The state is here to stop that happening. But it's not just about protecting property rights. The state, and civil society of which it is part, are essential to the production of wealth as well.

You take the most sturdy, individualistic, "self-made man", cast him away alone on a desert island and see how many Audis he can make all by himself. That's not saying anything against self-made men and women. They can do great things. But they can't do them on their own. The economy, especially what we call a market economy, is inextricably a social concern.

Really, progressive taxation should not be seen simplistically, as it commonly is, as a matter of redistributing income from rich to poor, but as good old user-pays. You want to use New Zealand's civil society as your platform for earning an honest shilling or three for you and your family? Fair enough, go for it. But you need to give something back in return, and the more you benefit from the civil state, the more you should willingly pay.

So should your taxable income include realised capital gains on assets? Yes, of course it should. To not include these sources of revenues is distortionary and unfair. Should it even include capital gains on the precious "family home" when this is owned by the family who use it, these being mainly the richer two thirds of households across the wealth distribution? Well, why ever not?

Let us be clear where property capital gains come from. Unless designed by a suddenly famous architect, it is not the house itself which gains in value. On the contrary, your house is quietly deteriorating and losing value even as you read this. It is the bare land underneath the house which has appreciated, and this not by your efforts but because of the overall pressures of higher incomes and a larger population on a fixed land base.

Adam Smith, who despised rentiers, would be shocked at the very notion of unearned capital gains on land going tax-free while the fruits of the worker's honest toil are clipped at 33 per cent.

I am told that taxing the "family home" is politically unacceptable. Well, it is not my job as an independent economist to second-guess what is or is not political. I, and many other economists, just have to point out that a comprehensive, no-exemptions tax system gets the two ticks for efficiency and fairness. And perhaps our politicians are actually underestimating the basic good sense of the citizens on this matter. I do hope so, for all our sakes.

• Tim Hazledine is a professor of economics at the University of Auckland Business School.