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JUL 11

Tax on capital gains long overdue

Labour’s tax plan announced last week represents an effort to rebalance the economy towards productive enterprise and away from unproductive assets. With the tax system as it is now investment in assets is favoured. Assets provide few jobs and little tax revenue to the Government. The same investment in the productive economy provides jobs, export earnings or import substitution, higher incomes and more Government revenue.

A more balanced tax system will see investment flow to the most intrinsically profitable areas of the economy, rather than those that are tax advantaged. Furthermore, all other things being equal, the tax take from other areas will be lower.

This table used by Brian Gaynor in an article for the NZ Herald shows the impact the tax free status of property has had. Housing values and associated debt have skyrocketed while the NZX (companies providing jobs and paying their fair share of tax) has remained stagnant.

This table shows the other key reason a tax on capital gains is warranted. The tax free status of capital gains increases the demand for asset based debt which leaves New Zealand in a vulnerable state where banks could struggle to obtain funding to service this debt, particularly if there were to be more external shocks like the global financial crisis. Irrespective of debt servicing, the act of debt expansion also has the effect of overvaluing the exchange rate, so at once the productive sector is robbed of investment and revenue.

With the dollar hitting post float highs that impact is clear and the economic situation in the United States and Europe is sufficiently fragile to require prudence in regard to public debt and action from Government to ensure capital flows to areas that will create foreign earnings, not more foreign debt.

tags: capital gains tax, current account deficit, household debt, overseas debt
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