Please note: The views in this article are those of the Westpac Economics Team, not Westpac NZ. The Westpac Economics Team provides independent advice and opinions for clients and the public on a range of economic matters. Westpac NZ does not hold a position on a capital gains tax.
A Capital Gains Tax would encourage New Zealanders to diversify their investments, says Westpac Chief Economist Dominick Stephens.
Stephens has been keeping a close eye on the Tax Working Group, which recently came out with its final recommendations, and believes its plans, if implemented, will have a far reaching effect on New Zealand.
“Basically what they’re saying is that we should reduce rates of income tax, and tax income earned via capital gain more.
“I think that’s a combination that will lead to higher long run living standards for New Zealand.”
Levelling the investment playing field
Stephens says that the current “uneven” tax system encourages investment heavily focused on capital gain rather than income generation, such as residential property and farms, and in effect turns people away from investing in more income-focused investments, such as factories and medical practices.
“We tax the income earned on investments very heavily, but we tax the capital gain earned on investments hardly at all,” he says.
“Introducing a Capital Gains Tax should level the investment playing field, leading to more diverse investment choices.
“In turn that should allow a diversification of the national balance sheet… which ultimately will lead to a more efficient and productive economy.”
The problems with CGT
Stephens points out that the complexity of a Capital Gains Tax will result in a huge amount of work for accountants, which he labels a “misallocation of resources”. However, he add that’s it would still be “less of a misallocation than we are currently enduring.”
The other big problem he sees is that the tax Working Group’s recommendation for CGT excludes the family home.
“That will leave over-investment in family homes in tax, the so-called ‘mansion effect’,” Stephens says.
“(This) is less efficient for the economy, and it’s also regressive.
“It’s a tax break for those wealthy enough to afford a house, it leaves those paying rent doing so out of their after tax income.”
Finally, Stephens points out that introducing a Capital Gains Tax will have transitional effects.
“I think a Capital Gains Tax will reduce house and farm prices relative to the counterfactual.
“That tends to affect consumer confidence, and lead to lower spending, so introducing a Capital Gains Tax will slow the economy through the transition period.”