What the f*ck is capital gains tax?

Capital gains tax is a point of conversation this election, but what the f*ck actually is it and how does it work?

The cost of living as well as the affordability of housing has been an issue important to many New Zealanders, especially with election season in full swing.

Inland Revenue released a report earlier this year that showed the wealthiest New Zealanders paid lower effective tax than their less wealthy counterparts. The report showed that personal taxable income was only a, "small part of the economic income of the wealthiest New Zealand families.”

According to the Inland Revenue report, "increases in the value of businesses, property and financial portfolios they own or control,” and the picture changes when that was all considered, referred to as "economic income.”

A New Zealand Council of Trade Unions (CTU) economist Craig Renney spoke to Radio New Zealand and noted that capital gains was an area on inequity, stating that “most New Zealanders pay tax on every dollar that they earn, whereas the wealthiest are paying no tax on large parts of their economic income."

One of the proposed fixes to these issues of inequity is a capital gains tax. However, this solution is a rather controversial one, with left leaning voters being in support and right leaning voters being against.

A capital gains tax is as the name suggests, a tax on capital gains on assets. These assets can be shares, bonds and property. When capital gains tax is discussed, it is often in the context of property.

“New Zealand is the only OCED country without a comprehensive capital gains tax” says Geof Nightingale, a PWC tax partner as well as a member of a tax working group created in 2018 in an interview with the New Zealand Herald.

But what is the rationale behind a capital gains tax? In a report released by the Tax Working Group the various benefits of changing New Zealand’s capital gains tax laws are discussed.

The first rationale is rather simple, it would make our tax system fairer. In a document released by the group they talk about “the fairness question” and provide readers with an example. It discusses how Tim pays tax on “every dollar he earns in his day job” and his neighbour Carol, a property investor who under the current rules “doesn’t have to pay tax on all her income and gains.” It mentions how Carol has the advantage over Tim as “many of the gains earned from selling assets like shares and investment properties are not taxed in New Zealand.”

Another rationale behind changing New Zealand’s capital gains laws is to shrink the gap between rich and poor, income inequality is on the rise in New Zealand. The working group notes that “tax free capital gains are mostly enjoyed by our wealthiest households.” Changes to the capital gains tax system would help to reduce inequality.

Changes to the capital gains tax system would also result in a broader tax base for the government to draw on, because of this the government would be less reliant on revenue from wages and salaries. The new revenue stream allows the government to cut taxes elsewhere or put into public services such as healthcare or infrastructure.

Despite the potential benefits of changing capital gains tax laws in New Zealand there has been no recent attempts to introduce bills to parliament. The last attempts to enact capital gains tax reforms was under the Prime Minister Jacinda Ardern, such attempts at reform were bought to an end my then coalition partner New Zealand First, as their leader Winston Peters refused to support it. Ardern said, "So I've done the public facing arguments on it ... my job then became getting the votes in Parliament."

A main reason behind a lack of interest from parliament to address capital gains tax laws is due to the lack of widespread public support.

Geof Nightingale, in the same interview to the New Zealand Herald noted that he wasn’t surprised about capital gains taxes being unpopular in New Zealand. “New Zealanders are aspirational… That underlying aspiration has been exploited by people who oppose an extension of capital gains tax.”

With an upcoming election the two major parties Labour and National have rejected creating comprehensive capital gains tax laws as well as similar wealth tax laws, the Greens and Te Pāti Māori are currently some of the only parties running for election this year who support capital gains tax reform.

Debate around capital gains taxes in New Zealand is not a new thing, it is a hot topic issue nearly every election, Despite economic experts encouraging New Zealand to take the steps to create comprehensive capital gain tax laws, with it being an election year there is no desire from major political parties to take the risk politically with such a potentially unpopular policy. However it is possible after the election and with time that the issue may finally be resolved.