Capital tax ‘disincentive to saving’

Press, 18 December 1989, Page 1

Capital tax ‘disincentive to saving’

By

PATTRICK SMELLIE

in Wellington

A CAPITAL gains tax would stop New Zealanders from saving, investing in business, and creating new jobs, a paper released today by the Committee Against Capital Taxes says. Coming a day ahead of a big Government discussion document on capital taxes, the paper says the Government has yet to demonstrate why a capital tax is needed. “Capital gains taxes are recognised worldwide as the least efficient of all taxes,” the CoACT director, Mr Basil Logan, said. “Some countries are now reevaluating their worth. “The Government has an obligation to prove that capital gains tax will assist in New Zealand’s economic recovery and help restore our low household savings record.” Capital taxes penalised effort and encouraged people to spend rather than save and invest. Instead, the Government should be promoting a high rate, progressive GST-type tax with no personal or company tax, he said. “A key question facing New Zealand is whether introducing an explicit CGT regime will discourage investment here,” the paper says. “It is highly probable that foreign non or disinvestment and some capital flight would occur with the introduction of the sort

of CGT that seems to be contemplated by the Labour Government.”

The Government has given no clear indication so far of what type of capital tax. would be favoured, and several different options are likely to be canvassed in tomorrow’s discussion document. However, some indications have emerged that exemptions for assets valued below a certain level are likely in whatever is finally decided. CoACT argued that this would make the tax unfair, when its prime aim was increasing the fairness in the tax system. CoACT also feared that whatever was proposed would end up taxing capital gains by stealth, as had already happened in several areas. The Government was likely to try and push through other areas of tax reform, such as land tax or death duties to “cloud the issues,” said Mr Logan. The international experience was that capital taxes were extremely complex, making them more trouble than they were worth. This was all the more so because they did not collect much tax revenue. “The theory of what is a ‘good’ CGT has never been matched by the practice,” the paper said.

It was also untrue to promote CGT on the basis that it was a “catch-up” with other countries overseas. Recent tax changes such as the livestock regime, accruals rules, superannuation industry tax regime, and international tax changes all had elements of capital tax. In addition, the Inland Revenue Department was now more actively enforcing longstanding parts of the existing tax law which involved an element of capital tax, but had tended to be ignored. “A significant proportion of what are capital gains are already taxable under New Zealand tax law,” CoACT says. Since capital taxes were generally argued on the basis of equity, they should have several elements which included: • Full deductibility of capital losses as well as taxability of capital gains. • Taxability on an unrealised accruals basis, rather than at the time of sale. •No exemptions for any assets or any person including family homes. • Low compliance costs. Mr Logan said any attempt to exempt any class of asset or person from the tax was social engineering through the tax system rather than an honest attempt to improve it.