Capital gains tax and fairness

If one concept encapsulates the "Kiwi way of life", it is fairness.

Yet, according to the Government, it's the very concept those complaining about the proposed capital gains tax fail to consider.

New Zealand certainly tries to be a fair country of equal opportunities. We do OK, but there's a long way to go. Where and who we're born to does still matter. Genetics and upbringing mean only very few Kiwis have the potential to become All Blacks or Silver Ferns, or to make billions, or to reach the ninth floor of the Beehive.

Under scrutiny, New Zealand is not fair. Nor is the Government's claim a desire for fairness is driving the proposed tax changes.

That claim goes something like this: a wage-earner is taxed on every dollar she earns, yet someone selling an investment property for more than she bought it for is not taxed on that difference. That is not fair, and should be changed.

That the Government is determined to address the divide between the richest and poorest is admirable. Few Kiwis would be comfortable with individuals amassing considerable fortunes while, just a suburb over, entire extended families live in garages.

But is the issue that our society allows millionaires, or that it allows people to live in poverty? The two are not the same, yet it could reasonably be inferred the current Government believes the two are directly linked - that poverty is a result of the wealthy not paying enough taxes.

If we believe that, we must ask: who are the wealthy? Is there a dollar figure we can settle on to determine what constitutes wealthy? Does that figure relate to net worth or income? And, once decided upon, would it be fair to ask those wealthy individuals - already paying the lion's share of tax - to not only pay more, but to vilify them in the process?

If that is the case - and many consider it to be so - is the proposed capital gains tax a fair way to achieve this?

Because wealth is the number on the bottom line of a balance sheet, not the total number of entries above that bottom line.

For example, a Balclutha home owner may live in a house worth $300,000. They may, despite the risk and work involved, also own and rent out another five houses of the same value. That would give them $1.8 million in real estate. On selling that real estate, they would be taxed on the capital gains of more than 80% of it.

Meanwhile, many family homes in Auckland's leafy inner suburbs, like the Prime Minister's Mt Eden house for example, are valued at more than the entire property portfolio of the Deep South investor.

Yet upon selling, the gain on that Mt Eden family home will not be taxed. That is, surely, not fair.

Then there's the difference between profit and a rise in price. The two are not the same. If inflation alone has lifted the value of an investment property, the value of everything else has risen too. There is no gain in spending power, no profit. Is it fair to tax that inflationary gain as if it's income?

If a landlord buys an uninhabitable two-bedroom house for $200,000, spends that much again on renovations and sells it for $400,000, is it fair to tax her on the $200,000 difference between purchase price and sale price? Even though her profit was zero?

Wouldn't fairness mean profits being taxed as profits, with expenses like renovations, improvements and inflation accounted for? To do so would mean a mountain of accountancy. But it would be fair.

There is a growing divide between rich and poor in this country. The Government is right to address it. But it should beware of overselling fairness. It would be better to discuss tax changes without insinuating those opposed lack empathy or fairness.

Comments

Making billions is not a benchmark of talent and achievement. It depends on how they were made, such as the drug trade.

Fortunately there is no suggestion that capital gains tax would be based on talent and achievement, only on capital gains, including those made by mediocre people who struck it lucky in their course of their uninspired lives. Who'd have guessed a shabby shack on a gorse infested paddock, bought as a get round tuit project that quickly ran out of tuit, would become prime real estate 20 years on?

I agree with her that the CGT should be tweaked to account for expenses like renovations, improvements and inflation. But I disagree that it would be a "mountain of accountancy". In this day of excel and computers its really simple to account for those unassuming deductions.

she says "Government believes the two are directly linked - that poverty is a result of the wealthy not paying enough taxes." Of course it is. It is the only method of redirecting wealth that I know of. Are there others that I'm missing?

I always found it quite astounding that NZ doesn't have such a tax. And that there has been such a stink recently (well not so surprised on that considering who owns the megaphones).

And we remain one of the only nations without one. It is a glaring loophole for the rich. Why don't people get it? The megaphones perhaps? Albeit there have been some very good minority article supporting the tax.

 

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