Jury must deliberate on tax reform

As expected, a capital gains tax has been unveiled as a key plank in improving New Zealand's tax system.

The Tax Working Group, chaired by Sir Michael Cullen, delivered its report on Thursday, including a range of recommended changes and additions to our tax system.

Most prominent, of course, is a capital gains tax and New Zealand voters should be striving to understand the implications.

The Government has stipulated any tax changes be fiscally neutral. To ensure that, marginally lower income tax is proposed. Yet this appears to only mitigate up to the first five years. After that, if the capital gains take increases, will larger income taxes be delivered? And is the proposed lower rate - less than $600 a year to most earners, regardless of their needs - enough of a redistribution of wealth to make the changes worthwhile?

The report makes clear there will be compliance and efficiency costs associated with a capital gains tax, meaning less money per dollar taxed for the government to spend. But Sir Michael is clear that is a price worth paying, pointing out New Zealand is an outlier with its lack of a comprehensive capital gains tax. That, he says, reduces the fairness of the tax system and "benefits the wealthiest members of our society''.

However, unlike many of the countries which do have capital gains taxes, almost a third of our current tax revenue comes from our exemption-free consumption tax, a tax which efficiently collects the most from those who spend the most.

Is simply increasing our GST rate a better option?

The capital gains tax, as it is proposed, would have a number of exemptions, most prominently the family home - though there are exemptions there, too. If there are loopholes to be found, the country's accounting fraternity will find them. Is that the sort of growth industry we want?

As the proposed tax is very high and inflation will not be taken into account, what incentive will there be for rental owners to improve the quality and value of their assets? Could investors hold on to their properties longer - waiting until retirement to ensure a lower tax rate? Will rents increase as investors do their sums and readjust how they gain a desirable return from their investments? Will rental stock decrease?

Would it hamper the growth of small and medium sized Kiwi businesses by pushing up costs, disincentivising investment and diminishing the pool of available capital?

As the wealthy will not be taxed on their multimillion-dollar family homes or art collections, will the hoarders of wealth simply adjust the way they hoard?

It seems most New Zealanders are uncomfortable at the growing gap between rich and poor. If that is the generally accepted problem, is this tax proposal the best solution? Is there a better alternative? Is the onus now on the Opposition to present that alternative?

Also worth noting is Sir Michael's report, with a capital gains tax set for most to 33% while not taking inflation into account, is likely somewhat political - with particularly harsh proposals tailor-made to be softened by the Government. But we will have time to see those changes before we decide we want them, or not.

As such, the real onus is on us. To decide what we want we must understand the material being put before us, we must ask questions, research answers, and be willing to reach conclusions which may differ from the answers we want or the ideologies we hold.

It is right for the Government to look at redesigning the tax system to reduce inequality. Whether these proposals are the right ones is up to New Zealanders to decide. They should do so maturely, as members of a jury, making a considered and informed decision.

The court, then, is in session. The judgement will be delivered after the general election, next year.