Labour Party leader Chris Hipkins recently announced that the party take one other take a look at tax policyincluding a possible wealth tax or a “capital gains tax” (Corporate tax).
This happened barely a 12 months after the party excluded a wealth tax or a capital gains tax in the event that they win the 2023 election.
So what has modified? The idea of former finance minister David Parker is to make use of corporation tax to specifically tax high earners whose income just isn’t effectively captured by the present tax system.
But what’s the difference to other options for wealth and capital gains taxation? And what options arise if a sort of wealth tax is introduced?
The basic wealth tax
You can consider wealth as assets – as valuables. These can include land, stocks, artwork, or other worthwhile collectibles. A wealth tax often has a low tax rate. The Norwegian wealth tax, for instance, has a rate of 1%.
Only 4 OECD countries currently levy a state wealth tax.
But outstanding economists, especially Thomas Pikettyargue that wealth taxes are obligatory and practical. Piketty also advocates progressive inheritance taxes – these can be seen as taxes on wealth. Even considered one of New Zealand’s richest men, Bruce Plested, billionaire and co-founder of Mainfreight, has supported the concept of a wealth tax.
A wealth tax often has some exemptions, comparable to the family home. Or there could also be an exemption on value, comparable to an allowance of NZ$2 million in assets before you could have to pay the tax. Usually, any debt on the asset will reduce the asset value.
To illustrate, consider the Green Party's policy within the last election. It was a 2.5% wealth tax on assets. An individual could have $2 million in assets before having to pay the wealth tax.
So in the event you had a $3 million portfolio of investment properties and stocks, you’ll pay 2.5% tax on $1 million (that’s, the $3 million portfolio minus the $2 million exemption). That involves $25,000. Note that this amount is paid yearly—not only once.
Some compliance costs are obvious here – for instance, the valuation of assets, especially those who might not be actively traded (for instance, certain artistic endeavors or unlisted shares).
Cash flow can also be a problem. People will be wealthy but insolvent. A tax policy that forces people to sell their assets with the intention to pay taxes is prone to be politically unacceptable.
Taxation of capital and land
Capital gains tax (CGT) also taxes wealth. However, CGT is a tax on the rise in value of an asset – often when it’s sold. Therefore, unlike annual wealth tax, CGT is generally paid once (when the asset is sold).
We don’t have a comprehensive capital gains tax in Aotearoa, but income tax laws may end in some capital gains being taxed.
And what a couple of property tax? A property tax is a tax that’s levied only on land. Property taxes have some benefits – they’re difficult to avoid or evade, since you’ll be able to't move or hide land, for instance. And land often has an existing assessment, which makes compliance and administration easier.
These sorts of taxes (wealth, capital gains tax or land tax) are flexible – elements will be included or excluded as needed. For example, productive land, Māori land or the family home will be excluded.
Importantly, they’ve the potential to make a major contribution to tax revenue. The amount of revenue is determined by the tax settings (e.g. what’s included or excluded – and what the tax rate is).
These taxes are usually not perfect. They result in behavioral distortions. For example, people invest an excessive amount of of their family home when it’s exempt from tax.
Income tax, capital gains tax and inheritance tax are often only levied when money or property changes hands. Wealth and property taxes are usually not based on a transaction but relate to property that exists and will be valued.
Where capital gains tax is different
The Labour Party's CIT system goals to calculate income (and taxes) based on an individual's capital holdings.
The details are usually not yet clear, however it involves taxing what people “should receive as income” based on the assets they and their families own. We see something similar with the foundations on foreign investment funds, which require a 5% return.
A company tax could appear to make sense to economists, but most individuals are inclined to think that they’re being taxed on something they receive or own, somewhat than on something they expect to receive.
Fair taxation
Basically, it's concerning the fairness principle of ability to pay. A dollar is a dollar, no matter whether that dollar comes from wages, interest on a checking account, or assets.
This principle underlies Labour's CIT. Support for wealth taxes comes from the wealthy, the general public and experts. Tax Working Group 2010 really useful a low property tax. The majority of Tax Working Group 2019 really useful a capital gains tax on a broad range of assets.
New Zealand has not yet implemented such measures. Even the UK, where conservative governments have been in power for 32 years since 1979, has a more progressive income tax system than New Zealand, including a comprehensive capital gains tax and an inheritance tax with an ordinary rate of 40 percent.
If taxing wealth is an obvious policy option for other OECD countries, why don't now we have it? And why has there been so little serious debate about moving away from our reliance on income tax and GST?
New Zealand isn’t any exception and will model itself on the most effective tax regimes within the OECD. Progressive politicians must deal with the basics of ability to pay – “a dollar is a dollar”. However well-intentioned a company tax could also be, it’s unlikely to show voters the basics of tax fairness.
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