Free Press, 29 January 2019 - Taxing Success
We’re Back
The summer break has been a
wonderful reminder of New Zealand at its best – a free
society brimming with opportunity. Inevitably, though,
politics returns. Parliament resumes on 12 February, and the
Government will continue its experiment of seeing how much
bad policy the economy can withstand before it runs out of
steam.
Watch the Working Groups
A
capital gains tax, a return to nationally-negotiated wages
for entire industries and removing school autonomy will join
last year’s policies of banning oil and gas exploration,
tying foreign investment up in red tape and ending the
charter school model.
The Simplest Argument
Against a Capital Gains Tax
The simplest
argument against a CGT is that it’s double taxation. It
punishes saving and investment by taxing it twice. It is not
about fairness as its advocates claim, but the idolisation
of envy. It is the wrong philosophy in a country that should
be celebrating success.
But, But,
But…
The classic argument for a capital gains
tax is something like this: “Why should someone who works
pay up to a third of their income in tax when someone who
makes the same amount of money from their shares or their
own business appreciating in value pay none at all?”
It’s a great argument on the face of it but it misses
something.
Why It’s Double
Taxation
There’s no point in holding an asset
– a business or rental property – unless you can get
income out of it or sell it to someone else who will. The
value of a capital asset depends on the annual income it
provides, and that income is already
taxed.
Selling a Million Dollar
Business
Someone who buys a million dollar
business knows they’re going to be taxed on every dollar
of income they eventually receive. Without company tax it
would be worth $1.39 million, but the buyer knows they’re
going to pay 28 per cent on income, so it’s only worth a
million. If you built the business, your capital gain has
already been reduced by $390,000 from the buyer factoring in
the tax they’ll have to pay.
Then They Tax You
Again
A capital gains tax means you’re taxed
again when the asset is sold. At the top personal tax rate
of 33 per cent that’s another $330,000. The total loss to
the hapless bugger who built the business is $390,000 plus
$330,000, making a total of $720,000 – more than half the
value.
What About Housing?
Nobody in
Sydney, London, Los Angeles or Vancouver believes a capital
gains tax has made housing affordable. Even the Tax Working
Group told the Government a CGT will not achieve housing
affordability.
Other Objections
A
capital gains tax is administratively clunky, requiring
valuations and arguments over inflation and what passes as a
new class of investment and whether you can leave capital
gains to your kids. It’s foolish that a country that has
always struggled with a shortage of capital would seek to
further punish capital accumulation. These are good reasons
to object, but they are not the real reason.
The
Real Objection
This summer showed the best of
New Zealand – strong and free. It’s a place where canny
people have built a special society at the edge of the
earth, based on successful values. The real problem with a
tax on success is none of the technical issues, but the
simple fact that a society that seeks to tax success will
have less of it.