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Capital gains in the capital city

Capital gains in the capital city

Victoria University will today be hosting a public debate on the merits of more comprehensive capital gains tax—a step which taxation expert Associate Professor Dr David White considers would be beneficial for New Zealand.

Organised by student group Beta Alpha Psi, the event will see Dr White joining MPs from National, Labour and the Greens, along with tax partners from PricewaterhouseCoopers and Ernst & Young, in mooting the pros and cons of adopting a comprehensive scheme of taxing capital gains.

According to Dr White, from Victoria’s School of Accounting and Commercial Law, New Zealand’s current tax system as a whole could be made a great deal fairer and would be more efficient if the income tax base was extended by consistently including income from assets, such as property and shares, on a rational basis.

“There is considerable debate in the public finance literature about the rate of tax on capital income but none of the literature recommends the current patchwork of taxation and non-taxation that we currently have. It’s a haphazard, mishmash of regimes built up bit by bit,” Dr White says. “Some of the current rules for taxing gains made on land transactions, for example, depend on your intention or what your occupation is. It’s not a rational system.

“This issue about how we tax ourselves is right at the heart of government. We have a limited amount of capital in New Zealand, and the present incoherent system of taxing it is distorting investment. To help improve the overall living standards of New Zealanders, we need to reduce these distortions. For reasons of fairness, I think that we should do this by bringing more capital gains into the income tax net along with labour income.”

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Dr White says most countries in the OECD have a comprehensive capital gains tax of some sort, and though they differ in scope and complexity, the idea of taxing the gain made through selling an asset for a higher value—like a piece of land, or share in Telecom—is widely accepted.

During Dr White’s 24-year career in this area, which has seen him work extensively around the world and as a former chief analyst in tax policy for New Zealand Treasury, he says it has always been a contentious topic. “Most capital gains tax is collected from a very small percentage of the population, typically less than one percent. And yet, it’s a controversial issue because tax design inevitably involves value judgements.

“If you look at capital gains taxation in Europe and North America, it’s very few people who report most of the capital gains. There are generally thresholds that take most people out of the regime.

“There needs to be a sense within society that we’ve got a fair system, not only for collecting revenue but for allowing people to meet all their legitimate aspirations. As our population ages, you’re going to find the working young increasingly called upon to fund their own consumption and retirement, but also to pay for older people’s. The issues of fairness are likely to become more acute.

“The current New Zealand tax system with a broad-based GST and a fairly broad-based income tax is highly regarded around the world. The main feature of the income tax that many overseas experts cannot understand is the extent to which, and the reasons why, certain capital gains are excluded from New Zealand’s broad-base, low-rate tax policy. ”

The public debate will be held at 7pm in the Student Union Memorial Theatre on Victoria’s Kelburn Campus. Speakers include Dr Kennedy Graham—Green Party Finance Spokesperson, Hon David Parker—Deputy Leader of the Labour Party, Simon O’Connor—National MP and Deputy Chair of the Finance and Expenditure Committee, Dr David White from Victoria University’s School of Accounting and Commercial Law, as well as Chris Leatham, a tax partner from PricewaterhouseCoopers and Aaron Quintall, a tax partner from Ernst and Young.

ends

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