Treasury talks capital gains tax

Brian Fallow writes:

The Treasury has renewed its call for reform of the tax system, including the issue of capital gains from property investment.

It wants the system to have a broader base and lower rates, Treasury Secretary John Whitehead told an Institute of Directors function yesterday. “And at the risk of being chased down by an angry crowd with pitchforks and flaming torches, yes this should include consideration of moving the boundaries to tax more capital gains – for example on investment property – and shifting more of the tax base towards consumption,” he said.

Without changes to the tax system, there was a real risk that the Government’s revenue base would be unsustainable in the medium term, given growing international competition for capital and skilled labour, and an ageing population.

“A key priority has to be reducing effective marginal tax rates and increasing the rewards for effort. There is a growing view that the high mobility of our skills base means high personal income taxes are especially harmful for New Zealand’s growth and productivity,” he said.

I used to be fervently against a capital gains tax on investment property. Since the credit crisis, partly caused by rampant borrowing for property, I have started to change my mind.

So long as other taxes were cut, so overall tax revenue does not increase, I think the time is right to now take a serious look at capital gains tax. And I say this as someone looking to buy an investment property.

“I know there is a lot of passionate debate on this matter, but capital gains or property taxes would be beneficial for encouraging investment in productive activity.

“A more complete capital income tax base reduces the impact of tax distortions on investment decisions, thereby improving the allocation of capital in the economy.” And greater reliance on GST – aligned with reduced income and corporate tax rates – should help strengthen incentives for savings, he said.

I don’t expect the Government to say they are in favour of a capital gains tax. But I do hope they will allow Treasury to work on proposals for how one could work, so it can be debated in the fullness of time.

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