A capital gains tax for New Zealand? The role of housing affordability and other socio-economic factors in the capital gains tax debate
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There has been much debate in recent times concerning the need for a separate and comprehensive capital gains tax (CGT) in New Zealand (NZ). Some of this debate can be attributed to the prominence that this topic gained in the 2011 and 2014 general elections when both the New Zealand Labour Party and Green Party of Aotearoa New Zealand included the introduction of a CGT in their respective tax policies. The arguments for such a tax include equity, base broadening, certainty, projected additional tax revenues and remedying the “housing affordability crisis”. On the other hand, counter-arguments such as tax complexity (in the design of the CGT), overstatement of projected tax revenues, high tax compliance and administrative costs and adverse economic effects on savings and investments have been raised by opponents of a CGT.
The Taxation Review Committee 1967 generally favoured a realisation-based CGT on “equity” grounds. However, the committee concluded that “the significant administrative problems with such a tax” outweighed the benefits. Griffiths observes that “[o]ther reports in the following years have reached broadly similar conclusions for broadly similar reasons.” At the political level, commentators have long stated that the enactment of a comprehensive CGT in NZ would be “[a] sure-fire path to political suicide”. Indeed, former Prime Minister, the Rt Hon David Lange, is reputed to have characterised “a capital gains tax policy as one likely to lose you not merely the next election, but the next three”. After the defeat in the 2014 election, the (then) Labour Party leader, Mr Andrew Little acknowledged that their CGT policy may have alienated voters in that election.
Since the formation of the centre-left Labour-led coalition government in 2017, the issue of a CGT has once again been singled out as an item to be considered, this time by the government appointed Tax Working Group. Against the background noted above, what has prompted the government to reconsider the issue (and to go as far as suggesting a CGT could be part of its tax policy in the 2020 general election)? The authors suggest non-taxation factors are at play, in particular socio-economic factors such as housing affordability, income/wealth inequality and fiscal sustainability - issues which resonate with the current government’s philosophy and may yet tip the scales in favour of a CGT in NZ.