Though Sir Michael Cullen’s Tax Working Group reported yesterday with no recommendation on a capital gains tax it almost immediately came under more pressure from Finance Minister Grant Robertson to address the issue.
Robertson yesterday sent a letter to Dr Cullen reinforcing the Government’s intention that the Working Group “Considers a package or packages which reduces inequality, so that New Zealand better reflects the OECD average whilst increasing both fairness across the tax system and housing affordability.”
During a lengthy media briefing, Cullen conceded the fairness argument and said that New Zealand’s tax system was unique in not having a capital gains’ tax.
“Every developed country except New Zealand has a reasonably broadly based form of capital taxation,” he said.
“So the question is are we so bright that we are the only people who aren’t doing it or are we so dumb that we are the only people who can’t manage to do it.
“That is an issue.
“And then there are issues about what exactly are you going to tax.
“How fair is that in practice.
“Will it reduce savings; a possibility.”
That “possibility” was touched on in the Working Group’s description of one method taxing assets on an annual basis rather than on the profit when they are sold.
It was quickly picked by the National Opposition.
Paul Goldsmith asked Grant Robertson in Question Time to rule out applying a capital gains tax to KiwiSaver accounts.
Robertson: “The working group’s report was released today. It is their report; it is an interim report. What we are focused on is making sure that we get a fairer and more balanced tax system than the one we inherited.”
Repeated questioning from Goldsmith asking Robertson to rule the tax out got nowhere.
But what Goldsmith may not have known was that Cullen had told the media briefing three hours earlier that the Working Group would revisit KiwiSaver in the light of its final findings about capital taxation next February.
“Our basic intention is not to increase the level of taxation on KiwiSaver as the major form of saving for low and middle-income earners,” he said.
PERSONAL INCOME TAX
The Working Group said it would provide recommendations regarding the rates and thresholds of personal income tax in its final report in February.
But Robertson’s letter yesterday said that increasing any income tax rate would be “out of scope.”
“We’ve not yet finalised any suggestions on rates and thresholds,” said Cullen.
“We are constrained not to increase any rates or thresholds which is pretty constraining if you are looking at changes to personal income taxation because even things which would benefit most people are largely cut out except, effectively, some lowering of rates or increasing thresholds is possible and also a tax free zone at the bottom end.”
And Cullen said Robertson’s letter also required the Working Group to produce a revenue-neutral package at the end of the process.
“In other words, whatever will come to inform various changes in the tax system is recycled back through the tax system in one way or another.”
The Working Group has proposed that a move towards environmental taxation begin by expanding overage of the Waste Disposal Levy and for re-assessing waste and landfill charges.
Longer term it said there could be benefits from using tax to address challenges in water pollution and water abstraction.
In the longer term, new tools could allow for an expanded role for environmental taxes to address other challenges such as biodiversity loss and impacts on ecosystem services.
CORPORATE TAXATION
The Working Group does not favour any reduction in corporate taxation, but Cullen said it wanted the rate “kept under advice”.
“The vast majority of companies are in New Zealand because they have to be here basically,” he said.
“The arguments against capital attraction fall down on empirical grounds.
“We’ve had three major cuts in the company tax rate in the last thirty years.
“There was no great flood of incoming desirable capital movement for investment purposes as a result.”
Business NZ CEO Kirk Hope, who was also a member of the Working Group, said he was disappointed there was no recommendation to reduce the corporate tax rate.
But he said there were other proposals in the report which might reduce the effective tax rate.
“For example re-introducing depreciation on buildings and reintroducing depreciation for seismic strengthening and for black hole expenditure which is essentially R and D, so that reduces the effective corporate tax rate but that costs a lot of money.
“The previous Government removed depreciation and saved itself about $1 billion so that money would have to come from somewhere and that is part of the package that is being considered.”
Asked if business could be assured it would not end up paying more tax, he said, “I hope so.”
SUGAR TAXES
Cullen at his media briefing yesterday indicated that he was at best sceptical about other new tax ideas particularly some that have long been near and dear to the hearts of many in the Government, particularly segments of the Labour party and the Greens.
Thus, he argued against sugar tax; taking GST off fruit and vegetables and women’s sanitary products.
“What is it we are trying o with corrective taxes,” he said.
The public health community has united in favour of sugar taxes.
“But the issue here is what is it you are wanting to do?
“Are you trying to get people to reduce their intake of fizzy drinks and if so, why don’t we just set a maximum level of sugar content.
“It would not be regressive as a tax on fizzy drinks would be.
“If you don’t believe me come to Pak and Save in Whakatane and look at what’s going through the checkout.
“Who is buying fizzy drinks. It’s by and large low-income people.
“High-income people get their equivalent sugar through single malt whisky.”
CAPITAL GAINS TAX
But the big issue is capital gains tax.
At the heart of the Working Group’s brief is a request from the Government that they address the fairness of the tax system.
From the report and from Cullen’s media briefing yesterday, it is possible to see why Robertson might have felt the need to remind the Working Group in his letter about how he wanted it to address fairness.
The Working Group made no recommendation on such a tax and Cullen at the media briefing yesterday was careful to set out not only the advantages but also the disadvantages of a capital gains’ tax.
“Every developed country except New Zealand has a reasonably broadly based form of capital taxation,” he said.
“So the question is are we so bright that we are the only people who aren’t doing it or are we so dumb that we are the only people who can’t manage to do it.
“That is an issue.
“And then there are issues about what exactly are you going to tax.
“How fair is that in practice.
“Will it reduce savings; a possibility.”
On the question of whether it would increase rents, he said the weight of international evidence was not supportive of the argument that it would.
So the Working Group has set out two different forms of capital gains tax.
The simple one is a realisation based tax which would tax any capital gain made on the sale of an asset at the owner’s marginal rate of income tax.
Capital losses would generally be able to set against income for tax purposes.
The other way of taxing capital gains is what is called the “Risk-free rate of return method.”
Instead the profit on the sale of an asset this would apply a low annual tax based on what it was assumed the asset could earn.
This would be most directly applicable to financial investments since the return on the capital asset would be easily measurable.
In the case of property, it would replace the current system where income minus expenses are taxed.
The McLeod tax committee proposed this in 2001 and rejected by Cullen who was then Finance Minister, but he returned to it the following year and said he was “interested” in whether it could be applied to holdings of overseas shares and unit trusts.
ROBERTSON’S PRESSURE
Cullen is going to have to come up with a preferred capital gains tax.
Robertson’s letter has left very little room for the Working Group to oppose a capital gains tax.
It has been an increasingly accepted article of faith within Labour since the defeat of the Clark Government in 2008 that such a tax was needed.
Thomas Piketty’s “Capital in the 21st Century” published in 2013 has had a big influence on some Labour figures, particularly associate Finance Minister, David Parker who was the author of the 2014 capital gains tax that Labour took to that year’s election campaign.
Few professional tax ep[xerts who have studied the New Zealand tax system argue against a capital gains tax.
But politicians have tended t6yo go along with David Lange’s argument that a capital gains tax was the tax you introduced if you wanted to lose not just one election but the next three.
Cullen had an opportunity to introduce one in 2001 and didn’t.
In a way Cullen’s job now is easy, but getting the electorate to buy what he might recommend could provide very difficult.
