Why should we tax more capital gains?

A capital gain is made when you sell something that has increased in value, like shares or investment properties.  Some of these gains are already taxed in New Zealand, but many aren’t.

The Tax Working Group has recommended New Zealand should tax more capital gains on at least rental properties and the majority of the Group has recommended that it should be on most other things as well.

Why would they do this?

It’s mostly about fairness.

Take Tim. He earns a salary from his job and pays tax on every dollar he earns. His neighbour Carol makes all her money from investing and doesn’t have to pay tax on every dollar she gets. That’s not fair.

Tax free capital gains are mostly enjoyed by our wealthiest households.

That’s not fair either.

There are other reasons as well.

Revenue from it would let the Government cut taxes elsewhere, but it also means that the Government won’t be so heavily reliant on taxing salaries and wages in order to pay for things like healthcare.

Taxing more capital gains will also close loopholes some people use to avoid paying tax.

And it could encourage people to invest in more productive assets rather than ones that offer the most tax benefit.

But there are challenges with taxing more capital gains.

There will be costs for people, businesses, and the Government to keep track of their capital gains and for Inland Revenue to enforce it.

It could reduce some forms of investment if investors have more tax to pay, although the Group has proposed changes to help with this.

People might hold on to their assets for longer to delay paying tax.

And the amount of tax collected each year will go up and down, making it harder for the Government to budget.

Most of the Tax Working Group believe the positives outweigh the negatives, and New Zealand should tax many more types of capital gains, so that’s what they’ve recommended to the Government.