Free Press, 29 January 2019 - Taxing Success

Tue, 29 Jan, 2019

We’re Back

The summer break has been a wonderful reminder of New Zealand at its best – a free society brimming with opportunity. Inevitably, though, politics returns. Parliament resumes on 12 February, and the Government will continue its experiment of seeing how much bad policy the economy can withstand before it runs out of steam.

Watch the Working Groups

A capital gains tax, a return to nationally-negotiated wages for entire industries and removing school autonomy will join last year’s policies of banning oil and gas exploration, tying foreign investment up in red tape and ending the charter school model.

The Simplest Argument Against a Capital Gains Tax

The simplest argument against a CGT is that it’s double taxation. It punishes saving and investment by taxing it twice. It is not about fairness as its advocates claim, but the idolisation of envy. It is the wrong philosophy in a country that should be celebrating success.

But, But, But…

The classic argument for a capital gains tax is something like this: “Why should someone who works pay up to a third of their income in tax when someone who makes the same amount of money from their shares or their own business appreciating in value pay none at all?” It’s a great argument on the face of it but it misses something.

Why It’s Double Taxation

There’s no point in holding an asset – a business or rental property – unless you can get income out of it or sell it to someone else who will. The value of a capital asset depends on the annual income it provides, and that income is already taxed.

Selling a Million Dollar Business

Someone who buys a million dollar business knows they’re going to be taxed on every dollar of income they eventually receive. Without company tax it would be worth $1.39 million, but the buyer knows they’re going to pay 28 per cent on income, so it’s only worth a million. If you built the business, your capital gain has already been reduced by $390,000 from the buyer factoring in the tax they’ll have to pay.

Then They Tax You Again

A capital gains tax means you’re taxed again when the asset is sold. At the top personal tax rate of 33 per cent that’s another $330,000. The total loss to the hapless bugger who built the business is $390,000 plus $330,000, making a total of $720,000 – more than half the value.

What About Housing?

Nobody in Sydney, London, Los Angeles or Vancouver believes a capital gains tax has made housing affordable. Even the Tax Working Group told the Government a CGT will not achieve housing affordability.

Other Objections

A capital gains tax is administratively clunky, requiring valuations and arguments over inflation and what passes as a new class of investment and whether you can leave capital gains to your kids. It’s foolish that a country that has always struggled with a shortage of capital would seek to further punish capital accumulation. These are good reasons to object, but they are not the real reason.

The Real Objection

This summer showed the best of New Zealand – strong and free. It’s a place where canny people have built a special society at the edge of the earth, based on successful values. The real problem with a tax on success is none of the technical issues, but the simple fact that a society that seeks to tax success will have less of it.