Here is why introducing a CGT in NZ is a bad idea:
1. Discouraging Enterprise.
By taxing capital gains, we are effectively discouraging entreprenuerialism, thrift and hard work, by
making those who profit from sensible investment subsidize costs for everyone else. We already suffer the loss of too much of our young, smart and ambitious talent force to the likes of Australia and England. if we further tax the fruits of investment, we risk losing even more of our highly productive and enterprising labour force, leaving a higher proportion of less productive labour and a greater reliance on welfare and government superannuation, placing even greater financial drain on the high tax payers that remain.
It sounds simple in theory, but a CGT will be very complex and expensive to administer. A decent chunk of the revenues generated by the tax will be consumed in administering it. These funds act to water down the effect that the tax is designed to produce. The only people this will benefit are the public servants in Wellington, and all businesses and services supporting these staff… Including the landlords supplying top quality office space to the IRD!!
3. It is Slow.
It will take years for capital gains to accrue, and time for investors to sell assets, hence a long time to actually start generating significant revenues fro this tax at all. Some have estimated it takes approximately 15 years for the tax to generate full revenues. But the costs will start, at least in part, from day one.
4. It Will Not Make Housing More Affordable in the Long Run.
England and Australia are two examples of markets with capital gains taxes, and both these markets are very high indeed, with housing affordability no better than here in NZ. It also does not eliminate the boom-bust tendency of real estate markets. Existing investors will think twice before selling properties and paying tax on some of heir capital, hence tightening supply further.
5. It will Not Ease the Rental Market.
Any additional tax or other type of cost to investors will only make property investment less attractive to some investors, encouraging them to exit the market. Similarly, experienced investors who decide to stay in the market, will need to see their costs absorbed before encouraging them to purchase additional properties. The result will be a decrease in supply of rental accommodation, hence producing increases in rents.
6. It is Risky!!
If a CGT was to be introduced, surely it would apply to all asset classes (shares, businesses, property, farms etc) and it would surely be indexed for inflation to make sure tax was only being paid on real capital gains, not nominal capital gains. In order to be equitable, a capital LOSS would also reduce the taxpayers tax bill. Imposing a CGT assumes that real asset prices continue to increase, in order to generate the tax revenue. It is entirely possible that real asset prices do not increase, or even decrease, over an extended period of time. I can not see this happening in the near future, but it is possible. If This was to occur, this would act to significantly reduce the tax revenue, potentially rendering the country bankrupt.
Can the Government take such a risk?
A Capital Gains Tax will not stop me from investing in property, if it is introduced. It would still be the best form of investment in my view. But my buying rules would change slightly, in that I would require greater income from my assets.
Now is a great time to buy, if you are considering getting in to the market, do not wait for the buying to be better, I doubt that it will!!
July 13 2011 12:52 pm | Uncategorized