Thursday, February 21, 2019

For a capital gains tax

The Tax Working Group has reported back, and (as expected) recommended taxing capital income. And they make the point that this is fundamentally about fairness:

The Tax Working Group has confirmed its support for a broad-based tax on capital gains, suggesting handing back much of the $8.3 billion it might raise over five years through income tax cuts for almost all workers.

Some have criticised the proposed tax as "envy tax", but working group chairman Sir Michael Cullen said it was wrong that wage-earners were taxed on their full income while "you can earn income from gains on assets and not be taxed at all".

At the moment we have a situation where ordinary New Zealanders are taxed on every dollar they earn, while the rich are not. And that is simply wrong. Income should be treated equally and taxed no matter what the source - and that means taxing capital income. If it has the side effect of removing distortions in our economy - the housing bubble, or farmers farming for capital gains - then that is a bonus, but fundamentally it is about fairness and making the leeches pay their fair share for once.

As for what to do with it, the Working Group recommends recycling the revenue into a broad income tax cut, by raising the lowest threshold. Which is fine, as far as it goes. But we don't just need to shift the tax burden back onto the rich where it belongs - we also need to end the cycle of underinvestment in and by government. Our health and education systems are tottering due to lack of money, and there are countless necessary things the government "can't afford", so we should take this opportunity to reset the size of the state and fund it properly for once. Kiwis expect decent public services. And the government should use the tax system to raise enough revenue to meet that expectation. Doing it by taxing capital income has the advantage that most people will never notice the cost - but we'll all see the benefit.