Friday, July 8, 2011

A Capital Gains Tax is a Fair Tax


I have already presented on previous posts my concerns at the huge inequities of income in New Zealand. Most working New Zealanders barely earn more than the minimum wage with the median income sitting around $27,000. The largest employers over the last year have actually been returning huge profits with Westpac seeing a massive 63% increase in profits over the last half year. The most profitable businesses and the wealthy of our country have benefited from huge tax cuts when many already escape taxes on much of their income. It has been revealed that the most wealthy gain around 40% of their income from capital gain and this is not taxed, whereas those earning moderate or low wages have all of their income taxed.

The Government have been relying on the old and failed theory (trickle down) that if you allow business to return greater profits and tax the wealthy less then they will invest in growing their businesses and employ more people. What has happened in the US and here is that many highly profitable businesses have not grown their companies within their own country and have outsourced much of their production instead. We also know that successful companies have also invested much of their profits into higher salaries for their top management. Fonterra placed a wage freeze on their middle management and awarded their CEO a 41% increase (after a 53% increase 5 years earlier), he is now earning $5.1 million.

The wealthy are largely keeping their profits to themselves, there are currently 2644 homes for sale on Trademe for over $1 million and a number of them are around $10 million or more. These properties are a small fraction of the mansions many of our wealthy elite are building or buying for themselves. At the same time over 100,000 of our children are living in families dependent on financial support and a large portion of those will be in substandard housing.

The tax cuts that were awarded to our wealthy has also seen sales of higher priced cars reaching a level where New Zealand has a big enough market for a Rolls Royce dealership. 120 new Bentleys were sold here over 2010 and at around $400,000 each it amounts to about $48 million being spent on Bentleys alone. Loss of jobs and reduction in real income is a reality for most New Zealanders while the wealthy elite are spending like never before. A CGT will not only generate much needed government revenue but will push investment into more productive sectors and allow property prices to become affordable for average families again.

Wealthy Australians claimed the introduction of a CGT in their country would have catastrophic results and their predictions of a property and financial collapse never eventuated and I can't imagine the same happening here.

Here is Russel's and the Treasury's view on a CGT:


Treasury: Millionaires biggest beneficiaries from lack of a tax on capital gains
Millionaires are the biggest beneficiaries from of the lack of tax on capital gains while the vast majority of New Zealanders would be completely untouched by such a tax, Green Party Co-leader Dr Russel Norman said today.

"Research produced by the Treasury and Inland Revenue shows that those on very high incomes gain disproportionately from the lack of a capital gains tax," said Dr Norman.

"In the USA, those earning $1 million or more derived 40 percent of their income from capital gains. The figure was similar in Australia, with those earning $1 million or more deriving 30 percent of their income from capital gains. Those on average incomes gain negligible income from capital gains.

"Treasury and Inland Revenue therefore conclude that a tax on capital gains (excluding the family home) in New Zealand would fall mostly on those on very high incomes thereby increasing the progressivity of the tax system.

"It's Treasury's way of saying that a capital gains tax is incredibly fair.

The joint paper published by Treasury and the Inland Revenue Department used data from the United States and Australia to draw conclusions about the likely equity implications for a capital gains tax here. They found that a capital gains tax (excluding the family home) would increase the integrity of our tax system while raising an additional $4.5 billion in government revenues over time.

"The research highlights the fact that the bulk of interest and wage income was earned by those on lower incomes. This income is fully taxed," said Dr Norman.

"The largest proportion of capital gains is earned by those at the upper end of the income spectrum. This income currently remains untaxed.

"This tax loop-hole for those that can afford to own multiple properties needs to be closed.

"By defending the status quo, John Key is arguing those earning more than $1 million a year shouldn't have to pay tax on 40 percent of their income while those on the average wage should pay tax on all their income.

"By refusing to implement a tax on capital gains, John Key is not protecting the interests of wage and salary earners.

"A capital gains tax is a fair, progressive tax one that treats every dollar earned the same."

Link to the Treasury & Inland Revenue's background paper on capital gains tax:
http://www.victoria.ac.nz/sacl/cagtr/twg/Publications/3-taxation-of-capital-gains-ird_treasury.pdf
Related links
Capital gains tax - why it's smart
Taxing capital gains will help make homes affordable
Taxing capital gains essential to protect taxpayers and family farms




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