In the last few minutes I was released from the Tax Working Group’s lock-up at Treasury where I received the Group’s final report and a media briefing from Working Group Chair (and former Labour Party Minister of Finance) Sir Michael Cullen.

As we feared, the majority on the Working Group has recommended one of the most aggressive capital gains taxes in the world.

Sir Michael’s group was supposed to deliver ‘fairness’. Instead, he’s given something Kiwi taxpayers should fear.

In our recent report, we outlined Five Rules for a Fair Capital Gains Tax, but any notion of fairness has been flagrantly disregarded by the Working Group. It fails most of our tests.

As expected, the Group is proposing a full-scale capital gains tax, among other measures such as environmental taxes.

The only assets excluded from the proposed capital gains tax are small family homes and art – commercial property, businesses, publicly listed shares, and every other type of enterprise will be slammed by this tax:

• Capital gains will be charged at 33% for the majority of taxpayers – one of the most punitive capital gains tax regimes in the world, and more than twice the rate proposed by the Labour Party at the 2011 and 2014 elections.
• There will be no inflation adjustment – even paper gains will be hoovered up by IRD.
• Revenue neutrality only applies for the first five years: while the group proposes changes to income tax thresholds (see below) most of the revenue from a capital gains tax is forecast to be collected after five years — after ‘revenue neutrality’ has expired.
• ‘Valuation Day’ is imminent: taxpayers will be forced to value their assets within five years, or must rely on rough and ready evaluations (such as rateable value for land).

Even though the Government explicitly ruled out taxing the family home, properties larger than 4500m²will in fact be taxed. The message to regional New Zealand is that their lifestyle blocks, farms, and semi-rural properties don’t deserve the protection given to Wellington and Auckland penthouses and townhouses.

Iwi-owned businesses will pay a discounted rate (17.5 percent, compared to 33 percent for other businesses).

In short, the proposal is as bad as we could have feared.

It is a costly, bureaucratic, and seemingly envy-driven tax grab. It threatens New Zealand’s prosperity, drives up housing costs, and punishes responsible investors.

You can read the Tax Working Group’s final report here.

Proposed sweetener with changes to income tax appear to be spin rather than substantive

While the Working Group supports adjusting the bottom tax threshold, they propose coupling this with an increase in the second tax rate from 17.5% to 20.5% to increase ‘progressivity’.

From an economic incentive perspective, this is a terrible move. Even though many taxpayers will receive a small tax cut, middle-income earners would face a higher marginal tax rate on additional earnings, which reduces the incentive to take on more hours, skill-up, or take-on extra responsibility at work.

45.6 percent of earners fall within the second tax bracket, hundreds of thousands of earners could be affected by this distortion in incentives – the cumulative economic effect would be massive.

A fight now inevitable

While my job is to advise on the technical details and economic impact, from what I’ve read this morning it is almost certain the Taxpayers’ Union will be fighting this with everything we’ve got.  A campaign to Axe This Tax will almost certainly be put into effect: to force the Government to reject the extreme proposals.

In the meantime, feel free to forward this email to friends and colleagues — those interested in following our campaign can sign-up here to receive updates.

Similarly, if you have suggestions of how we can work together to Axe This Tax, reply to this email, or contact us using the website.

Thank you for your support,

Joe Ascroft Economist New Zealand Taxpayers’ Union