Treasury and the Inland Revenue did not think a comprehensive capital gains tax was feasible for the 2010 budget and argued it could be considered later in continuing strategic tax reform.This advice is in background documents for the May budget released
Treasury and the Inland Revenue did not think a comprehensive capital gains tax was feasible for the 2010 budget and argued it could be considered later in continuing strategic tax reform.
This advice is in background documents for the May budget released by Treasury today.
A regulatory impact statement (RIS) written by IRD deputy commissioner Robin Oliver and Treasury tax strategy manager Bill Moran argues that the current tax system is not sustainable and that the tax base needs to be broadened.
The RIS notes that in 2009 70% of the total tax take was from income tax on a highly mobile workforce and company tax, and that such taxes are damaging to economic growth.
A diversity of tax rates means individuals shelter personal income from higher marginal tax rates using different vehicles, reducing progressivity and undermining the integrity and efficiency of the tax system.
"The absence of a comprehensive capital gains tax means that income from certain forms of capital is not taxed," the report said.
The Tax Working Group considered capital taxation bases, including a land tax, a capital gains tax, and the application of a risk free return method (RFRM) on rental properties.
The government did not take up these suggestions. Tax gains on capital, particularly in the property market, has always been controversial, but a number of economic commentators have argued for it.
The RIS says a land tax has a number of merits but adverse issues need to be considered. It would impact on people holding wealth in land and the value of land would likely fall.
"Detailed consideration of these policy issues would be required to determine whether the introduction of a land tax would make a positive contribution towards the medium-term strategy," the RIS said.
New Zealand already taxes some capital gains, including gains on shares, but does not have a comprehensive capital gains tax.
"At a theoretical level, there is a strong case for a comprehensive capital gains tax. It would broaden the income tax base and make it more comprehensive.
"However, in reality, the arguments for and against a capital gains tax depend on how it is applied, for example on accrual, realisation, or some combination of both."
The report said any comprehensive capital gains tax would have to be carefully designed and consulted on and this would take a significant amount of time.
It identified a capital gains tax on investment property as a main area to be considered but said the RFRM suggested by the Tax Working Group was a complex system to implement.
"Given the significant magnitude of the risks associated with progressing any of these taxes in Budget 2010, Treasury and IRD consider their resources would be better put towards consideration of other aspects of the tax system which may be feasible for Budget 2010.
"Not considering these taxes in Budget 2010 does not preclude their consideration subsequently as part of a continuation of strategic tax reform."
