Tax Working Group: CGT a lost opportunity to explore solutions to inequality

Child Poverty Action Group welcomes the Tax Working Group’s (TWG) final report and acknowledges the huge amount of time, effort and expertise involved in developing a comprehensive Capital Gains Tax (CGT).

“However, the opportunity has been lost to explore serious alternatives to a CGT that better meet the express instructions from the Minister of Finance to the TWG to address housing affordability and reduce inequality,” says Associate Professor Susan St John, CPAG’s Economics Spokesperson.

CPAG preferred the imputation approach which aggregates net equity in housing and residential land for each person. The return on net equity is assumed to be the same as for a bank deposit, and taxed along with other income. A fixed exemption for the family home would mean that the majority of homeowners had nothing to pay.

The main objection to this approach in the TWG report was that an annual cash flow was required, where there may not be one. Yet only the very wealthy would be affected.

“Compared to a CGT the net equity approach is much more capable of addressing inequality as has been argued elsewhere,” says Dr St John.

“Moreover, it would encourage empty houses to be rented and the housing stock to be better used, save on accountants’ fees, and stop negative gearing.

“The TWG acknowledges that a CGT would have little impact on housing prices and rents. It will be very complex and the revenues projected depend heavily on there being actual capital gains in the future which is highly questionable. The property market is long overdue for a substantial correction, raising the prospect of years of capital losses. Moreover, the second home may be a holiday bach at the seaside affected by climate change.”

CPAG says that while the TWG had to provide revenue neutral options, the TWG also are clear that if boosting low incomes is the aim, using the CGT revenue to increase the threshold for the 10.5% bracket is much inferior to a policy of direct redistribution.

“Transfers such as benefits and Working for Families tax credits are much more focused tools, and align better to the Government’s aim of reducing child poverty,” says Dr St John.

“These better options for spending any CGT revenue will be clearer when the Welfare Expert Advisory Group reports.”

CPAG is disappointed the TWG chose not to examine whether the tax credits in Working for Families are well designed, even though the In-Work Tax Credit portion of the scheme can be described as a ‘corrective’ tax aimed at influencing behavior through its intent of ‘ incentivising work’.

The removal of the failed ‘corrective’ aspect of Working for Families would benefit both families who receive their incomes from benefits and also low-income working families who don’t meet the current paid-work criteria.

CPAG is pleased to see the TWG recommendation of “ensuring that a KiwiSaver member on parental leave would receive the maximum member tax credit regardless of their level of contributions”.

“However we fail to see why the work of parenting newborns is considered valuable to society only if paid work has been involved. Mothers of newborns who do not meet the work tests for Paid Parental Leave (PPL), or are in receipt of a benefit, should also get this subsidy. All parenting work is valuable,” says Dr St John.

“Those receiving PPL may not even return to paid work, yet their KS is boosted by the taxpayer.

“Those struggling to raise the next generation in the toughest of conditions should not miss out on future retirement subsidies that others receive exclusively, due to ideological bias.”