Two thirds of the forecast revenue from the Tax Working Group’s proposed capital gains tax is the created by the proposal’s failure to adjust for inflation, reveals the Taxpayers’ Union in its new report, Inflating the Cost of Tax: Why failing to adjust capital gains tax for inflation is unfair.
Jordan Williams, Executive Director of the Taxpayers' Union, said:
“Michael Cullen defends his proposal on the basis of ‘fairness’, but it is not fair to tax New Zealanders for inflation that they have no control over. If the Government fails to fix this aspect of the tax, it will be guilty of a cynical revenue grab.”
“This tax will hit New Zealanders at far higher rates than advertised, it would thieve from those who are not necessarily getting any richer, and it would reward politicians who fail to control inflation with extra revenue.”
Joe Ascroft, Economist at the Taxpayers' Union who authored the report, said:
“The compounding effect of inflation creates large ‘paper gains’ on assets in the long term. Under the Working Group’s proposal, these gains would be unfairly taxed, even though they don’t represent any real increase in value.”
“This will result in some asset holders paying real tax rates far higher than the advertised 30 or 33 percent. In fact, in some cases the tax on capital gains will be well over 50 percent.”
Over two thirds of the tax’s forecast revenue can be attributed to the effect of taxing paper gains (based on the Working Group’s own assumptions about expected capital gains).
A typical $500,000 rental property could face a real capital gains tax rate of 55.7 percent when sold after 20 years.
A typical $450,000 bach could face a real capital gains tax rate of 76.5 percent when sold after 30 years.
A typical $800,000 family home / lifestyle block could face a tax rate of 30.35% when sold after 10 years.
A typical $500,000 bach that experiences zero real capital gain could still produce a $64,000 tax bill when sold after 25 years.
* based on an inflation rate of two percent.