Category: David Parker

Don’t believe the scaremongering on capital gains tax

capital gains tax first world problem

The unholy trinity of National, right-wing blogs and the mainstream media are scaremongering about Labour et al’s proposed capital gains tax again. Because it’s new and because it’s a tax, it seems scary and there’s easy political points available in opposing it. But in fact most countries have capital gains taxes. New Zealand’s tax system is one of the most generous to the rich, and part of that is our anomalous lack of CGT.

The current scaremongery relates to inherited family homes of deceased family members. The impression John Key et al are putting across is that a grieving, struggling family will have to scramble to sell their deceased parents’ family home to avoid being stung with a hefty capital gains tax they can’t afford. IF that were the case, a one-month “grace period” certainly doesn’t sound like long enough to grieve, get organised & sell the house to avoid financial ruin.

But it’s NOT the case. Even without a grace period, only profit since inheritance – I repeat, profit since inheritance – would be taxable (and at a modest 15%). If a family inherited a house worth $400,000, and sold it a year later for $430,000, they’d incur tax of $4,500, but they’d get to keep the other $25,500. They’d still be $25,500 better off than if they’d sold the house straight away, and $425,500 better off than if they hadn’t inherited the house.

This is no different from inheriting any other profitable asset. Currently, if you inherit a company, and it makes $30,000 profit over the next year, you’ll be liable for 28% ($8,400) company tax on that profit. There’s no “grace period” there. And more importantly, there’s no “grace period” on the profits – 72% of which you’ll keep and no doubt enjoy.

So it’s extremely dishonest of Key to portray families inheriting profitable assets as somehow hard-done-by, simply because they’ll incur tax on those profits. Truly hard-done-by families are the families of (increasingly numerous) people who’ve never managed to buy a house (largely because of tax-free property investment). Those families will receive no inheritance (let alone profitable inheritance), and many struggle to pay for (increasingly exorbitant) funeral and burial costs.

Years from now, if my siblings and I inherit my parents’ house and it makes capital gains by the time we get around to selling it, we’re not hard-done-by if we incur tax on those gains. We’re lucky my parents own their home in the first place, and have something to leave us (in fact, something that continues gaining value until we sell it).

That said, I do tend to agree there should probably be a grace period of maybe six months, because the tax is supposed to target people who buy extra houses for profit, not people who gain an extra house by accident because a relative died. Besides, it may take some months to decide whether they’ll sell it, keep it as a rental, or have other family move in (in which case it remains a family home, thus exempt from CGT). But a grace period would be an act of compassion to people who don’t really need it; certainly not a demand of justice or need.

Of course, Cunliffe didn’t help his own cause by remembering the policy wrong and declaring unequivocally that the grace period will be one month. In truth, the length of the grace period is a detail that they’ll leave to an expert advisory group to work out. It was incompetent of Cunliffe not to know this.

Anyway, despite those two caveats: don’t believe the hype. Look into it, listen to David Parker’s explanation, think about it, etc. After doing so, no right-thinking person would think there’s anything to worry about.

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A quick word on tax cuts

coma cartoonNational has announced their first budget surplus, after plunging us into debt for the last five years.

They’ve also hinted that at some stage before or after the election campaign, they may announce what makes all our hearts instinctively leap, at least before we think about it: tax cuts. This would mark the first changes to tax since 2010, when they shifted the tax burden from the rich onto poor and middle-income earners.

Mana’s John Minto has an interesting reaction. He says tax cuts are a great idea, and suggests shifting the tax burden back again: abolishing GST and tax on the first $27,000 of income, and paying for this by finally taxing the unproductive untaxed income of the 1% – capital gains and financial transactions.

Something tells me a party of property magnates and investment bankers is not going to propose those kind of tax changes – any recovery-era tax cuts will presumedly be along similar lines to their recession-era tax cuts.

Does this strike anyone else as a little strange? Not just because they’re promising tikka masala before the chickens have hatched (the surplus is tiny, and only a projection based on fudged numbers, disguised cuts and abandoning Christchurch).

The main reason it’s strange is that when we were heading into rough financial times, they thought the appropriate thing to do was to cut taxes on the rich. And now in healthier financial times, they again think the appropriate thing to do is to cut taxes (presumedly again on the rich). Never mind the fact that they haven’t paid off their debt from the last tax cuts and tough economic times yet.

The truth is that they’re not responding to the economic climate at all. In tough times or healthy times, they’re pushing a philosophical agenda to let the rich continue getting richer while paying lower taxes, and reduce the social safety net to pay for it. Bill English recently let this agenda slip in a recent speech to the party’s Southern Region conference. They’ve already let public goods and services drop from 35% of GDP to 30% – one of the lowest rates in the OECD – and they intend to reduce that even further, to 26% over the next six or seven years. This is not what NZers want.

The obvious solution is not to let them rule for the next six or seven (or three) years.