Biggest tax move since GST
Some see it as an envy tax, others as a long-overdue rebalancing of the tax system that will drag New Zealand back into line with its global peers.
But today the Tax Working Group will spell out its proposal for the biggest shakeup to the tax system since GST was introduced in 1986. It would take billions from the rich and give that money back quite evenly to millions of taxpayers.
At 11am, most of the 10-person working group set up by the Government and chaired by Sir Michael Cullen will confirm their support for a broad-based tax on capital gains from the sale of investment property, second homes, shares and businesses.
The extra taxes would kick in from 2021 at the earliest and would initially raise only a few hundred million dollars a year, but it has previously been forecast they would contribute more than $2 billion a year to the Government’s coffers by 2025 and almost $6b by 2031.
The vast majority of the extra tax would come from the wealthiest 20 per cent of New Zealanders, who own more than 80 per cent of the assets that would be taxed.
The working group will suggest introducing a new $7000 tax-free threshold, under which income tax wouldn’t be payable, or halving the lowest rate of income tax on annual income under $14,000 to 5.25 per cent.
Either change would deliver a
tax cut worth $735 a year to almost all taxpayers at a total cost of slightly more than $2b, and would have the knock-on effect of bumping up New Zealand Superannuation payments by a few hundred dollars a year.
The working group is expected to recommend axing employer superannuation contribution tax for KiwiSavers earning less than $48,000 a year and phased reductions for people earning between $48,000 and $70,000, delivering another benefit worth hundreds of millions to low- and middle-income earners.
The Government has signalled it would aim to pass any laws before the next election, so any tax changes could take effect from April 2021.
The first hint of whether the Government believes it might have the support that it needs from its coalition partners to get all, many or indeed any of the working group’s recommendations through Parliament may come within hours.
Finance Minister Grant Robertson has signalled it may make some ‘‘initial comments’’ when the report is made public. But it won’t provide a full response until April, after it has had detailed discussions with officials and consulted its coalition partners.
The Government will be able to count on the enthusiastic support of the Greens, whose co-leader James Shaw has questioned whether the Government deserves to be re-elected if it doesn’t implement a capital gains tax. Less clear is what, if any, backing it can rely on from NZ First.
Taxes on capital gains from the sale of shares and investment properties could strike at the heart of NZ First’s older support base.
And although a capital gains tax would mostly be paid by the well-off, a Stuff poll in September found 70 per cent of respondents were opposed.
The National Party has promised to repeal any capital gains tax if it wins the next election.
The complexities of taxing capital gains are likely to be weighing heavily on the minds of NZ First and Labour. The working group will recommend taxing gains on assets that people already own from the date the tax changes come into effect.
But there are concerns that a socalled valuation day approach could be a headache for small-business owners in particular.
Making things simpler, but more expensive – people would pay tax on capital gains at their marginal income tax rate, and capital gains would not be adjusted for inflation.
The working group is not expected to show much enthusiasm for a Government suggestion of a tax-free threshold for small-business owners under which gains from the sale of their businesses would not be taxed.
But that may not be an idea that quickly goes away.
Indeed, what – if anything – comes through the political mangler in April may not closely resemble the ‘‘purist’’ report of the working group.
Cullen argued in November that it might be ‘‘last chance saloon’’ for a capital gains tax and that it was not just about pursuing greater equality.
The Productivity Commission estimated last year that the proportion of Kiwis’ income that came from wages, as opposed to returns on capital, fell by more than 8 percentage points to 56 per cent between 1978 and 2016. It suggested labour law changes, technological change and globalisation could all have played a part.
Whatever the cause, Cullen is concerned that, if the trend continues, the lion’s share of the tax burden will fall on an ever-shrinking and hardearned chunk of people’s overall income – their wages.
When the Government appointed the working group in December 2017, it asked for expert advice while at the same time tying its hands on a few important policies such as not taxing the family home or imposing an inheritance tax.