Should a Capital Gains Tax Be Introduced in New Zealand - Essay Example

Should a Capital Gains Tax be introduced in New Zealand? of the Introduction New Zealand is an isletcountry situated near south-western part of the Pacific Ocean. The country is comprised of several small islands. As the country is isolated by its surroundings of various islands and oceans, such remoteness is largely reflected in the demographics and economy of the New Zealand. The capital of New Zealand is Wellington and Auckland is the most populous city of the country. The population of the nation is approximately 4.5 million as per the estimates on June, 2014 in which 29% inhabitants are youth in age; thus ensuring a sound economic structure. In fact, the market economy of New Zealand is one of the most prosperous economies of the world with a Gross Domestic Product (GDP) of $181.3 billion, as on April, 2013 (OECD, 2013). Background Analysis Taxation in New Zealand is a vast and complex phenomenon. Since 1980, the country is going through significant tax reform programs for the purpose of restructuring its marginal tax rate system. In 2010, the marginal income tax rate was reduced from 66% to 33%, corporate tax rate was also diminished from 48% to 33%. GST (Goods and Service Tax) was introduced at a rate of 10% initially. However, imposition of Capital Gain Tax in New Zealand still remains a controversial issue. A Capital Gain Tax may be defined as the tax levied on realization of assets such as shares, bonds and properties or capital gains for individuals and corporations. This kind of tax is imposed when investors realize a profit by selling the capital asset at a price higher than the purchase price. In this paper, the significance of introducing Capital Gains Taxation in New Zealand’s economy will be discussed and eventually relevant inference regarding the concerned matter will be drawn (OECD, 2013). Discussion New Zealand is one among the three countries in Organisation for Economic Co-operation and Development (OECD) which is not having Capital Gains Tax. According to the reports from March, 2014 both the Labour Party and Green Party of New Zealand are advocating the importance of imposing Capital Gains Tax. However, implication of imposition of such tax burden is still in debate (Claus, Creedy & Teng, 2012). Argument 1: From the Economic Income Perspective Capital Gains Tax from economic income perspective is a long debated issue. Arguments can be introduced in this regard by experiencing the Labour Party’s effort to establish horizontally equitable income by taxing the capital gain on accrual basis and by imposing taxes at an equal rate on capital gain irrespective of their other source of income. Apart from that, be it Labour or Green Party, the main agenda taken behind capital gain tax is to institute less biased investment in assets to create provision for capital gain. It is also expected from the policy formulators of New Zealand public sector that they will keep the structure of Capital Gains Tax so transparent that there will be minimum uncertainty among the tax payers regarding tax implications of a particular gain. Initiative will also be taken for neglecting deformation of investment and hence, risk to the revenue base. If capital gains tax can be introduced in such prerogative manner, this will definitely help the country to expand its government revenue (CCH New Zealand Ltd, 2013). However, counter arguments can be brought forward to establish reasons behind avoiding the Capital Gains Taxation in New Zealand from the perspective of lower tax rates. Gain from such capitals can be experienced when the asset is sold at a considerable higher price than its cost price. Under progressive tax structure, if an individual holds an asset for a longer period of time and enjoys the profit derived from the asset as income, such additional income may push the tax payer towards a higher tax bracket unlike the gains he would have realised as accrued income. Moreover, the capital gain of an individual may prove to be deceptive if the inflation rate has not been taken into account and the proper indexation has not been done. For instance, if a stock worth $1000 is purchased today, sold at $1500 after 10 years and paid the entire appreciation of $500 as Capital Gains Tax, the actual gain for the investor becomes negative. New Zealand is already experiencing a high pre tax capital income inequality. Therefore, if such tax structure is introduced in New Zealand, the tax payers will have to approximate the forecasted gain from the assets before purchasing it. This will highly distort investment interest of all individuals. Another problem associated with Capital gains is lock in effect. Individuals may transfer the asset to their heirs and the successors can easily avoid capital gains tax even if they immediately sell off the asset. Such effect can create more confusion in the complex tax structure of New Zealand (Radulescu, 2007). Argument 2: Maintaining Status Quo The Labour Party has proposed a flat capital gain tax rate of 15% for the initial period. Though long term implications should always be apprehended before taking any fiscal decision, the policy makers must not ignore the immediate connotation of such factors. Imposition of comprehensive Capital gain Tax will broaden the base of tax payer and accumulate a vast tax payment, giving the revenue of the economy a big boost. Presently, New Zealand is foregoing such potential income that the economy can congregate and use it for infrastructural development, improvement of public services, enhancement of international trade and many other areas for system up gradation (CCH New Zealand Ltd, 2013). However, argument can be established on the ground that the lower rate of tax is only a transitory phenomenon. In the long run, the government will have to raise the rate of capital gain tax to meet its spending on tax collection; otherwise it will lead to great deficit in the fiscal budget of New Zealand. In order to control such deficit, if the tax rate is reduced further, it will lead to undermine the progressivity of tax structure. This will arise as comparatively wealthy individuals and big investors will tend to pat low tax due to the flat rate of capital gains tax. This will lead to change the investors’ behaviour. If an individual knows that his capital gain will be taxed at a rate which is lower than tax rates from other income, the tax payer will definitely shuffle his portfolio to maximize his net income. Hence, introduction of capital gains tax will definitely bring an alteration in the status quo which may harm the equilibrium of the economy as a whole (Grubel, 2001). Conclusion After several tax reforms also, the decision for imposition of Capital Gains Tax in New Zealand is still in the proposal state. Though introduction of any changes in the existing system inherits some unavoidable circumstances, calculative decision should be made before introducing the change. Cost benefit analysis should also be done and it should also be checked whether corrective measures has been taken for encountering the forecasted risks associated with the policy changes. Considering the matter of introducing capital gains tax in New Zealand, though the political parties are trying to highlight the positive factors arising out of tax implications in order to expand government revenue, the capital gain tax structure proposed by the policy makers is still in its inception stage. The questions as to what will be the tax base, which gains should be subjected to the CGT, the provision for indexation and adjustment of inflation with the return etc remains undecided as well. Issues such as whether the tax will be applicable on the entire gain or on the marginal income of tax payers, roll over relief will be provided or not and bewilderment related to valuation date are also very prominent. In such circumstances, it is advisable to New Zealand not to introduce capital gains tax in the recent future. Once the economy has been able to address all such issues arising out of introducing Capital Gains Tax, the economy can consider of imposing such tax to broaden their tax base but for now, it is a big no for New Zealand. References CCH New Zealand Ltd. (2013). New Zealand Tax Administration Act 1994 (2013 edition). Auckland: CCH New Zealand Limited. Claus, I., Creedy, J. & Teng, J. (2012). The Elasticity of Taxable Income in New Zealand. Fiscal Studies: The Journal of Applied Public Economics, 33(3), 287-303. Grubel, H. G. (2001). International Evidence on the Effects of Having No Capital Gains Taxes. Vancouver: Fraser Institute. OECD. (2013). OECD Economic Surveys: New Zealand 2013. Paris: OECD Publishing. Radulescu, D. M. (2007). CGE Models and Capital Income Tax Reforms: The Case of a Dual Income Tax for Germany. Berlin: Springer Science & Business Media. Read More