Fairness is essential in tax regime

Why do we pay taxes? Because the money we own and earn, although often generated through our own efforts, is also partly due to two other factors: luck, including the talents we were fortunate to be born with; and communal infrastructure, in the sense of the collectively built schools, hospitals and roads we all use. So we pay tax to maintain that collective infrastructure and compensate the unlucky.

In tax, fairness is essential. People with equal resources should contribute equally. But that isn’t currently the case. A rest-home carer, say, pays tax on every dollar of their $50,000 salary. But someone who buys a house and sells it six years later for a $50,000 profit pays no tax on that gain. This is profoundly unfair.

Hence the Tax Working Group is contemplating a capital gains tax, something that would effectively treat the above house sale as income and tax it accordingly. This makes complete sense. It renders life much more equal – so much so that one could call it a fairness tax.

The standard objections to this tax are easily swept away. We must remember that many countries, Australia among them, have successfully run capital gains taxes for decades.

So yes, some extra valuations of assets may be needed. Yes, some people may find ways to game the system around the edges. Yes, the tax system may become a little more complex. But all these problems have been easily overcome in other countries, and can be easily overcome here. Time, patience and the acceptance of some extra administration costs, for both public and private players, are all we need.

Some argue that a capital gains tax will, by taxing the sales of businesses, discourage entrepreneurship. But the revenue raised actually goes into things that support business – the collective infrastructure described above, which includes roads, ultrafast broadband and even the courts that enforce commercial contracts.

Businesses find it easier to operate in countries with high levels of health and education, safe streets and a strong, cohesive social fabric – all things that taxes support. An extra $6 billion a year, the estimated value of a capital gains tax, would, for instance, help tackle our massive child poverty problem.

The government could do more to get struggling families back on their feet and ensure a decent start in life for their children, so that they go on to become good citizens, and productive workers.

Some also claim that a capital gains tax could increase rents – but if we ramp up housebuilding, thus boosting competition in the housing market, landlords will find it hard to pass on any increased costs to their tenants.

The only possible objection to a capital gains tax, in fact, is whether it goes far enough. Wealth, in the sense of our houses, cars, cash and other kinds of investment, brings benefits constantly, not just when we sell something. It gives us stability, security, the ability to ride out tough times. (And it is, as above, generated partly through luck and the support of others.)

So there are good arguments that we should tax wealth directly. People should pay an annual levy worth a certain proportion of their wealth – either a flat rate of 1 per cent, say, or a rate that is higher for larger fortunes, given their greater ability to pay. This would require annual valuations, but would capture the benefits of wealth more comprehensively. It would also raise revenue much more quickly than a capital gains tax that applies only once assets are sold and could take over a decade to generate its full amount of revenue.

If, however, we are faced with a decision between a capital gains tax and no tax on wealth at all, the choice is clear. People arguing for the latter want to preserve a world in which land speculators can make huge profits and pay no tax on them, while the rest of us dutifully file our IRD returns. There is simply no way that can be described as fair.

Max Rashbrooke is the author of Government for the Public Good: The Surprising Science of LargeScale Collective Action, recently published by Bridget Williams Books.

‘‘Someone who buys a house and sells it six years later for a $50,000 profit pays no tax on that gain. This is profoundly unfair.’’