Tax all home ownership

As expected, the merits, or otherwise, of a tax on capital gains have been hotly debated in the weeks since the release of the Tax Working Group’s report.

Essentially, the group’s key recommendations are to tax capital gains made on investment housing, shares, business assets and some ‘intangible’ assets while exempting the family home and certain personal assets such as jewellery and fine art.

While a Capital Gains Tax (CGT) isn’t the only recommendation — it’s easily the one which has most animated people on both sides of the debate — particularly given that it’s a topic on which few people occupy the middle ground. You either support a tax on capital gains, or you don’t.

For the record — I don’t.

Even if you accept that the tax system needs reform — and while there’s merit to the argument that capital gains are a form of income and should therefore be taxed — that position lost any validity the moment the Government exempted the family home.

There’s simply no compelling logic for heavily taxing one group while completely exempting another.

As a result, it’s hard not to draw the conclusion that the proposed CGT on rental investors is an envy tax designed to punish people who have tried to provide for themselves.

Sadly, it gets worse. Someone who purchased an investment property for $650,000, and saw that property increase to $975,000 would pay 33 per cent tax of $107,250 on that capital gain. That’s simply outrageous.

A much fairer solution is to make capital gains tax universal, like GST, and apply it to every house sold. Then we could drop the rate to just 3.5 per cent and raise more revenue.

There is around 1.8 million homes in New Zealand and around 180,000 are sold each year. Based on the example of a home being purchased at the current national median of around $650,000 and on-sold for $975,000 — a gain of $325,000 — a tax of 3.5 per cent would be $11,375 on the sale, but a whopping annual tax take of $2.05 billion. These numbers deal solely with a CGT on property — whereas a truly universal capital gains tax would levy a small amount on the gain of all appreciating assets.