PHOTO: Chris Hipkins. FILE
Labour Party leader Chris Hipkins has recently announced a fresh review of the party’s tax policy, including considerations of a wealth tax or a “capital income tax” (CIT). This marks a shift, as the party had previously ruled out wealth or capital gains taxes ahead of the 2023 election.
So what has changed? The CIT, championed by former revenue minister David Parker, aims to address high earners who currently avoid paying their fair share under the existing tax framework.
But how does this differ from other tax approaches like wealth or capital gains taxes, and what options are on the table if such measures are introduced?
Wealth Tax Overview
Wealth typically refers to assets of significant value—such as land, stocks, or artwork. Wealth taxes are often imposed at low rates; for example, Norway has a 1% wealth tax. Presently, only four OECD countries implement national wealth taxes.
Renowned economists like Thomas Piketty argue for wealth taxes as both feasible and necessary. He also advocates for progressive inheritance taxes, which target wealth transfers. Notably, New Zealand billionaire Bruce Plested, co-founder of Mainfreight, has shown support for wealth taxation.
Wealth taxes usually include certain exemptions, such as a family home or a threshold, like NZD $2 million in assets before any tax is imposed. Using the Green Party’s previous proposal of a 2.5% wealth tax, if someone holds NZD $3 million in assets (e.g., property and shares), they would pay tax on NZD $1 million (the amount exceeding the NZD $2 million threshold), resulting in an annual tax bill of NZD $25,000.
Capital Gains Tax (CGT) and Land Tax
A CGT, another form of wealth tax, applies to the increase in value of assets, typically when sold. Unlike wealth taxes, CGTs are event-based and paid at the time of sale. Although New Zealand lacks a comprehensive CGT, certain capital gains are taxed under existing income tax laws.
A land tax, in contrast, is levied solely on land ownership, making it difficult to avoid. This type of tax is easier to administer, as land is immobile and often already valued.
All these tax types are flexible, allowing for inclusions or exclusions like productive land, Māori land, or the family home. They could meaningfully contribute to tax revenue, depending on how they are structured.
The Distinct Nature of Capital Income Tax (CIT)
Labour’s CIT proposal seeks to tax income based on an individual’s asset holdings. While the details remain unclear, it may function by estimating what an individual “ought” to earn from their capital, akin to rules for taxing foreign investments where a 5% return is assumed.
Though this approach may appeal to economists, the public may find it hard to accept taxation on projected, rather than actual, earnings.
The Fairness Principle
The underlying principle is fairness—taxation should be based on the ability to pay. Whether income is earned from wages, interest, or assets, the idea is that “a buck is a buck.” The CIT aligns with this concept, as does the push for wealth taxes, which have gained support from economists, the public, and wealthy individuals.
The 2010 Tax Working Group recommended a low-rate land tax, and the 2019 group backed a comprehensive CGT. However, New Zealand has yet to adopt either measure. Other OECD countries, including the UK with its inheritance tax and CGT, have implemented more progressive tax systems.
With wealth taxes increasingly common in other nations, why has New Zealand not followed suit? Progressive policymakers might need to refocus on the basics of tax fairness and communicate the principles more effectively to the public. A CIT may not fully capture these principles in a way voters can easily understand.
SOURCE: RNZ