- The expectation gap: Government revenue vs perceived ability to pay
- The family home is exempt, so how do exclusions create distortions in the tax system?
- Our tax system has to be perceived as broadly fair to achieve taxpayer buy-in
The expectation gap
In the 14 months since the Tax Working Group’s terms of reference were published, there has been a lot of talk about fairness – particularly in relation to a capital gains tax (CGT) – but not much about balance.
Fairness means different things to different people at different times, depending on their situation.
To keep as many people as possible happy, and tax revenue flowing, over millennia, tax authorities have come up with a number of often-competing tests of a "good" tax system, including fairness, efficiency, certainty, minimising avoidance and compliance costs, coherence and raising enough cash to meet the Government's needs.
At the same time, taxpayers have developed one simple principle – not in my backyard. If the tax collector is to reach into my backyard, then the pain and the gains should be equally shared relative to ability to pay.
That expectation gap – as old as tax itself – is one the working group is hoping to balance with its proposal to tax capital gains on assets not already caught by the tax net, what some are calling a new capital gains tax.
It’s all about balance
Internationally, capital gains taxes are often advanced on the grounds of fairness and it's a foundation of the working group's argument for extending taxes on capital gains.
Its interim report warns that inconsistent taxes on gains from sales of capital assets, which favour the wealthiest, make our tax system less fair and risks undermining public acceptance of the system.
So consistently taxing capital gains will make our tax system fairer, right?
Well, it might not be that clear cut.
Revenue derived from all sources should be treated and taxed equally, which is not the current situation. Income from salary and wages is taxed in full, whereas revenue from business and capital investments ultimately may not be.
A truly fair approach would be to tax all asset classes, however, as the Government has told the working group that the family home must be exempt, this broad approach is hamstrung from the get-go.
Casting the capital gains tax net more widely has understandably received a lot of attention. The bach, retirement savings and small business are close to the heart of many Kiwis and a CGT in one form or another would impact these.
But the reality is people save for retirement, or other goals, in different ways.
Along with KiwiSaver, an investment property or a business are valid forms of saving. Despite best intentions, the ultimate design and exclusions (or holes) in the tax net have the potential to create further distortion.
Hence introducing a capital gains tax needs to be carefully considered.
CA ANZ Recommendations
Chartered Accountants ANZ's view is that if introduced, a CGT should include land, residential investment, commercial property and farms, shares and business assets.
The Government has told the working group to have specific regard to housing affordability. If this is the case, we question the outright exemption of the family home given the strong prevalence (65 per cent) of owner-occupied housing in the overall housing market.
An alternative approach would be to include a dollar-value exclusion threshold and only tax gains above this threshold – targeting overcapitalisation. This approach has been used successfully overseas and would minimise distortions.
A family who has a split living arrangement for work, such as an apartment in the city while retaining a primary home – for argument's sake – worth $1 million, would be far worse off under current proposals than someone who owns a single multi-million dollar residential property.
Left unchecked this would encourage people to overcapitalise their family home, reducing investment in the productive sector.
It's about balance.
No perfectly fair tax system
The working group's key question is whether "the fairness, integrity, revenue and efficiency benefits outweigh the administrative complexity, compliance costs and efficiency costs" of introducing a CGT.
We must remember there is no perfectly fair tax system. As working group chair, Sir Michael Cullen admits in the foreword to the group's interim report, "arguably no forms of tax are all bad, neither are they all good".
A CGT is a particularly complex issue and CA ANZ's recommendation to ministers and to the Tax Working Group is to ensure policy designers have enough time to strike the right balance between what assets are included and what roll over relief is available when the asset changes hands and, at the same time, fully integrating changes with existing income tax legislation and stakeholder systems.
We have urged officials to consider deferring the initial application date of the CGT and then phase application to minimise concerns around the valuation of assets if a valuation day approach is adopted.
Our tax system has got to be perceived by taxpayers as broadly fair to achieve their buy-in.
It must be easy for people to comply with and difficult to avoid. It also must ensure the tax base is sustained and broad enough to support our health system, national infrastructure, schools and social assistance./p>
This story originally appeared in Stuff.co.nz on February 5, 2019
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