The CGT debate is back in the news – and it’s been met with some reasonable discussion and some tired, old myths. Simon Percival debunks a few common ones.

The annual capital gains tax discussion has started up again.

Just this month, Chris Hipkins said that Labour was considering a capital gains tax (after flat-out rejecting the idea last year), the outgoing chief executive of the Treasury said that we need one, and researchers at Victoria University produced a report (like the IRD’s one last year) showing that the wealthiest New Zealanders pay very little tax.

As usual, this has raised questions around the tax system’s fairness and sustainability – which have been met with some reasonable discussion and some tired, old myths. Here’s a response to some of them.

We shouldn’t tax capital gains, because they’re different from income

Let’s start with the big one.

There’s no real difference between income and capital gains. Sure, the law pretends that there is, but this is because it sticks to a bunch of weird, outdated rules that judges made up in 19th century Britain.

For several decades, most economists have agreed that capital gains are income, and that it isn’t fair to tax them differently. In fact, most say that we should even tax increases in wealth that don’t come in the form of cash – like when the value of someone’s house goes up but they don’t sell it. For political reasons, a capital gains tax in New Zealand would probably only apply when someone sells an asset (that isn’t their main home or certain other kinds of assets) that has gone up in value, and it might apply at a lower rate than income tax. But strictly speaking, a perfectly fair tax system would tax all increases in wealth as income – the closer the tax system is to doing that, the fairer it is.

All this is to state the obvious: a dollar is a dollar, regardless of whether you got it from hard work, or from occasionally speculating on property. Taxing money from the first source, but not the second, is unfair.

A CGT is unfair because it would tax us twice

Some people think that a capital gains tax would be unfair because of “double taxation”: it would be unfair for people to pay income tax when they earn income, and then capital gains tax when they invest it.

This is wrong.

Firstly, we already get taxed twice on the same income. We pay income tax when we earn income, then GST when we buy things with it. But most economists would argue that the money you earn from investing is new income anyway, meaning that paying tax on your investments isn’t “double taxation”.

In any case, people already pay tax after they put their money in a savings account, KiwiSaver or a managed fund. The ability to not pay tax after you put your money in a plot of land is, essentially, a tax exemption – a very unfair one, which the wealthiest New Zealanders can, and do, make the most use of.

A capital gains tax would wipe out our productivity

This myth has some logic behind it, as capital gains taxes – particularly ones that only apply when you sell an asset for a capital gain – do affect people’s decisions. For example, they might make people hold onto assets longer than they otherwise would, which prevents them from moving their money into something more productive.

But not taxing capital gains is terrible for productivity.

Firstly, it encourages people to invest in non-productive assets. Under the current law, it’s better for people to make $62-$68 in capital gains (often on unproductive investments like property) than $100 in income. This directs more and more money into New Zealand’s bloated property industry, which is clearly bad for productivity. And the fact that some commentators seriously say it would be “unfair” for the government to tax people’s “only way of getting ahead” shows just how bad it is.

Secondly, this kind of argument assumes that taxing some kinds of investments would have a much worse impact on productivity than taxing workers. But nobody has fully justified this assumption, and our tax system currently taxes workers far, far too harshly – in ways that are clearly bad for productivity.

For example, many low-income earners who benefit from Working for Families tax credits currently lose money if they do too much work. This is because as they earn more income, they’ll have to pay ordinary tax on it, they’ll go past “abatement thresholds” and lose out on tax credits, they’ll have to repay their student loan, and they’ll also have to pay more for childcare. If making investors pay more tax is bad for productivity, then what about building massive walls of tax in front of the poorest New Zealanders? And if potentially making less post-tax profit is bad for productivity, then what about being unable to fulfil you and your children’s basic needs?

A capital gains tax would be too complicated

The idea that a capital gains tax would be complicated also makes sense. Tax is always complicated, and a capital gains tax probably would be even if we designed it very well.

But the idea that a capital gains tax would be too complicated to be worth it is wrong.

Earlier, I mentioned that the boundary between income and capital gains comes from the weird ideas of 19th century British judges. Because of that, there are all sorts of cheeky ways to turn taxable income into tax-free capital gains. And because the government (understandably) doesn’t want to let people do that, there are all sorts of horrifically complex rules that try (and sometimes fail) to prevent it. So, while a capital gains tax would be complicated, it would let the government make the income tax much less complicated.

Also, even some of the unusually complex capital gains taxes in other countries aren’t too complicated to be worth it. They generate a reasonable amount of revenue for the administration costs, so countries keep them around. It follows that a fear of complexity definitely shouldn’t prevent us from implementing a capital gains tax.

A capital gains tax is just a tax grab

Lastly, people like to pretend that a capital gains tax or other new tax proposals are uniquely shameless tax grabs – like a new tax is the way the government will take more of “our” hard-earned money, and it won’t happen otherwise.

But let’s be real.

The government’s going to need more revenue no matter what, and any new tax is just one way to get it. New Zealand has an eye-watering infrastructure deficit, the costs of healthcare, superannuation and climate change are increasing, and the proportion of working taxpayers is going to shrink. If we don’t implement a capital gains tax, then the government will get money by increasing existing taxes, butchering social services, or tinkering around the edges with new levies and other nonsense.

As recent reports have shown, workers already have much higher effective tax rates than people who build their wealth through capital gains. Either we get the revenue we need by making things even more unfair, or we finally decide to level the playing field.