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The BulletinApril 20, 2023

The surprise return of New Zealand’s most controversial tax

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The government is signalling something significant is on its way – but would it really introduce a capital gains tax in an election year, asks Catherine McGregor in this excerpt from The Bulletin, The Spinoff’s morning news round-up. To receive The Bulletin in full each weekday, sign up here.

Countdown to a mystery tax announcement

When there are two reports on the tax system set to be released simultaneously, you know it’s likely worth paying attention. When you have two reports and, reportedly, a speech by the revenue minister all scheduled for the same day? Something is definitely up. That’s the conclusion being drawn by a number of commentators – including Duncan Greive on The Spinoff this morning – ahead of next Wednesday’s big tax reveal. A year to the day since it was announced by revenue minister David Parker, IRD’s report on the tax paid by the country’s wealthiest individuals will be released, accompanied by another report from Treasury on the effective tax rate paid by New Zealanders of all incomes. “If, as seems likely, they reveal enormous incomes which attract a relatively small tax contribution,” writes Greive, it could set the stage for “a reversal of Jacinda Ardern’s position on capital gains tax”. The former prime minister famously ruled out a capital gains tax while she was leader. Now she’s gone, her successor Chris Hipkins has the chance to resurrect a tax that proponents had all but given up for dead.

‘High-wealth individuals ARE paying their fair share’

But could he dare to take such a bold step just months out from an election? As Pattrick Smellie writes in BusinessDesk (paywalled), “Hipkins has a reputation for political caution. Would he really buck the conventional wisdom that trying to tax wealth in NZ is a recipe for political annihilation?” New Zealand is the only country in the OECD where capital gains is not a significant part of the tax system, notes Greive, and there are plenty of good fiscal reasons to make a change. But Ardern, for one, was clear-eyed about the political risk inherent in announcing any new tax – especially one that would hit almost every homeowner in the country. It’s not only some Labour politicians who are apparently nervous about the prospect of a CGT. Tuesday saw the release of yet another report on our tax system, this one commissioned by tax consultancy OliverShaw. “Don’t be fooled, high-wealth individuals ARE paying their fair share, with tax payments increasing as their income grows,” the report confidently states. That claim has raised eyebrows among experts including tax professor Craig Elliffe, who tells Greive it left him “extraordinarily confused” – “it just defies common sense”.

The tax bracket problem

Here’s how the OliverShaw report comes to that controversial conclusion: instead of simply calculating tax paid as a proportion of income, it “takes into account Working for Families and other benefits, as you cannot sensibly consider average effective tax rates without doing so” – that’s from a summary of its findings published on Interest.co.nz. It turns out households who get WFF top-ups already “generally get most if not more than the tax they pay back”, BusinessDesk’s Smellie observes – and those households can look forward to an upwards adjustment in the WFF rate in the next budget, says the Herald’s Thomas Coughlan. The more pressing issue, Smellie argues, is “the inexorable rise of NZ middle-income earners into higher personal income tax brackets as a result of the simplest thing any government can do: ie, nothing.” The government hasn’t adjusted tax thresholds for 13 years, defying “principled tax theory [that] suggests thresholds should be adjusted every year for inflation, at least.” Indexing tax brackets to the rate of inflation is current National party policy, though a plan to scrap the top 39% rate was jettisoned in November.

Single renters among the hardest hit

The OliverShaw report’s claim about New Zealand’s wealthiest taxpayers got the most attention, but I was drawn to another of its headline conclusions, that “households of single employees renting face some of the highest average effective tax rates”. More of us than ever are living alone these days, and that greater tax burden could be hurting women in particular. “The cost [associated with living alone] is an issue that’s particularly important for women because they tend to earn a bit less,” financial planner Liz Koh told The Spinoff in 2021. “So if a woman ends up living on her own it can be a lot harder than for a man who’s potentially earning 10% more.”

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