Summarised by Centrist
Stuff outlines the fairness argument for a comprehensive capital gains tax. Independent tax expert Geof Nightingale argues that economists regard capital gains as income, meaning leaving those gains untaxed creates unequal treatment between different sources of income.
The article says New Zealand’s wealthiest families pay only 9.5% tax on their full economic income, compared with 20.2% for families it describes as being in the top 10% of the wealth distribution.
Editor’s note: Stuff appears to mislabel the comparison group: IRD’s report, pages 8–9, places the 20.2% benchmark around the middle of the wealth distribution, not the top 10%.
The more important point is how “income” is defined. The 9.5% figure does not mean wealthy people pay only 9.5% on their earnings, as the average person thinks of earnings. For this purpose, you can even include realised capital gains in earnings.
Instead, it measures tax against broader “economic income”, including not just realised capital gains but also unrealised capital gains. Unrealised capital gains are often very hard to measure, on an individual basis, but easy to put in a formula on an average basis. It is also important to note that the IRD report states on page 1, paragraph 6 that the wealthy individuals studied paid a median rate of around 30% on their personal taxable income. Both figures can be correct because they measure different things.
Asset appreciation increases wealth, so counting it as economic income has at least some theoretical support, although we know of no country that uses economic income as the basis for taxation. We think there is a good reason for that as it would be an administrative nightmare. Of course, only people with assets are going to benefit from rising asset prices.
What about, as happened with real estate for the last several years, when asset values go down? Then people with assets may be paying tax on their taxable income but actually losing money overall. In that case, their tax rate would be over 100%. It should be noted that the IRD Report just tried to estimate the asset appreciation for a number of years. In those years, according to the IRD, the asset values went up. That was a reasonable assumption for the period, but reasonable people could still easily disagree with how much.
The Report also left out a number of taxes that wealthy people pay, such as the taxes deducted for PIE investments, where the taxes are deducted within the PIE and not on a personal return.
A wealthy person could easily be paying millions in such tax but the report just ignored it. People, including politicians, like to point to studies and data to support their arguments. The first step is to understand them.
Re-published from the Centrist with permission
