Sunday, 7 August 2011

Capital Gains Tax - Time to Have the Guts To Prepare For Tomorrow

The feedback I’ve had from my article on Labour’s proposed capital gains tax confirms wide support for the tax. Naturally, those who currently benefit from not paying tax on capital gains aren’t keen on the idea. But let’s look again at why a capital gains tax makes sense for everyone.
Firstly, it corrects a major loophole in our tax regime. As a matter of economic reality it makes no sense that people who make money through a capital gain pay no tax, but those who make money from wages or a business do. We must close this gap not just for ourselves, but for future generations. Consideration of the burden being placed on future workers to help fund the retirement needs of our elderly in the decades to come doesn’t seem to be on the Government’s agenda. This is appallingly shortsighted given the aging population we all know is coming.
Concerns about how we are going to provide care for our elders was brought home to me during a visit to Carter Court retirement home last week. I was impressed as the Chris the manager and Board members showed me possible plans for expansion of this important community facility designed to meet our need as our population ages. It is a real worry that our population is aging at a rate that we are not preparing for in terms of residential care beds, tax base to cope with the increased demand for national superannuation and the need for expanding health facilities.
It is imperative that we close the obvious gap in the tax base from a lack of capital gains tax, otherwise we will continue to rely too heavily on wage earners and hikes in GST to fund the huge investment needed in care facilities, let alone superannuation payments.
The recent release of the Ministry of Social Development’s report on trends in household incomes was referred to by the Prime Minister because the report showed the gap between “rich” and poor” appears to have narrowed in the last couple of years. The graph in the report showing a decline in inequality was based on annual statistics produced before the rise in GST and lowering of top tax rates so doesn’t show the true picture.
However the report does highlight the issues I have raised about the need to act now to plan for the rising cost of caring for our elderly. The report states that NZ Super payments have been flat in real terms since the mid 1990’s. As a percentage of the median household income, NZ Super has fallen from 67% in 1994 to 51% in 2010. Also 40% of people over 65 are totally reliant on NZ Super and the next 20% are 80% reliant. So affordability of NZ Super in the decades to come is vital.
The Retirement Commission’s policy review published in December 2010 called on the Government to consider the long-term affordability of NZ Super. From 2020 baby boomers will start to go onto the NZ Super roll, and Commissioner Diana Crossan is concerned that changes need to be made so that the scheme remains affordable. I suspect most of us would argue that at least looking at these issues is sensible. Why is the Government refusing to budge?
PM John Key said he’d resign before agreeing to increase the retirement age – this seems a random sort of promise to make when he finds it palatable to sell off assets all New Zealand tax payers have paid for to solve a Government debt problem that doesn’t really exist (recall from past articles I have written that NZ’s government debt is relatively low, peaking at 30% of GDP post Christchurch earthquakes compared to the likes of Italy at 120% and the US at 100%).
Could it be that the affordability of NZ Super is a problem we don’t really have to face for another 9 years, so making a promise about it was more about needing to make a promise about something at the time, with little risk of it coming back to bite in the next few years? I wonder…
Diana Crossan warns “decisions will need to be announced and legislated well in advance. If there is no commitment within the next 10 years, the total cost of NZ Super will continue to trend upwards and more severe changes might need to be taken later, putting the long term future of NZS itself at risk”.

Leadership popularity contests aside, you have to admit Labour’s policies show more guts and determination to secure NZ’s future prosperity than anything “Smile & Wave” has come up with.

References: Robin Oliver, Good Returns website 18 September 2000
Ministry of Social Development report “Household incomes in New Zealand: Trends in indicators of inequality and hardship 1982 to 2010

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