Capital Gains Tax

[Te Whetu]

Te Whetu a couple of comments - inflation has very negative impacts on an economy not just poor people but the business environment as it creates a lot of uncertainty. Its not the actual rate of inflation that causes this problem but the rate of change in inflation. If inflation was a constant 10% p/a and we all knew and expected that we could deal with it in wages, contracts, capital purchases etc. Its when it varies that it causes so many problems and people are unprepared.

That is partly true, a steady 10% is better than wild fluctuations between 2% and 7%. However I can name a several things that high inflation do impact which is not desired, here are a couple:

i) Very high inflation means depreciation becomes worthless for long life projects (significantly reduced tax shield), this discourages investments in longer term projects in favour of shorter term projects even when the longer term project might otherwise be a better use of capital.

ii) High inflation is a nightmare to model out more than a few years. This also disadvantages long term business projects and a high inflation country is disadvantaged vs. one with low inflation due to the degree of confidence that can be provided with scenarios provided to decision makers. High inflation also harms the validity accounting records makng things like ROE or ROA fairly meaningless.

iii) High inflation means that the tax on bank deposits would be greater than real interest. Also in the cases where capital gains are taxed there would either be massive over-taxing OR additional complexity added to the tax system to allow for inflation.

iv) High inflation means where a party pays another party annually (e.g. some taxes are only paid annually based on prior year income). The government would effectively lose out on larger amounts which are from one year ago.

v) High inflation disproportionally hurts the poor, as they are less able to structure their affairs to account for the fact that inflation is high. If they only got one pay rise a year then they will be fine at the start but by half way through the year things are all 5% more expensive and the're another six months away from a pay rise. Giving more frequent pay rises would become a necessity which puts additional strain on businesses. Alternatively you could agree to 2.4% pay rises each quarter... but even that adds more complexity.

vi) Prices need to be updated a lot more. That's fine for larger businesses which have automated systems and possibly also smaller businesses where it's not too large a task. But in some businesses re-pricing is not something which is a cheap exercise and can cause disruption to customers. The tighter the margins in the industry the more often prices need to be changed.

Mainly just wrote these as they came to mind...

EDIT: Basically a lot of these could be adjusted and accounted for, but that in itself would take a lot of resources. So I'd argue high inflation increases the dead-weight loss in a countries economy, even when inflation is correctly forecast to be high.

Also not sure why you think a property tax is a good thing. In my opinion income is the most appropriate thing to tax. And capital as compared to income and consumption is the most sensitive to taxes. Capital can flee an economy if it doesnt like a tax unlike labour and consumption. Obviously land is not the kind of capital that can flee an economy and because of this there is a strong economic argument that taxing land is efficient but there are very strong counter arguments against this when you consider the role of the govt becomes landlord and master of your property and free to levy taxes as they see fit.

What form the property tax takes has different advantages/disadvantages, a CGT is less likely to drive off capital. But it's also harder to implement (and would need to be higher) than a FDR tax. I'm actually rather unconcerned which it is but we should really have I just feel we need something.

Anyway in my opinion property taxes are more likely to drive property prices up not down.

I'd argue this, but not now... and can certainly see some arguments which could be made on your side. What does history show us? I'm sure property taxes have been introduced and the impact recorded in other places in the world. Do you also say that a CGT would increase prices (I'm assuming not)?