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Capital gains tax reviewed by Tony Alexander, BNZ

CGT In Summary For issues of taxation system equity there should be a capital gains tax regime in New Zealand. But people need to realise that all taxes alter behaviour and in summary some of the alterations at the margin which one could expect include these.

-Lower NZ share prices as investors switch to shares offshore. -Higher foreign ownership of the NZ sharemarket as Kiwis sell.

-Extra investment in one’s own house, stretching the gap between entry level housing and the next steps up the family home ladder. Extra family financing of home purchases widening the gap in wealth and home ownership between those with parents able to spare cash and those without.

-Reduced construction of new houses for rental purposes.

-Extra initial house sales by some investors and reduced availability of rental stock as young people currently crammed in at home buy and shift out. Tenants get displaced. Reduced relative rental stock availability will place upward pressure on rents and government payments of the Accommodation Supplement.

-Reduced setting up of new businesses.

-More running of businesses to maximise cash withdrawals while discouraging business growth through long-term investment in assets.

-While some tax sensitive battered down property investors may sell, others may hold onto their properties and businesses while Labour are in power waiting for a National government to abolish the tax – probably while leaving any personal income tax cuts in place as the fiscal accounts are in good shape. History suggests National would not however reverse this reform and I have yet to find any businessperson in recent days who believes their promise to reverse a CGT.

-Reduced use of homes for work purposes leading to greater demand for offices, greater road congestion, and greater demand for properties close to city centres.

A CGT tax regime would not be the end of the world for NZ. But in the context of a country needing to encourage rather than discourage deepening of the capital stock, encourage the local sharemarket, facilitate faster business failure in order to boost productivity growth, and address issues of housing availability and cost, other policies should probably take priority. And were I one of the coalition partners considering which elements of the working group recommendations to support, my focus would be on achieving desired goals through other means which would be more targeted.

Go here to read the rest of Tony Alexander's weekly review