Labour Is Talking About A Wealth Tax Again What Are Its Options And What Might Work?

(MENAFN- The Conversation) Labour Party leader Chris Hipkins recently revealed the party is looking once again at it's tax policy , including a possible wealth tax or a“capital income tax” (CIT ).

This comes barely a year after the party ruled out a wealth tax or capital gains tax if they won the 2023 election.

So what changed? Former Revenue Minister David Parker's idea is to use the CIT to target big earners whose incomes are not effectively captured by the current tax system.

But how is this different from the other tax options on wealth and capital gains? And what are the options if some kind of wealth tax is introduced?

You can think of wealth as assets – items of value. This could include land, shares, art works or other valuable collectables. A wealth tax typically has a low tax rate. Norway's wealth tax, for example, has a rate of 1%.

Only four OECD countries currently have national wealth taxes.

But prominent economists, notably Thomas Piketty , argue wealth taxes are necessary and practicable. Piketty also promotes progressive inheritance taxes – these can also be seen as taxes on wealth. Even one of New Zealand's wealthiest men, Bruce Plested, billionaire co-founder of Mainfreight, has supported the idea of a wealth tax .

Often a wealth tax has some exclusions, such as the family home. Or it might be a value exclusion, say an allowance of NZ$2 million in assets before you have to pay the tax. Usually any debt against the asset reduces the asset value.

To illustrate, let's take the Green Party policy from the last election. This was a 2.5% wealth tax on assets. An individual could have $2 million in assets before the wealth tax would need to be paid.

So if you had an asset portfolio of investment property and shares valued at $3 million you would pay 2.5% tax on $1 million (i.e. the $3 million portfolio less the exempt value of $2 million). This comes to $25,000. Note that this is paid every year – not just once.

Some compliance costs are obvious here – valuing assets for a start, particularly those that may not be actively traded (some art works or unlisted shares, for example).

Cash flow is also an issue. People may be asset-rich but cash-poor. A tax policy that forces people to sell their assets to pay tax is likely to be politically unpalatable.

A capital gains tax (CGT) also taxes wealth. However, a CGT is a tax on the gain in value of an asset – usually when it is sold. Therefore, a CGT is usually paid once (when the asset is sold), unlike an annual wealth tax.

We don't have a comprehensive CGT in Aotearoa, but income tax legislation can result in some capital gains being taxed.

And what about a land tax? A land tax is a tax only on land. Land taxes have some advantages – they are hard to avoid or evade as you can't move or hide land, for example. And land usually has an existing valuation, which makes compliance and administration more straightforward.

These types of taxes (wealth, CGT or land) are flexible – items can be included or excluded as required. For example, productive land, Māori land or the family home can be excluded.

Importantly, they have the potential to make a meaningful contribution to tax revenue. The amount collected will depend on the tax settings (e.g. what is included or excluded – and what the rate is).

These taxes aren't perfect. They create distortions in behaviour, such as people over-investing in their family home if that is excluded from the tax.

Income tax, CGT and inheritance taxes usually only apply when money or property changes hands. Wealth and land taxes do not rely on a transaction but relate to property that exists and can be valued.

Labour's CIT aims to calculate income (and tax) based on a person's capital holdings.

While the details are not yet clear, it's about taxing what people“ought” to receive as income, based on the assets they and their families beneficially own. We see something similar in the foreign investment fund rules which presumes a 5% return.

A CIT may make sense to economists but most people are likely to expect to be taxed on something they receive or own, rather than on something they are expected to receive.

It's basically about the fairness principle of ability to pay. A“buck is a buck” whether that dollar comes from wages, bank account interest, or is held in wealth.

The principle also underpins Labour's CIT. Support for wealth taxes comes from the wealthy, the public and experts. The 2010 Tax Working Group recommended a low-rate land tax. The majority of the 2019 Tax Working Group recommended a CGT on a broad range of assets.

New Zealand has yet to adopt any such measures. Even the United Kingdom, where Conservative governments have held power for 32 years since 1979, has a more progressive income tax system than New Zealand, including a comprehensive CGT and an inheritance tax with a standard rate of 40%.

If taxes on wealth are an obvious policy choice for other OECD counties, why we don't have them? And why has there been so little serious debate about moving away from our reliance on personal income tax and GST?

New Zealand is not exceptional and should learn from the best of OECD tax arrangements. Progressive policy makers need to focus on the basics of ability to pay –“a buck is a buck”. Well-meaning as it may be, a CIT is unlikely to communicate the fundamentals of tax fairness to the voting public.

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