Success or Failure of CGTdependant on Macro-Economics

Published: Fri 22 Feb 2019 10:58 AM
Success or Failure of the Capital Gains Tax dependant on Macro-Economics
By Mark Rais
The newly proposed capital gains tax (CGT) has the potential to beneficially improve economic conditions, especially for low and middle earners who would see an exempting of a portion of their income tax. But such beneficial results can only come if the implementation of the CGT takes into account current macro-economic factors.
Unfortunately, among all of the debates, there are few voices that are emphasising the CGT in the context of macro-economics.
The proposed CGT can have truly beneficial or significantly destabilising results, depending on how well the legislation is written with regard to impact of major macro-economic realities.
Three such realities that will impact CGT include:
1. Other governments including Australia, China, and the United States already impose CGT on their citizens for any capital gains made on overseas assets. Therefore, a CGT here will have potential dual taxation impact.
2. A CGT is driven exclusively by economic growth. When growth stalls the tax take from a CGT declines. CGT are notoriously poor at creating economic stabilisation.
3. Global banking liquidity is on a decline, which exacerbates instability in the housing market and investments and may impact the benefits from a CGT.
Each one of these macro realities may have an influence on the result of a new CGT here in New Zealand. However, when combined and occurring in a short-term economic cycle, they can have a substantially overall impact on any of the benefits of a CGT.
It is not a surprise that repeated calls for a CGT have occurred here in New Zealand. A number of other countries already apply similar taxes to world-wide assets.
However, unless the New Zealand CGT is applied in the international context and includes options to avoid dual taxation, any such individuals or businesses will potential be required to pay a CGT twice.
For example, any Australian resident will be taxed on all capital gains made from assets including overseas assets such as property. There is a foreign tax offset clause but it only applies in certain circumstances where such an offset has already been negotiated with the other country.
Chinese tax requirements dictate that any individual who sees capital gains on assets get taxable at the rate of 20%. Capital gains tax as it applies to Chinese companies is simply integrated as part of the regular tax for all assets including those foreign owned.
The United States and the UK require payment of Capital Gains Tax when selling overseas property as part of their tax filing.
This amounts to a potential dual tax on residents or dual nationals who are living here in New Zealand, unless the CGT legislation includes dual taxation clauses that are mutually negotiated with such countries.
The initial impact, should such dual taxation options not exist is that foreign investment as well as migration will see a decline, directly impacting current economic growth drivers.
Moreover, should dual taxation become a reality, it will have a major impact on long term overall economic growth in New Zealand, potentially cutting growth for a number of sectors.
CGT and economic growth have an inverse and counter productive relationship. If CGT is directed at a broad asset base, or is set at a level that is perceived as cutting too deeply into the investment gains, it will invariably cause a decline in sector investment and eventually overall economic growth.
Moreover, if there are any forthcoming economic declines, where asset classes fail to produce year on year gains, CGT tax take substantially dips.
It is therefore, along with a land tax or personal property tax, one of the least stable methods by which to impact investment and create new government revenue.
The end result of any CGT is also deeply influenced by overall growth drivers such as interest rates, inflation, and liquidity.
As mentioned in earlier articles, global lending liquidity is rapidly decreasing, much of it on the heels of both declines in overall global growth and the impact of BASEL III and BASEL IV banking standards.
A review of the Basel Accords banking liquidity formulas shows that overall global liquidity will need to decline by potentially over 25% as banks come to implement the new standards.
The real world impact of this trend has not been fully realised yet.
Over the next 12-18 months this declining liquidity will culminate in major changes to the housing market and economic growth drivers. To ignore liquidity and overall global growth when applying a new CGT would be inappropriate.
The proposed CGT taxes can have either beneficial or destabilising results, depending on how well the legislation incorporates macro-economic drivers.
Should the new CGT ignore the three primary macro-economic realities of today, it may either fail in its intention or be the catalyst for greater instability and a decline in growth.
Procedurally, it is important that any new laws, especially as they impact the economy of New Zealand take into account such macro-economic conditions.
Other Scoop articles by Mark Rais:
Fallacies promoting housing collapse
The end of the Housing Boom
Low Interest rates are creating broader instability
Interest Rate Cuts Fail When Applied in Isolation
Trapped in the age of Nuclear Deterrence
Clash of Super Powers in an Age of Global Conflict
Mark Rais is a writer for the technology and science industry. He serves as a senior editor for an on-line magazine and has written numerous articles on the influence of technology and society.

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