Capital Gains Tax + Strategy = Jobs

Introducing Capital Gains Tax would bring New Zealand one step closer to rebalancing the economy in favour of exports and jobs instead of imports and passive asset inflation, says Selwyn Pellett of the Productive Economy Council.

While we must wait till next week for details of Labour's proposal, the PEC, like Treasury, RBNZ, New Zealand Exporters and Manufacturers Association and the Tax Working Group, favours a broadening of the tax base to include a tax on capital.

There are three fundamentally important reasons the country needs a Capital Gain Tax:

1)The government's high borrowing, on top of an already high net foreign debt is causing our country to be uncompetitive in exports outside of the primary sector. While diary and other primary exports are a critical part of our future, they do not create many new jobs. As such they are capable of neither sustaining an increasing population base nor providing the high standard of living those leaving New Zealand clearly desire.

2)A broader lower tax base is desirable for both compliance and efficiency. Much of what was said in the Tax Working Group's paper was about the unfairness of the current tax system and its effects on compliance. A Capital Gains Tax alongside other tax changes already implemented largely addresses those concerns.

3)A Capital Gains Tax sends the right signals for investors and means those choosing to take the path of unproductive property investment will have to pay their fair share of tax. While fairness in tax is good the real long term benefit is the chance to get more of our limited capital invested in making New Zealand more, not less, competitive.

Many will not understand how these points affect their lives but they all effect our ability to compete with the world and the strong evidence is we are failing in that regard. Exports have been declining since 2004 which correlates with the rapid asset inflation of property and the emergence of sustained, high interest rates and a high dollar. Today our exchange rate swings around the fortunes of our diary industry and while that to some extent buffers our economy, it simultaneously kills our differentiated manufacturers and exporters - preventing the very thing we need most, an expansion of our export base.

Many things have to happen to address this downward spiral but getting investment into the productive side of the economy is first and foremost, followed by the need to stop borrowing as a Nation and to cease funding asset inflation. Capital Gains Tax combined with investment in Research and Development, and an expansion of the Reserve Bank Act's objectives to include not just inflation targeting but also jobs and exports are the beginnings of a productive economy strategy we will fully endorse.

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