Taxing capital gains essential to protect taxpayers and family farms

The absence of a comprehensive tax on capital gains allows some farmers to make huge untaxed profits while leaving other taxpayers to pay for government services like schools and hospitals, Green Party Co-leader Dr Russel Norman said today.

Dr Norman was responding to reports today that an average dairy farmer’s tax bill was $1506 despite an average Fonterra payout to farmers of well over $500,000 in the latest year for which figures are available.

“The absence of a comprehensive tax on capital gains (excluding the family home) makes our tax system hugely unfair,” said Dr Norman.

“Some farmers and agribusinesses are farming for capital gains, enabling them to avoid paying their fair share of tax. They are borrowing heavily for farms and then claiming the cost of the interest payments against their tax bill, so they pay little tax. Then they sell the farm and take all the capital gains tax-free, making a tidy profit subsidised by other taxpayers.

“A capital gains tax would close this tax loophole and ultimately put downward pressure on farm prices over the longer-term. It’s perhaps the best way to keep our farms in family ownership.

“The problem isn’t limited to rural land. The same tax game is being played out in the housing market as well. Property speculators are pushing up house prices in their pursuit of tax-free capital gains. The Government’s Savings Working Group blamed tax rules for half of the recent increase in housing prices.”

When questioned in the House yesterday, Prime Minister John Key continued to defend the status quo saying that a capital gains tax would be ‘inefficient’ and ‘difficult to apply’. New Zealand is one of the few countries in the OECD that does not have a capital gains tax.

“The IMF, the OECD, and the Government’s own Savings Working Group have all come out recently in favour of a capital gains tax,” Dr Norman said.

“The biggest winners from a capital gains tax would be the productive sector, as the new tax would drive investment out of speculation in property and into manufacturing and export sectors. First home buyers and those wanting to buy a family farm would benefit too.

“A capital gains tax is a critical component of rebalancing our economy. It would raise much-needed revenue at a time of record government deficits. As such, it should be a central feature of the upcoming Budget.”

Link to the Green Budget document (7 pages):
http://www.greens.org.nz/misc-documents/green-budget-2011

Link to the Savings Working Group report:
www.treasury.govt.nz/publications/reviews-consultation/savingsworkinggroup

Link to the Tax Working Group’s revenue estimations from a CGT [pp46-47]:
http://www.victoria.ac.nz/sacl/cagtr/twg/Publications/3-taxation-of-capital-gains-ird_treasury.pdf