Building a Better Bridge - The Case for Taxing Capital Gains in New Zealand

This article reviews the case for taxing capital gains in New Zealand. The analogy is drawn between a taxation system and a medieval toll bridge. The wider the span of the bridge the more traffic can pass in the same time period. This can allow a reduction in the rate of toll, reducing the incentive to avoid the toll.Against the context of a current and future severe fiscal deficit budget position the Victoria University of Wellington Tax Working Group suggested tax reform proposals which excluded a comprehensive capital gains tax. While generic problems in the New Zealand income tax system identified by the Tax Working Group have been addressed in their recommendations this base broadening was not. The article examines the problems of income tax, not only from the narrowness in omitting capital profits, and the anomalies that arise from this non-taxation, but also other systemic problems with income tax, such as the fact that it artificially taxes cash flow rather than economic gains. Some of these problems arise from the origins of income tax, being a creature borne out of the law of trusts.In addition to the inherent flaws of income tax, the case for capital gains tax is based on grounds of fundamental equity between taxpayers and the desirability of progressive tax. Furthermore, taxation of capital gains protects the integrity of a tax system by removing incentives to recharacterise economic gains in ways that fall outside the scope of tax