The case against a CGT

I’ve said that in principle I support a CGT, if it is part of making NZ a broad base low rate tax system. Former ACT Leader Rodney Hide makes the argument against a CGT, as an effective double tax on business. He writes at interest.co.nz:

A business generates $100 a year. The going discount rate is 10 percent. The value of the business is $1,000. That’s if there’s no tax.

Introduce a tax of, say, 30 percent, and the business now yields only $70 a year. The business is worth only $700. The tax liability is capitalised into the value of the business.

Now let’s say I buy the business and fix it up. I double its income to $200. In the absence of any tax the business is now worth $2,000 and I can sell the business and pocket a $1,000 capital gain. However, if there’s an income tax of 30 percent the increase in the business’s value is from $700 to $1,400. My capital gain is now only $700.

My gain is not tax free even though I appear to pay no tax on my gain.

That’s because the capital value reflects the extra tax the extra income the business generates.

A capital gains tax of 30 percent reduces my gain from $700 to $490. I am doubly taxed.

Capital gains aren’t tax free and a capital gains tax doubly tax savings and investment.

Put like that, it does appear to be a double tax. Any arguments against the logic?

Capital gains tax is brutally unfair

There are plenty of ways a capital gains tax is unfair. Imagine a young widow with children whose husband poured his heart and soul into his business. Following his death the young widow has no choice but to sell the business. She has no income and no other assets.

The business was a start up. It generates $200 a year. After tax, that’s $140. The business sells for $1,400 upon which capital gains tax has to be paid at say 30 percent.

She nets $980. In the absence of any tax she would net $2,000.

The widow is taxed at 51 percent. That’s brutal.

A good case against by Rodney