Guest Post: Wealth taxes would fritter away a chance at prosperity

A guest post by Joe Ascroft:

The Prime Minister’s tax working group is tasked to make a series of proposals to the Government prior to the 2020 election.

We are now beginning to see what those changes may look like. Sir Michael Cullen, the group’s Chair, is already making the case for a variety of new taxes, including a wealth tax. A capital gains tax, taxes to combat obesity, land taxes, environmental taxes, and others will also be considered.

Every proposal needs to be examined according to an important, and often forgotten, fact: New Zealand is a poor country.

Adjusted for spending power, our income per head is similar to the struggling economies of Spain and Italy. Meanwhile, our Australian neighbours earn similarly to Germany, the economic powerhouse of Europe.

Languishing as a backwater economy hurts us. It means we have lower wages, families find it more difficult to meet their financial needs, and the government is less able to provide decent social services. Our struggle to keep up with funding of drugs which are available in Australia is but one example.

So, when the working group considers new taxes, it should primarily consider whether they will either make us more prosperous, or slow our economic growth.

So, what happens if we tax assets, such as with a wealth tax or capital gains tax?

It would essentially be a tax on savings and investment. And when your potential investments face high taxes, it is more appealing to simply fritter away your wages, than invest earnings in, say, the stock market.

This is damaging, because investment is the most important factor in determining sustainable economic growth and wage increases, whether that investment is in new or existing businesses. Greater investment makes workers more productive, and improved productivity levels lift incomes over time.

Further, imposing additional taxes on investment would effectively ‘double-tax’ families. Any money put aside for investment has already been taxed when it was earned as income, so a tax on the investment taxes the same pool of money over and over again.

And starting a business, or growing your existing business, is far less attractive when those investments are squeezed even more by the IRD. That’s especially true when consumption remains relatively untaxed: why risk money for a measly return, when you could instead just go out for dinner for a reliable pleasure hit?

Supporters of capital gains and ‘wealth’ taxes often say it’s important that the rich pay their fair share, but direct income earned from investments is already taxed, and we already have a capital gains tax on property speculators in the form of the ‘bright-line’ test.

In fact, everyone will pay from economy-stunting investment taxes. Incomes will be lower, families will continue to struggle to make ends meet, and we will continue to languish compared to Australia.

If the Tax Working Group places new constraints on investment and growth, it will damn future generations to a poorer quality of life. We must be more ambitious.

Joe Ascroft is an economist with the NZ Taxpayers’ Union.