Two thirds of CGT revenue would come from inflation!

The Herald reports:

The bulk of the revenue expected to be gathered from the proposed Capital Gains Tax will come because the Tax Working Group has not made allowances for inflation.
This is according to lobby group the Taxpayers’ Union, which this morning released a report which took aim at the proposed tax’s failure to adjust for inflation.
In February, the Tax Working Group (TWG’s) released its recommendations which included a broad capital gains tax (CGT).
The Government will soon outline which, if any, of the report’s recommendations it seeks to adopt.

The Taxpayers’ Union report said more than two-thirds of the proposed tax’s forecast revenue can be attributed to the effect of taxing “paper gains”.
In other words, the Government would be getting more money through taxing the on-going process of inflation, even when asset holders – such as a someone with an investment home or a bach – aren’t getting richer.
For example, the report said a $500,000 rental property could face a real capital gain of almost 56 per cent when sold after 20 years, as a result of the compounding effect of two per cent inflation over that period.

It may be even worse than that. From the report:

You buy a rental property for $500,000. It increases in value by 4% a year and inflation is 2% a year. You sell it for $1.095 million so a capital gain of $595,000 which gets a tax bill of $196,535.

But the actual real gain in value in the property has only been $242,973 so you are paying tax of $196,000 on a real gain of $243,000. When you take into account inflation on the tax also, the effective tax rate is 56%.