Business Daily Media

Business News

Forget a capital gains tax – what New Zealand needs is a tax on inherited wealth

Forget a capital gains tax – what New Zealand needs is a tax on inherited wealth

The world’s wealthiest people will transfer US$15.4 trillion in assets to their heirs in the next decade, according to a recent report[1].

Published by specialist data analysts Wealth-X, the report focused on the richest 0.1% (those with net assets worth over US$5 million), but it’s a similar story for the more modestly wealthy baby boomers.

With New Zealand’s average national house price[2] now over $700,000, the heirs of home-owning boomers (as well as people born before 1945 whose significant wealth is often overlooked) will receive a currently untaxed bonanza.

Ignoring this unprecedented transfer of wealth from people who no longer need it to people who haven’t earned it would be absurd. But equitable tax policy must first overcome political timidity and rhetoric.

Read more: How rising inequality is stalling economies by crippling demand[3]

As New Zealand’s election approaches, forward-thinking politicians should take heart from Sinn Féin winning a majority in the 2019 Irish election on the promise of making the country’s tax system radically more equitable[4].

While a capital gains tax (CGT) is off the table[5] for now, tax arrangements are never set in stone and voters can be open to change.

Taxing inheritance is nothing new

New Zealand first taxed inter-generational capital transfers in 1866. However, the rate of estate duty was reduced to zero in 1993 and gift duty was scrapped in 2011. According[6] to tax law specialist Michael Littlewood:

These taxes for many years enjoyed broad political support. Indeed, it was widely regarded as obvious that a significant part – perhaps as much as 50% or so – of every large estate ought to go to the state.

Taxing a person’s wealth when they no longer need it, provided a reasonable exemption is made to support dependants, has been usual since Roman times. In the modern era, inter-generational wealth was seen as eminently taxable, too. Indeed, progressive tax rates were applied to estate taxes before they were first used for income taxes.

In 1979 Australia became the first developed country to abolish estate duty (at both state and federal levels). As analysts Sam Reinhardt and Lee Steel pointed out[7], support for estate taxes had declined despite “various tax review committees recommending refinements to improve the equity, efficiency and simplicity of the tax”.

Politics gets in the way

In New Zealand, Te Herenga Waka—Victoria University’s 2010 tax working group[8] didn’t consider reintroducing an estate tax or retaining the gift duty then in force. It argued that reforms in the late 1980s had “improved the efficiency and equity of the tax system”.

Certainly, stamp duty is an unlamented tax – although many jurisdictions try to use it to cool overheated housing markets. But it’s not clear why the working group considered estate taxes inefficient or inequitable.

Read more: New Zealand’s proposed capital gains tax could nudge taxpayers to invest in art instead of property[9]

Unfortunately, the terms of reference[10] of the next tax working group, established by the Labour-led government after the 2017 election, specifically excluded an inheritance tax. While there were good theoretical reasons for such a tax, group member Geof Nightingale said[11], it “breaks down at the politics”:

Inheritance taxes are intensely disliked, so if you haven’t got one it’s very hard to put one in.

The arguments against estate taxes are well rehearsed – usually accompanied by emotive references to “death taxes”. But, in the long term, the current ideological opposition to taxing inter-generational wealth transfers may prove to be an anomaly.

One simple reason for reviving the debate about such a tax is demographic: baby boomers, the wealthiest generation that has ever lived, will increasingly start dying during the 2020s.

Tax policymakers cannot ignore the opportunity – arguably the moral imperative – of taxing and redistributing those transfers.

Millennials and Gen X will be the winners

There remain three challenges to achieving a fairer tax based on inter-generational wealth.

First, the application of tax needs to shift from the deceased to the living. In other words, we need to focus on the recipient of the wealth transfer. Ireland’s capital acquisitions tax[12] (CAT) applies a flat rate of 33% to accumulated gifts and inheritances over the relevant threshold.

Unlike a CGT, which can be perceived as penalising business owners, a CAT targets unearned windfalls from an accident of birth. This should make a CAT more politically acceptable than a CGT.

Read more: If you want a fair inheritance tax, make it a tax on income[13]

Second, the younger generations most critical of baby boomers’ “unfair” acquisition of wealth (Gen X and millennials) must accept that taxing this unprecedented transfer of wealth will promote both inter- and intra-generational fairness.

If we don’t tax and redistribute these transfers, wealth inequalities will be exacerbated and entrenched among future generations.

And finally, arguments in favour of a more equitable system have to overcome the rhetoric of “death taxes”. As far back as the 1960s, Canada’s Royal Commission on Taxation did this by popularising the idea that “a buck is a buck[14]”, no matter how it is earned.

In other words, if you have the money you can pay tax, whether that money comes from labour, investment or inheritance.

So far, only the Greens are proposing any tax on wealth[15] as part of their election policy offering. But with the generational clock ticking, it’s maybe time for New Zealand to think about getting a CAT.

References

  1. ^ report (www.wealthx.com)
  2. ^ house price (www.stuff.co.nz)
  3. ^ How rising inequality is stalling economies by crippling demand (theconversation.com)
  4. ^ radically more equitable (www.sinnfein.ie)
  5. ^ off the table (www.beehive.govt.nz)
  6. ^ According (papers.ssrn.com)
  7. ^ pointed out (treasury.gov.au)
  8. ^ tax working group (www.wgtn.ac.nz)
  9. ^ New Zealand’s proposed capital gains tax could nudge taxpayers to invest in art instead of property (theconversation.com)
  10. ^ terms of reference (taxworkinggroup.govt.nz)
  11. ^ said (www.stuff.co.nz)
  12. ^ capital acquisitions tax (www.revenue.ie)
  13. ^ If you want a fair inheritance tax, make it a tax on income (theconversation.com)
  14. ^ a buck is a buck (www.thecanadianencyclopedia.ca)
  15. ^ tax on wealth (www.stuff.co.nz)

Authors: Jonathan Barrett, Lecturer, Te Herenga Waka — Victoria University of Wellington

Read more https://theconversation.com/forget-a-capital-gains-tax-what-new-zealand-needs-is-a-tax-on-inherited-wealth-143604

Business Daily Media Business Development

Celebrating Australia’s innovative, evolving and ‘loved’ local business community

Australia is a nation famous for local businesses. From the tip of Tasmania to the top of Darwin, and from the East coast to the West, retailers and mechanics, dentists and tradies are p...

Dave Scheine, Country Manager Australia at Podium - avatar Dave Scheine, Country Manager Australia at Podium

3 Things You Can Do To Reduce Workplace Injuries From Happening With Your Staff

So many businesses are more busy now than they have been in the last few years. But with issues with staffing and supply chain problems slowing things down, it’s vital that you as a bu...

Business Daily Media - avatar Business Daily Media

Wonders in The Whitsundays

TRAVEL DEALS   Stay for 3, Pay for 2 in Airlie Beach  Extend your holidays and treat yourself to the ultimate resort experience in February and March. Choose from fully self-contain...

Jasmine Halley - avatar Jasmine Halley

Icon Agency wins Large Agency of the Year at the 2021 GTA awards

Integrated Melbourne agency Icon has taken top honours at the 2021 Public Relations Institute of Australia (PRIA) Golden Target Awards, bringing home Gold as the Large Agency of the Year...

Business Daily Media - avatar Business Daily Media

Writers Wanted



NewsServices.com

Content & Technology Connecting Global Audiences

More Information - Less Opinion