Labour's Capital Gains Tax Captures Inflation, Not Just Real Wealth

New Zealand's Labour Party has been criticized for its Capital Gains Tax (CGT) policy, which would capture inflation as well as real gains. According to Labour's own modelling, where house prices rise by 3% and inflation sits at 2%, the vast majority of revenue collected from CGT comes from inflation rather than real gains.

National Party Campaign Chair Simeon Brown says that when Chris Hipkins and Barbara Edmonds designed Labour's CGT, they could have included a carve out for inflation. However, instead of doing so, Labour chose to tax the lot, which means Kiwis will face large tax bills due to inflation rather than genuine wealth creation.

Using an example where house prices rise by 3% and inflation sits at 2%, Brown explains that a couple who buy an $800,000 rental property and sell it five years later for $927,000 would have to pay a tax of $35,600. Once inflation is accounted for, this amounts to an effective tax rate of 81% on the couple's real capital gain.

Even worse, Labour's policy could leave some New Zealanders paying the tax even when they are in a worse position than when they started. For instance, if property prices only rise by 1.5% per annum, a business owner with a $600,000 property who sells up after ten years will face a tax bill of $27,000, despite the value of their property having declined in real terms by nearly $35,000.

Labour's CGT would impact various assets, including rental properties, baches, small businesses, and KiwiSaver accounts. Brown warns that this policy would weaken New Zealanders' future financial security and make Chris Hipkins take a larger share of their retirement savings.