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A  look at wealth versus capital gains tax

In brief
  • Rich people also want taxes to be “fair”.
  • It’s not just the amount, it’s the hassle and intrusion.
  • How does wealth tax compare to a capital gains tax, in the New Zealand context?
  • How much will a tax generate  if it drives away the people who are supposed to pay it?

Wealth tax versus capital gains, big picture

Broadly speaking, a wealth tax is a levy on your total net worth, while a capital gains tax is on the profit you have made on a particular investment. But tax can be complicated and the details matter a lot.

Let’s take a look at how each of these different taxes typically work.

Wealth tax specifics

The tax is on net worth, but determining this is invasive, costly and contentious. There can be issues with both assets and liabilities that can affect the answer enormously. For instance, a legal fight could greatly reduce your net worth, and last for years. Ironically, it could even be a dispute with the tax department. 

If the tax is yearly the process has to be yearly.

Payment is required, even if your wealth went backwards during the year, and you have no proceeds to use for payment. 

Wealth tax on a capital gains asset, that is not otherwise taxed, is one thing. Wealth tax on something like a term deposit, where tax is already being paid on the interest earned, is another. Wealth tax then seems like double tax.

The solution to difficult valuations is to create simplifying assumptions. For instance, assuming your private business is worth the amount of the net assets. 

Switzerland simplifies to the extreme, at least for immigrants. Your “wealth” is a deemed amount based on your lifestyle expenses. The result is a total tax that is much less than you’d pay in most other places. The simplifying assumptions change it so much it is no longer really a wealth tax.

A  look at wealth versus capital gains tax - Centrist
Calculating valuations can be a complicated nightmare.

Capital gains specifics

Some sort of valuation exercise is needed to set a value, on all eligible assets, as of the date a capital gains tax starts. The future tax, on actual sale, is then calculated using the valuation day amount, as if that amount is what you originally paid for the asset. 

There are ways to make this a little easier or phase it in, but it’s still a huge exercise.

Another big problem is NZ’s tax rules have been developed without capital gains being wired in, so the rules don’t work in many cases. However, there are many systems in other countries for guidance.

Kiwis historically have little experience with tax complexities. If a capital gains tax is introduced and you have capital gains, you’d have to file a return, unless there was an exemption below a specified amount.

Some observations

Both taxes will be difficult to initiate, but once set up, the capital gains tax is far easier on a year-by-year basis.

Capital gains tax is much more accepted world wide, especially if it’s at a preferred rate, as is often the case overseas. Intuitively, this greater acceptance is because the person has made money so there are actual gains to share with the government. Also, the government bears its share of the losses.

There can be all sorts of exceptions to either tax, including the family home. And elements of each tax could be applied to different assets.

In the same way that wealth tax kicks in above a set amount, capital gains tax could be set up with a lifetime or yearly tax free amount. For instance, a $1M lifetime exemption or $20K per year.

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