Crampton on capital gains tax

Eric Crampton makes some good points regarding a CGT in NZ.

The main point I would like to comment on is.

I’d be surprised if the efficient solution were a broad capital gains tax rather than IRD just watching things a bit more closely

I agree, 100%.  The fact is that income on housing investments often isn’t taxed in “effective terms”.  This creates a incentive to invest in housing beyond fundamentals, which leads to sub-optimal investment.  People supporting a CGT are equally happy with the idea that income tax will be enforced more generally.

Ultimately, economist supporting the idea of a CGT aren’t necessarily doing so because they think there are equity gains from doing so.  They are interested in income tax being applied more generally, in order to align the relative price of different investments to their fundamentals.

When talking about a CGT we are saying that we suspect that the composition of investment in NZ is suboptimal, and we want to remove the distortions in the current tax system.  We are not saying that we would like income associated with capital gains to be taxed twice 🙂