Capital owners pay no tax? Well, no …

Sam Morgan came out stating that he feels his tax bill was too low.  While I respect the idea that the current tax system does not match his idea of what is equitable, I am not sure that he has gotten off with as much of a free ride as he’s suggesting.

Why?  Well for one even though he isn’t paying income tax on his current stock of wealth, he does pay a consumption tax.  I would hardly call 12.5% a “minimal” amount of tax.

Furthermore, lets think about how this capital gain was created.

  • Mr Morgan had to invest, take on risk, he had to pay tax when buying in goods (if they were final goods), or accept that there was a tax on the final goods that he sold.
  • The income that Mr Morgan earned in order to invest in the business would have either been borrowed or would have involved him building up a stock of wealth by working (and thereby paying tax).  If the money was borrowed, then the initial person that built up the capital would have had to have paid income tax.
  • Most importantly, the stream of income provided by the asset is taxed, which implies that the asset value of the capital is in turn lower – when selling for a “capital gain” Mr Morgan was selling the future income stream of the business, taxing that and then taxing the income stream sounds sort of like taxing it twice doesn’t it 😉

As a result, I don’t think the idea that “he hasn’t paid tax” holds up to reason, at all.  If there are holes in the tax system somewhere that imply the tax base relies too much on labour relative to what we believe is fair then, hell yea, lets clean it up.  But I think Mr Morgan’s case has been heavily exaggerated – he has, and does, face a large lifetime tax bill.

UpdateAaron Schiff makes a similar point.

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  • Miguel Sanchez

    Logically, a capital gains tax should only apply to a rise in price for a fixed, identifiable asset. For instance, if you buy a house for $300k, spend $50k on refurbishing, then sell it for $350k, there’s no ‘capital gain’ to tax.

    So if Sam Morgan wants to claim that he sat on Trademe for seven years, adding no value, then sold it for a huge ‘capital gain’… well, he might want to reconsider that statement. 😉

  • @Miguel Sanchez


    I do think there is some confusion out there with regards to the “stock” of capital and the “flow” of return on capital. And I think that is what is driving a lot of the belief that labour is relatively overtaxed.

    There are “relative price” issues in the tax system, and some areas where two people with the same lifetime income will get taxed differently (such as when people have more volatile income). We should be thinking about the relative impacts of this more methinks.

  • steve

    I think your best point is about the new owners paying tax. they bought the future income stream, if their tax was lower they would have paid more for it. therefore, the total value of trademe is taxed, on its future revenue, even if it goes up in value, it is taxed on its now higher future revenue. I haven’t thought of it this way before, but this is a very good argument against a capital gains tax.

  • @steve

    It is definitely an argument against CGT. There is only really one reason why I would still support a CGT in theory – the government has decided that a tax on interest is optimal. A CGT is effectively like a tax on interest, and so putting one in place ensures that all investments are treated equally.

  • Robbie

    One worrying implication of that, Matt, is that a CGT is therefore a disincentive to save.

    Why do we think we are overinvested in housing, again?

  • @Robbie

    “One worrying implication of that, Matt, is that a CGT is therefore a disincentive to save.”

    Yes, it is as it “creates a wedge in the capital market” instead of “creating a wedge in the goods market”. That isn’t necessarily a worrying implication, it depends on the relative cost of the “wedges” when raising an X amount of revenue.

    “Why do we think we are overinvested in housing, again?”

    Spending on housing investment has been well about trend. However, the “number” of houses built has been low. In other words, we have been building bigger and flasher houses than we could afford, probably at an inefficient cost.

    For me, I don’t care if we invest heavily in housing if we do really value it – we just have to make sure that all investments are treated equally by government in order to ensure that the allocation of investment funds represents expected private return right. The feeling is that currently, housing is implicitly subsidised by govt relative to other asset classes – if this is true then that should be (and sounds like it will be) cleaned up.

    I believe the mish-mash isn’t just in housing, but between a myriad of invest types due to poor policy. Lets see what happens in the budget.

  • steve

    @Matt Nolan
    if this is the case then I would have thought a tax similar to the taxes on foreign investment (at the risk free rate) should be put in place across all assets (in NZ or overseas), whether about the capital gains or not. wouldn’t this be better than a capital gains tax?

  • @steve

    A CCT? The issue with that is that we are treating a stock like a flow – so the entire stock of capital gets taxed every year, rather than just the gain on capital. It seems fairly inconsistent with the treatment of all other income (namely on value add), and so I’m not a fan.

    In the end New Zealand needs to decide how it wants to tax income, both in an intertemporal sense and in a distributive burden sense. Until the nation is willing to face that we can’t figure out what sort of tax system to have 🙁

  • Robbie


    “The feeling is that currently, housing is implicitly subsidised by govt relative to other asset classes”

    I think you hit the nail on the head. The feeling is that the playing field is slanted towards housing, but in reality it’s not.

    If there’s no real problem caused by our enthusiastic investment in property on a level playing field, it seems like we’re just tinkering with something that isn’t broken?