The Treasury has indicated that a capital gains tax is the only tax base-broadening measure capable of generating substantial revenue for New Zealand as the population ages.
As New Zealand faces an ageing population, the number of working-age individuals contributing to the tax base is expected to decline sharply. Treasury and Inland Revenue have highlighted that this shift necessitates the reevaluation of the country’s tax system.
The Treasury indicated that, in answer to an Official Information Act request, it had submitted a joint report with Inland Revenue to the government regarding a capital gains tax in June.
“If an existing tax base is narrow, then broadening the base is generally the optimal way to raise more revenue,” the Treasury stated.
“However, besides taxing capital gains, base-broadening measures are likely to raise modest amounts of revenue.”
Economist Shamubeel Eaqub remarked that the situation was expected, noting that New Zealand is already generating revenue through GST, corporate tax, and income tax.
He indicated that increasing corporate tax poses challenges due to the need for New Zealand to maintain its international competitiveness.
Eaqub also mentioned that while income taxes are relatively high, the question remains about alternative taxation options. He suggested exploring land taxes, which would fall under the broader category of capital taxation.
“We somehow need to tax capital. That’s the bit that’s currently not in the system; that’s what they are saying. It’s not particularly controversial; every economist will tell you that,” Eaqub said.
He expressed uncertainty about whether significant additional revenue could be extracted from the current taxation framework.
Eaqub noted that although the current population structure places a significant burden on the working population, this situation is expected to change in a lasting manner.
He highlighted findings from recent Treasury research indicating that individuals tend to benefit more from tax-funded services and social support than they contribute. This means that younger individuals and seniors typically receive greater financial assistance through government programs than they pay in taxes.
However, during the peak earning period of an individual’s life, they contributed more in taxes than they received in income support and social services.
Eaqub stressed the importance of having a strategy ready if the country depletes its net taxpayers.