27 Apr 2011

Government rejects OECD call for capital gains tax

10:40 pm on 27 April 2011

The Government says it will not introduce a capital gains tax.

The Organisation for Economic Cooperation and Development says such a tax could help correct a distorted housing market that favours the wealthy and harms the poor.

In its latest biennial report on New Zealand, the Paris-based OECD notes that house prices remain high despite recent slight falls and that home ownership rates are dropping, unlike in most other member countries.

The OECD report notes that many people in rental accommodation have a job but still cannot afford to buy a house under normal banking rules.

It blames this in part on the taxation of rental property, which it calls regressive or favouring the already wealthy.

The reports says the National Government has taken some small steps to correct this, but should do more.

A capital gains tax was also proposed by the recent Tax Working Group, which said it could raise between $4.5 billion and $9 billion a year, depending on how wide the net was cast.

The Government says it wants to see houses become more affordable but will not introduce a capital gains tax, saying recent changes on property depreciation and the use of rental losses to qualify for state welfare payments are enough.

However business commentator Rod Oram thinks the changes the Government has made are too limited.

"What the Government billed last year is a very big reform of taxation, with nothing more than a tinkering of income tax levels and GST level and some regulation. That's nowhere near enough to start rebalancing the economy in a fundamental way."

High-powered spending watchdog favoured

The OECD also thinks New Zealand could benefit from a high-powered watchdog to scrutinise government spending and counter what it calls politicians' myopia, which leads to attractive short-term spending followed by intractable long-term debt.

It says Sweden appointed a fiscal watchdog headed by a foreigner to maximise its independence and that watchdog has since achieved a high reputation and a lot of media attention, which makes its comments on government spending hard for politicians to ignore.

The OECD report notes that New Zealand Government debt is projected to at least triple in real terms by 2050 and could increase sevenfold.