Professor Rob Salmond’s claims (reported in the New Zealand Herald on Tuesday) that the rich are taxed less in New Zealand than in comparable countries because New Zealand has a comprehensive GST but no capital gains tax ignores some important facts, says Casey Plunket, a member of the 2010 Tax Working Group (TWG) and a tax partner at Chapman Tripp.
“Salmond suggests that people who invest in company shares which they sell for a profit are being under-taxed, because there is no capital gains tax. This confuses legal liability with economic liability.
“Although the investor pays no tax, the company does. That tax reduces the sale price for the shares, because it reduces the company’s current assets, and the post-tax cash flow the buyer can expect from the company. Economically, the corporate income tax is a tax on shareholders rather than companies.”
New Zealand had a high corporate tax rate by international standards – 28% compared to the OECD average of 25.5% - and a very comprehensive corporate income tax base. As a result, corporate income tax accounted for a higher proportion of tax revenue here than in most other OECD countries.
“That is the reason why the TWG did not advocate a capital gains tax. The high corporate tax means we don’t have the same need for one as many other countries, and in many cases, it would actually lead to double taxation,” Plunket said.