Something “LABOUR’S FAIRER TAX SYSTEM EXPLAINED…” doesn’t explain

Are Labour’s CGT medium term risks understated? They are at least sketchy.

Labour has today revealed a bold plan to stop our valuable assets being flogged off overseas, give hard-working Kiwis a tax break, pay off the country’s ballooning debt and grow our economy.

The document mentions paying off debt a number of times. Labour acknowledge that ther proposal will require more borrowing in the short term (but they don’t mention this in the document).

Q&A 5. How much revenue is CGT forecast to raise?
Our policy has been fully costed by independent experts BERL. They estimate it will raise $78 million in the first year, rising to $2.27 billion in year 10. Over 15 years, it will raise about $26 billion in total. The amount raised will fluctuate depending on economic cycle.

It’s obvious that $78m in the first year won’t cover all the tax cuts (PAYE and GST), and CGT won’t cover them for a few years (they don’t say for how long). They say that the tax rate increase to 39% will approximately cover taking GST off fruit and veg. Before they increase tax take they will need to get more CGT that they have given up in no tax on the first $5k.

The estimated cost of the free-zone of $5,000 at full implementation is around $1.3 billion a year. Labour will pay for this with the CGT and by clamping down on tax avoidance.

On their figures, after ten years of CGT they will only be getting $1b in extra tax revenue (CBT less first $5k free). It could take five years or more (from 2014) before they increase their tax take.

How much extra borrowing will be required to fund their tax cuts? Labour have been scathing of National borrowing to pay for tax cuts.

If everything doesn’t go according to plan?

What if, in the first five or ten years, before the revenue from the CGT has grown enough to cover tax cuts, we have another recession? That could severely impact on CGT projections, meaning even more borrowing on top of the additioanl Labour borrowing.

It’s a high risk in the medium term.

Source: Fairer Tax Explained (large DOC download)

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  1. News & Views – Saturday 16 July 2011 | Your Dunedin

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