CGT A Setback For Innovation

The Global Innovation Index judges nations’ progress against a basket of parameters including infrastructure, research output plus market stability and institutional strength. In 2010 New Zealand surged ahead to 9th place out of 125 countries after languishing at 27 the previous year. But in 2011 we dropped back a little to 15th place, or more correctly, we were slightly overtaken by our close competitors U.S., U.K., Ireland and Canada. Whilst there’s no need for alarm, we must remain vigilant that government keeps the right settings in place and that businesses continue to take advantage of global opportunities by leveraging our creativity and growing new knowledge. I remain optimistic.

Last week I attended the outstanding Ice Ideas conference presented by the much lauded Icehouse business incubator which has a close relationship with the University of Auckland and has been involved in raising $50 million in funding for high-tech companies in the ten years since its inception. The incubator has now set itself the goal of achieving 3000 new business launches over the next decade. It’s an unashamed grab for more deal flow and a call to action for the community to support the initiative financially, for the betterment of NZ Inc.

Incubation is certainly a valuable aspect of the overall innovation ecosystem and I applaud these efforts. But we must also ensure that other structural features are strengthened, not undermined. Not the least of these is ensuring that the spectre of a capital gains tax (CGT) on business asset sales never sees the light of day. On the other hand, some kind of modest taxation of gains on speculative property transactions certainly has merit, in order to encourage more productive forms of investment. Unfortunately the two issues, although related, tend to become intertwined in the minds of the public as politicians desperately seek to gain a foothold.

A capital gains tax on business sales would discourage investment and accelerate the loss of talent offshore by taking away one of the key competitive advantages that we have over other developed economies. It may also have a negative impact on New Zealand’s standing as an innovative and business investment friendly destination.

Speaker presentations from the Ice Ideas conference are available here.

You can follow the author on Twitter @GeniusNet

5 thoughts on “CGT A Setback For Innovation

  1. “A capital gains tax on business sales would discourage investment and accelerate the loss of talent offshore by taking away one of the key competitive advantages that we have over other developed economies.”

    Is business in New Zealand in such a deplorable state that it classes favorable tax treatment as a competitive advantage over other nations? I thought Bill English’s and John Key’s “low wage” competitive advantage was bad enough.

    I’m an anarchist so I’m hardly an advocate of increased taxation, but I’m a believer in if we must be taxed, then at least the system should be fair and everyone should be equally subject. Its not fair people who choose to generate an income in a certain way should be exempt. Theres plenty of anecdotal evidence of people paying themselves a pittance of a salary or loading up on debt to mask the profitability of their firm or farm for that matter, too sell for a massive capital gain, which is then tax free. Or worse taking advantage of the Working for Families tax credit scheme because their declared income is below the threshold. People will invest in business when they see that there is a clear financial advantage in doing so. A loop hole ridden taxation system won’t convince people to do so when the returns aren’t there and working for a salary or wage with all the security and benefits that come with it is the better option. Or real estate “investment” and speculation for that matter.

  2. “A capital gains tax on business sales would discourage investment”.

    I disagree.

    It may discourage some forms of investment, but New Zealand suffers from too much investment in unproductive assets like property and not enough investment in productive industries and business.

    The overseas experience — well Australia anyway :-) — shows a CGT moves more investment into businesses and business growth. Surely that has to be good for innovation.

  3. Thanks for the comments.

    Like many policy proposals, comparative research is a little light on the ground. What evidence is there to support CGT?

    Also I’m not sure it is fair to compare to Australia, just because they are near neighbours. Their economy has long since diverged from ours and direct comparisons are a bit moot IMO.

    I’m a little cynical about NZ entrepreneurs bleating on about how they wish they’d paid more tax on their exit windfall. If entrepreneurs take risks to build businesses, create jobs, pay GST & PAYE etc. they should be encouraged. How about NOT taxing entrepreneurs on capital gains that are reinvested into new, locally based (non-property related) businesses within a certain period of time?

  4. “If entrepreneurs take risks to build businesses, create jobs, pay GST & PAYE etc. they should be encouraged.”

    We live in a capitalist society, surely hopes of profit, should be enough to encourage entrepreneurs into doing the above? The Invisible Hand, right?

  5. James, where I come from we live in a society that redistributes some of its wealth to assist the most needy. Consequently, it’s important that we encourage entrepreneurship, which is the source of that wealth.

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