Income from labour is taxed in New Zealand, but income from a gain in the value of a house generally isn't.

OPINION: The dictionary definition of "income" is "the amount of monetary or other returns, either earned or unearned, accruing over a given period of time" (Collins).

For tax purposes the "given period of time" is 12 months ending on March 31 each year.

If you were to put that definition in front of the average person and asked them whether income tax should be applied first to earned income or to unearned income, most would chose the latter. People work hard to earn their income but most have little or no unearned income (although they may know people who do).

They will be greatly surprised then to learn that, while taxpayers in other developed countries pay tax on both unearned and earned income, people in New Zealand do not.

We pay tax only on earned income while those who have significant unearned income pay nothing. But wait, it gets worse. Since New Zealand has no estate tax, when such people die, their unearned income will be passed on to their children untaxed.

This is wrong and it needs to change. If it does not, then the inequality in this nation, which is growing rapidly, will see a class system emerge in New Zealand: an upper class (including those born into wealthy families), a shrinking middle class and a rapidly growing lower class will be our lot.

Given the fast-shrinking decline in home ownership rates, all the people in the lower class will likely rent their home for their entire lives, experience hardship in retirement and leave little or nothing to their children. This is far from the "every family in their own home" ethic which New Zealand once aspired to achieve.

This is not the New Zealand I want and is not what our ancestors longed for. Many of them left Britain for New Zealand because they despised the class system. Their philosophy was that "Jack is as good as his master" and they wanted to live that out in an egalitarian society.

They believed in fairness and with Kate Sheppard that, "all separation whether by race, class, creed or sex is inhuman and must be overcome". Or with Michael Joseph Savage whose tax and welfare policy was "from each according to their means, to each according to their need".

So why do those who have unearned income (often, called, "capital gains"), pocket that wealth tax-free? The answer is "because we elect parties that let them".

In 1990 for example, Labour Party policy was to introduce legislation to tax unearned income, but a group of well-funded millionaires campaigned vigorously against it and National, who agreed with them, was narrowly elected.

We must not let that continue to happen. It is estimated that there are 100,000 or so millionaires in New Zealand (many just because they own a freehold house in Auckland), but there are about 3.2 million people on the electoral roll, so the numbers are there to change the current law, if we want to.

So do we want to?

In 1988, the Royal Commission on Social Policy, chaired by the late Judge Sir Ivor Richardson (president of the Court of Appeal and one of New Zealand's greatest experts on taxation), heard my submissions on this issue. When they reported back to the then Labour Government, they concluded that "viewed in terms of fairness (and economic efficiency) the argument for taxing capital gains is overwhelming".

Their reference to fairness I have mentioned but they also spoke of "economic efficiency" as a second reson for such a tax.

That is because, if one source of income (earned) is taxed and the other (unearned) is exempt, the whole economy is skewed towards the latter, since people are then incentivised to maximise their after-tax income by seeking unearned income. This may well be one of the reasons that our per capita productivity lags behind that of countries such as Australia, Britain, Canada, the United States and many European countries, which do tax unearned income.

An efficient economy with a level playing field, will tax both earned and unearned income at exactly the same rate and ensure that any tax owing is collected on death.

So are we going to allow the 5 per cent of voters who in 2009-10 already owned 39.4 per cent of the nation's wealth to continue to call the shots, or do we want a fair tax regime for all? If so, all we need is a party who will rise to the challenge, and to vote them into government.

That is doable but only if we can get this message across to the electorate.

Gordon Copeland is a former United Future MP and economist.