Sir Michael Cullen says tax would mostly be due when profits were "realised" but there would be some exceptions.

OPINION: Shortly, the Tax Working Group will release its final report outlining its recommendations for tax reform to the Government.

Among those recommendations will be some form of capital gains tax, with the Government expected to introduce legislation to Parliament by mid-2019.

Some detail of the tax has already been leaked or publicly announced. For example – while the Government could decide otherwise – the working group will recommend that the capital gains tax should not be adjusted for inflation.

Perhaps the most important detail of the capital gains tax regime – the actual rate of tax – has so far only been implied.

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The working group is expected to recommend that the capital gains tax simply extends the current income tax regime; capital gains will be treated as income, so the tax rate will be the income-earner's marginal tax rate.

Given how low our top tax-rate kicks in at $70,000 per year, the vast majority of income earners paying capital gains tax will therefore pay 33 per cent tax on any capital gains.

This is an extraordinarily high capital gains tax rate. In 2011 and 2014, the Labour Party campaigned on a capital gains tax with a rate of 15 per cent – and arguably lost both elections on the policy's unpopularity.

Now the working group is literally doubling-down with a tax rate more than twice that of those proposals.

STUFF Why do so many countries tax capital gains at a reduced rate? (File photo)

While members of the group try to argue that taxing capital gains and regular income at the same rate is 'fair', many other countries with capital gains taxes differentiate between regular income and capital gains.

In Australia, for example, long-term capital gains (capital gains on assets held for longer than a year) receive a 50 per cent discount – so taxpayers pay half their marginal tax rate on any capital gains.

The result is that their top capital gains tax rate on assets held for longer than a year is 22.5 per cent – approximately a third lower than our proposed 33 per cent rate.

Canada has a similar policy of only half-taxing capital gains. While the United Kingdom and the United States don't apply a discount multiplier to capital gains, they simply pay less tax on capital gains compared to regular income.

The top tax rate in the United Kingdom is 45 per cent, but taxpayers only pay 28 per cent on capital gains from property, and 20 per cent on capital gains from all other assets.

Taxpayers in Britain also receive a capital gains allowance; they only pay tax on capital gains exceeding approximately $22,000.

In the United States, the top capital gains tax rate is 20 per cent – and that only kicks in if you earn more than $625,000 per year. If you earn less than that, you'd probably pay 15 per cent – less than half the Tax Working Group's proposal.

Why do each of these countries tax capital gains at a reduced rate?

They acknowledge the risk to investment posed by a punitive tax on capital. More investment in small businesses, new farm equipment, larger buildings and innovative technology is the pathway to stronger economic growth and higher wages.

Punitively taxing capital investment might sound emotionally appealing, but it puts the brakes on future prosperity, dampening all of our future incomes and worsening the living standards of future generations.

If a 33 per cent capital gains tax is too high for Canada, Australia, the United Kingdom, the United States, and was too high for Phil Goff in 2011 and David Cunliffe in 2014, then it's probably just too extreme.

If the Tax Working Group fails to follow the rest of the world and recommend a discount to capital gains, the Government needs to introduce this feature itself in the legislation it brings to Parliament.

Failing that, the capital gains tax will deserve widespread opposition from prudent New Zealanders.

Joe Ascroft is an economist at the New Zealand Taxpayers' Union, you can view its new report Five rules for a fair capital gains tax here.

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