Saul Eslake

improve the fairness of the way the tax system treats people as between more affluent taxpayers and less affluent taxpayers, and between older and younger taxpayers.

But there are some wrinkles that I suggested to the committee needed to be ironed out.

First,

There is a problem with the way in which the government's proposed capital gains tax system treats start-up businesses because, as I said before, what they're proposing is to impose tax at your full marginal rate on capital gains, less an allowance for the impact on the cost base of the asset of inflation.

But if the cost base of the asset is zero, which is typically the case with a business that you might start in your garage...

then indexation of the cost base for inflation is of no value.

Or to take something that might resonate more for a young person, say someone goes to work for a startup business that's started by someone who's much more affluent, but instead of getting a high wage or salary, is given shares in the business.

with the expectation that when the business is either acquired by some foreign company or floats on the stock exchange in 10 years' time, those shares, which were initially worth nothing, will be worth quite a bit of money.

Well, if the initial value of those shares is zero, indexing them for inflation doesn't shelter your capital gains.

So I think the government needs to make some kind of provision for so-called start-ups, recognising that there is a public interest in encouraging people to start new businesses.

The second thing is the proposed minimum tax rate of 30% on capital gains means that someone whose total income is less than $45,000 and some of that comes from capital gains will actually be paying more tax than someone whose total income is $45,000 and it's in the form of wages and salaries.

The third point I made is that

Our tax system allows people whose incomes fluctuate a lot from year to year, like farmers or professional sports people or entertainers, to average their income over a period of years so that if they happen to have one year in which, for example, they win a lot of prize money or they're in a play or a show that...

makes a lot of money or they make a recording that sells particularly well, something that they don't normally do, then they're not hit with a big tax bill just for that year.

They're allowed to average it.

And my argument is that there are people who might only record a capital gain once or twice in their life.

and that there should be some kind of averaging for people who only report capital gains a few times, as opposed to people for whom it's part of their regular income, then they shouldn't get an averaging provision.

I think the government needs to incorporate in its proposed changes something that recognises the special position of start-ups, because I think it is in the public interest to have innovative, creative people start new businesses of their own.

So, you know, some of the arguments that are being put against this I think basically reflect the fact that there are people who are going to be asked to pay more tax who don't want to and should be seen in that light.

I think there are three reasons for that.