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Dr Muriel Newman

Capital Gains Tax – Labour’s great leap backwards

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Since the 2008 election, the Labour Party has been desperately searching for a new identity and relevance. As the main opposition party they have failed to gain political traction – if anything they have simply made National appear better than they really are. Now with an election just months away they need policies that will give them a real breakthrough, and Phil Goff needs to give his caucus a reason to support him as leader.

Make no mistake, the capital gains tax that Labour has proposed – and that they are hoping will give them they breakthrough they wish for – is being considered not because it would be in the best interests of the country, but because it is in their best interests. They believe a capital gains tax would be a good foil to National’s planned (and unpopular) partial privatisation of state assets. Their capital gains tax policy is a desperate grab for a cut-through policy by a desperate party.

Let’s not kid ourselves – the partial capital gains tax being promoted by Labour is designed to appeal to their primary constituency by promoting the politics of envy. Contrary to Labour’s political platitudes it will not be good for the country: it will raise very little revenue – after 15 years it will only raise 3 percent of the estimated $120 billion in tax – but it will add huge complications and compliance costs to the tax system. This is one of the reasons that none of the five government tax reviews over the years have recommended a partial capital gains tax with a multitude of exemptions.

The 1967 review of the tax system by the Ross Committee examined the feasibility of a capital gains tax but rejected it on the basis of the low revenue yield, the huge complexities, and the disincentive effect that such a tax would have on risk taking and growth investment.

The 1982 Task Force on Tax Reform conducted by the McCaw Committee also examined a capital gains tax, finally recommending against such a tax on the basis that it would not produce significant revenue but would create substantial complexity within the tax system.

The Valabh Committee differed in their conclusions in their 1989 Report by recommending that a comprehensive capital gains tax that had no exemptions should be introduced – in conjunction with a reduction in income and other taxes. In other words, the Committee saw the introduction of a comprehensive capital gains tax that included private housing and all other assets, as a legitimate mechanism to broaden New Zealand’s tax base and lower tax rates across the board.

The McLeod Committee’s 2001 Tax Review followed the recommendations of the earlier government reviews to oppose the introduction of a capital gains tax on the basis that it would not make the tax system fairer or more efficient, and that it would not raise substantial revenue but would instead increase the complexity and costs of the tax system as a whole.

The 2010 Tax Working Group on the other hand came out in favour of a capital gains tax, but only if it was comprehensive, and accompanied by a general reduction in income tax and company tax across the board. They also strongly recommended that company tax, Trust tax and the top income tax rates be aligned to reduce distortions within the tax system.

In other words, none of the expert working groups have recommended a partial capital gains tax of the sort that Labour is planning, which is riddled with exemptions such as the family home, Maori land, gambling winnings and other sweeteners aimed at their voting base, but which is designed to crack down hard on wealth producers. The fact that the tax policy also includes an 18 percent increase in the top income tax rate to 39 cents in the dollar, demonstrates that Phil Goff is taking a great leap backwards towards Labour’s origins in the British working class. There, within an entrenched class system where those with capital were able to get ahead, while those without had few opportunities, the politics of envy and greed had resonated.

The fundamental problem for Labour however, is that New Zealand does not have a dominant capital-based ruling class. Our deeply entrenched culture is pioneering. Most New Zealanders are aspirational, with an outlook on life that is based on the belief that anyone can get ahead in this country if they are prepared to knuckle down and work hard. By and large we are a country of ‘doers’ – we roll up our sleeves and get things done. Which is why the sharp end of Labour’s ‘us-and-them’ class-based style of politics is an uncomfortable fit with many New Zealanders and probably explains – to some extent – why, since the end of World War II, the Labour Party has only been in power for a total of 21 years, compared to National’s 40 year history in government.

In fact, in the late nineties, Helen Clark won the election by moving the Labour Party towards the centre-ground of New Zealand politics in order to attract the swinging voter, who usually determines the outcome of elections. It could be argued that this is the strategy that Phil Goff should have used – especially in light of former Labour Prime Minister David Lange’s warning that a capital gains tax is the sort of tax you introduce if you want to lose not just one election, but the next three!

The reality is that most New Zealanders want a government that will do what’s right for the country. They do not want to see politicians putting their own political self-interest first. Kiwi families want the opportunity to do better for themselves and their families – they do not want their government to put hurdles in their way. Policies based on envy and greed have no place in a modern economy, where people aspire to get ahead.

In his tax policy launch speech, Labour Party leader Phil Goff said the capital gains tax would make our tax system fairer: “You should pay your fair share of tax no matter how you earn your income”.

So, let’s look at who is paying their fair share of tax in New Zealand. According to Treasury, 75 percent of taxpayers now pay no more than 17.5c in the dollar in tax. Over half of all income tax in New Zealand is paid by the 13 percent of taxpayers who earn over $70,000. The 5 percent of taxpayers who earn over $100,000 pay almost a third. That means that better off New Zealanders already shoulder the lion’s share of the tax burden in this country. In other words, they already pay more than their “fair share”.

When it comes to household income figures, the Minister of Finance recently explained in Parliament that the number of households paying income tax is surprisingly small, with single-income families with two children paying no net tax until their income reaches $50,000 a year: “The lowest-income 43 percent of households currently receive more in income support than they pay in income tax. The 1.3 million households with incomes under $110,000 a year collectively pay no net tax – that is, their total income support payments match their combined income tax. The top 10 percent of households contribute over 70 percent of income tax, net of transfers – over 70 percent of income tax, net of transfers. This system is highly redistributive and we believe it is fair.”1

In his article Capital Gains Tax pitfalls and false prophets, this week’s NZCPR Guest, financial commentator Frank Newman, has examined Labour’s tax policy announcement and as well as reminding us that a capital gains tax already exists in New Zealand, he raises very serious concerns about the lack of policy detail:

“Not surprisingly Labour does not want to talk about the detail behind their policy – ‘The key point for us is not to be dragged down into the detail on the CGT. The public don’t care and we get boring’, says Labour strategist and MP Trevor Mallard.

“This probably explains why whenever they are asked a tough question the party faithful reply: ‘An Expert Panel will be established to deal with issues that are technical in nature and involve areas where a high degree of specialised knowledge is required before a final decision can be reached.’

“Detail is important – it’s like the fine print on a contract – it’s the detail that actually matters because that’s where the fish-hooks are.”

In his article Capital Gains Tax pitfalls and false prophets, Frank discusses a number of the major fishhooks that can be identified in Labour’s capital gains tax policy including the fact that there would be no adjustment for inflation. In a country where the government has historically been the key driver of inflation – not only through overspending, but through inflationary policies like the Emissions Trading Scheme (which has pushed up the price of power and fuel to cause rampant cost increases throughout the whole economy) – then taxpayers would be forced to pay excessive capital gains taxes on grossly inflated asset values.

In thinking about new taxes it is important to remind ourselves about the nature of politics – once taxpayers allow a capital gains tax to be introduced, how long will it be before a cash-strapped government removes the exemption for the family home, or increases the rate from 15 percent to 20 percent or higher? And before you say that could never happen, think about GST, which has now been increased from the original 10 percent to 15 percent, or the compulsory employer KiwiSaver contributions, which are now on the rise.

In addition, it is crucial to remember that it is low taxed economies like Hong Kong and Singapore that have strong growth and high living standards – neither of which has a capital gains tax. High taxed economies like New Zealand have stagnant growth and low living standards. If we want New Zealand to be a country with a growing and vibrant economy that encourages entrepreneurship and wealth creation – and keeps Kiwis who want to get ahead at home – then lower tax, not capital gains tax, is the way to go.