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No dice: The unloved capital gains tax

jacinda

Younger voters are disappointed it won’t make it easier to buy a house even though Jacinda Ardern implies it will.

As the debate over the introduction of a comprehensive capital gains tax rages in the media, it has mostly been reduced to arguing about its effect on the housing market and who would be stung by it and who wouldn’t. But one thing most commentators agree on is that it wouldn’t dent house prices significantly.

The Michael Cullen-chaired Tax Working Group said it would put only a small “downward pressure” on house prices and even Finance Minister Grant Robertson admits it would have a minor impact on affordability

In fact, the government’s general exclusion of the family home from any CGT regime could have the opposite effect in some suburbs if homeowners poured money into extending their houses, to bolster an investment beyond the taxman’s reach. In Australia, where family homes are generally exempt, this phenomenon is dubbed the “mansion effect”.

Interviewed on The Nation over the weekend, Jacinda Ardern seemed unaware of these inconvenient truths. Asked about a capital gains tax, she said: “There is a large group of New Zealanders — particularly young New Zealanders now — who, if their aspiration has been homeownership, [it] has just become harder and harder.”

Read more: Capital gains tax: 'New Zealand is joining the modern world'The proposed capital gains tax could do the opposite of what it claims

It is extraordinary that the Prime Minister — whose “captain’s call” for a capital gains tax backfired on her so spectacularly in the 2017 election campaign — still doesn’t appear to understand the negligible effect it would have on housing affordability and is continuing to use it as a selling point.

In a clumsy effort to downplay the opposition to the mooted tax, Ardern also told The Nation, “There’s a large group of New Zealanders who don’t have columns in the Herald, who might not be having a chance to have their say on this [tax].”

In fact, it’s not just Herald columnists criticising the proposal. Even media sites that represent a younger and less conservative readership than the Herald’s haven’t enthusiastically supported the proposed CGT.

Despite arguing a year ago that “tax is love”, The Spinoff doesn’t appear so keen on this one.

Writing for the site, The Opportunities Party’s Geoff Simmons said it won’t be the housing panacea Generation Rent is hoping for and recommended young people shouldn’t “settle for crumbs from the table of the property-owning class”.

Danyl Mclauchlan wrote that although the current tax system was “deeply unfair”,  compromises required to get the public to accept such a tax would result in “meaningless change”. 

And managing editor Duncan Greive thought that millennials should be taking a far deeper interest in it because it was their “startup businesses and future assets [that] are going to be most impacted by this tax” — not their “elderly creators (who’re already 500% up on their 90s rentals)”.

On Newsroom, 40-ish renter Anna Connell summed up her generation’s disappointment and apathy in a world-weary piece titled: “Capital gains tax — should we care?”, declaring mournfully: “I am left feeling indifferent… The CGT isn’t going to be a silver bullet for the housing crisis.” 

The Project’s Jesse Mulligan — who, like Ardern, is “youth adjacent” — also reluctantly admitted last week he couldn’t back the proposed capital gains tax: “It hurts to agree with anti-CGT folk… but I’ve dived pretty deep this week and now propose a truce: they admit that the current system isn’t fair and I’ll admit the new system mightn’t fix many of our problems.

“Rents may go up slightly, house prices may go down slightly. Unclear what will happen to investment in business but unlikely to be huge positives. KiwiSaver will need some complicated but not impossible changes so people aren’t put off. Some may hold onto assets until they die.”

Ardern has said she doesn’t want the debate to be framed in generational terms but that seems impossibly naive given that so many younger people — particularly those without wealthy parents to provide a deposit — have been shut out of the housing market. And it is housing that has provided the flashpoint for resentment about inequality between generations. 

Unfortunately for the government, it is caught both ways. It appears the pushback against a CGT is fiercer than it expected from property and business owners and it hasn’t sparked obvious support from poorer and younger voters. This is perhaps not surprising given they’ll only get $16 extra each week in their pay packets if the bottom income tax bracket is lifted as part of a tax switch.

A Newshub/Reid Research poll published a day before Cullen’s report showed that 54 per cent of New Zealanders would not support such a tax and only 32 per cent were in favour. Fourteen per cent were unsure. 

In response to the poll, Simon Bridges said he thought more people would come to actively dislike the idea of a CGT when they worked out what it meant for them. He could have added that the dislike would be compounded when younger people realised what it wouldn’t mean for their elders.

Many younger people are disappointed that a CGT wouldn’t strip baby boomers of some of the windfall profits they have booked from a turbo-charged housing market over the past few decades.

No matter how misguided they may have been — given that such a tax would never be retrospective — that is nevertheless what many understood “fairness” to mean.

Under the recommendations presented by Michael Cullen, a tax would be imposed only on the increase in a property’s value after April 2021. Bach owners and property investors would therefore find whatever profits had accrued to them in the long boom would remain untouched by the tax. And if they didn’t sell they would never have to pay any capital gains tax at all.

After a Herald article asserted that a proposed capital gains tax “would hit older Kiwis hardest who have saved money to invest in assets, holiday baches and investment properties”,,political commentator Ben Thomas tweeted this wasn’t true — and quipped: “For the avoidance of doubt, I see this lack of boomer persecution as a serious flaw in the proposal.”

With opinion ranging from apathy and disappointment to virulent opposition, there is no easy way out for the government from this tax imbroglio.

Even if the government decides against taxing the gains from shares, farms and businesses and restricts the tax to residential investment property alone, it will still be on treacherous ground.

There are more than 600,000 rental properties in New Zealand and their owners and their families represent a big chunk of the voting public. Many of them undoubtedly won’t take kindly to being singled out for the taxman’s attention.

There is, of course, the possibility that Winston Peters will veto the entire tax proposal. That would immediately get Ardern off a particularly sharp hook (“We tried!”) but would immediately raise another problem.

A big part of her appeal to younger voters rests on the belief she will deal to the housing market. If a capital gains tax is rejected, it will mean that what were perceived to be the government’s three main weapons to lower house prices — implementing a capital gains tax, using KiwiBuild to vastly increase housing supply, and cutting immigration to dampen demand — are all likely to be viewed as fizzers.

KiwiBuild has massively undershot its targets and Ardern and Peters have made no dramatic moves to curtail the arrival of non-citizens, despite their individual election campaign promises.

The government did, of course, pass a law to exclude foreign buyers last year and has a bill at select committee designed to ring-fence tax losses from rental properties, but a possible tally of two successes out of five policies won’t cut it after Ardern herself has proclaimed 2019 to be the year her government “delivers”.

No wonder Simon Bridges is looking so happy — although I suspect Judith Collins is less so. In discussing the capital gains tax on The AM Show in February, she predicted the likelihood of its introduction would “make Simon Bridges the prime minister”. 

Coming from someone with a smouldering desire to be leader herself, it was probably intended as a way of publicly showing loyalty to Bridges — for the moment anyway. But it sounded much more like a plea — “Please don’t make it so easy for him to hold onto the leadership and win the next election! That’s not the plan!”

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