• The Listener
  • North & South
  • Noted
  • RNZ

Why Labour’s capital gains tax dreams are turning into a political nightmare

Grant Robertson. Photo/Getty Images

After the working group's report, three words that terrify many Kiwis – capital gains tax – are looking increasingly nightmarish for the Government.

In a postmodern mash-up of St Augustine, who purportedly asked God to make him good “but not yet”, the Government has asked Sir Michael Cullen to make it do the “good” thing about tax, and soon.

But the former Labour finance minister, ever the contrarian humorist, is being a bit of a tease. His tax review’s first response on a capital gains tax (CGT) and other measures Labour has set its heart on is “not yet – and, come to think of it, maybe never”.

That’s the trouble: make someone God to your St Augustine, and He, not you, gets to decide what is good.

Macro alias: ModuleRenderer

Cullen had a telling line about a comprehensive new CGT, which many in the Cabinet are sold on: “Every developed country except New Zealand has a reasonably broadly based form of capital taxation. So, the question is, are we so bright that we are the only people who aren’t doing it, or are we so dumb that we are the only people who can’t manage to do it?”

He tactfully left that question unanswered, but from his comments, the likelihood of anything truly reformative in the way of a CGT making the review’s final cut seems about 60:40 against. He reminded the Government of the eternally obvious – that it would be politically hard to get across the line. New Zealand First and many in Labour will rightly question the wisdom of going to the next election, tough as that already looks for the coalition, with something so controversial and so unpredictable in its effect. A CGT’s reputation as the political third rail, or no-go zone, is probably exaggerated, provided it doesn’t apply to the family home. But is it worth the potential loss of political capital for what it would achieve?

New Zealand’s peculiar problem, in being so rare a beast in not having a proper CGT regime, is that we have no way of knowing what effect introducing one would have. Other countries have had their regimes for so many years we can’t reliably deduce anything from their experience. Money-moving practices in other jurisdictions have been built up around decades of different CGT regimes, affected not just by the CGT but by sundry factors such as different forms of taxation, and the ebb and flow of returns from various sorts of investment, none of which is likely to correspond closely enough to our sundries for a fair comparison.

Dismal dilemma

Economists, who tend to like CGTs, have a range of predictions. Many say it would wean us off our property addiction and into other, more productive investments. But some say it could actually cut into savings – including KiwiSaver, just to introduce a second third rail.

A confounding question is, what narks citizens, rather than the experts, about our tax system? These days it’s less their own tax rates – though most people wouldn’t resent paying less – than the lack of tax paid by big companies and the very rich. A capital gains tax could be a valuable part of redressing imbalances in that mix – but it would be hard to design a CGT that wouldn’t also catch the tiddlers. With so many middle-income people having stretched to buy the odd investment property or a family bach, a CGT would cause hardship where few politicians would wish to.

Any meaningful change would cause at least short-term turmoil in the housing market, and that enemy of all investment and growth, uncertainty. Even so, that CGT-wrought turmoil might – some economists say would – permanently redress the anti-productive distortion of our over-investment in property, which would be of long-term benefit to everyone. But there’s no getting away from the electoral economics: whichever parties caused Mr and Mrs Humble Property Investor such pain as to have to sell up or scrape for funds would be biffed out of office and replaced by parties that promised to repeal or neuter the CGT.

So, what about a weak-tea CGT, only on, say, third homes or assets over a certain eye-watering amount?

Alas, one thing most economists agree on is, the more exemptions you have from any tax regime, the more distortions and inequities arise. Cullen was, as expected, cold on another exemptive idea – NZ First’s pet tax item – of reducing or removing GST from fruit and vegetables and other “healthy food”, or introducing punitive imposts like a sugar tax.

And no wonder. Nutritionists are already bananas drawn at 10 paces over the relative harm from the sugar content of this and the fat content of that, paleo versus Mediterranean diets and whether the emerging secrets of the gut biome might sweep all past doctrine aside. From past experience, supermarkets would pocket some of the GST discount. Different produce sectors would lobby MPs to a frenzy. We’d be in trade disputes over whether imported healthy food should enjoy the discount. And consumers have a habit of disobliging those who second-guess their motives and seek to curb their behaviours. They might keep buying the dearer, unhealthy food because they prefer it.

Cullen’s review group was more bullish about the scope for new environmental protection taxes – but even that’s a tick in a potentially dangerous political box.

Hit me with your CGT

It almost feels pointless talking about these issues, as the Government would be mad to go too far with any of them.

But give the present Finance Minister his due: Grant Robertson is determined to be made good even if it’s bad for him. He has sent the tax review a formal letter re-emphasising that he wants to change taxation so as to “reduce inequality” and “increase housing affordability and fairness”, which surely is code for “For pity’s sake, I asked for an august alibi for doing something courageous but unpopular. Kindly furnish one.”

All of which is either a bit sadomasochistic or an example of how politicians see tax: as their trusty sheepdog that can herd the stock into neat pens and keep them out of paddocks that might give them the bloat. Really, though, taxpayers are voting stock, capable of bypassing the dog and biting the farmer.

Robertson must now be kicking himself for appointing to this review a former finance minister who had nine years to enact these bright ideas himself and chose not to.

This article was first published in the October 6, 2018 issue of the New Zealand Listener.