The Labour-led Government wants a capital gains tax — why else would it have a Tax Working Group spending months studying how to frame it?
The problem for Finance Minister Grant Robertson is that it could be politically toxic, as David Cunliffe found when he campaigned on it. So he’s now seeking a final recommendation from the TWG which makes taxing capital gains politically acceptable — at least to a majority of voters.
It will take all the political cunning of the old master, Sir Michael Cullen, to come up with the answer Robertson needs.
After receiving the interim report, the Finance Minister along with his colleague Revenue Minister Stuart Nash — and backed by Cabinet — called on the TWG to “consider” a package which reduces inequality and increases fairness across the tax system and housing affordability.
That’s a tall order: certainly a test for Sir Michael and his colleagues in the TWG. Even if it can be framed, the question is whether it can be “sold” to the electorate.
One possible solution would be to propose significant reductions in income tax rates, particularly at the lower end of the current scale. In effect the aim would be a revenue-neutral package.
In theory, the broader the tax base, the lower rates can be. The TWG’s interim report notes a realisation-based CGT would take years to build substantial revenue flows.
The TWG set out two models in its interim report for a broad-based CGT. Sir Michael said “the key issue” it had looked at was tax on capital income, but said it was not a “no brainer”.
He warned the TWG might be unable to reach a unanimous view, even when it publishes its final report in February, and said it was possible it might not come to “any conclusion at all” —though emphasising he thought that was unlikely.
Robertson and Nash, in their letter to the TWG, asked it to examine whether a tax on realised gains or the risk-free rate of return method of taxation (or a combination of both) is the best method for extending a potential capital income tax on specific assets “with the goal of ensuring NZ’s tax system is fair and balanced”.
The risk-free rate of return method, whereby a deemed return on assets is taxed as it accrues, was recommended in the Rob McLeod tax review but was smartly dismissed by Michael Cullen, who then was Finance Minister. One of the issues with that method is valuation in the absence of a market transaction.
The advantages of the broader taxation of capital gains are “fairness, equity”: people with the same income would pay the same amount of tax.
In NZ a very high level of capital assets are held by the top 10 or 20 per cent of the population: Sir Michael says that is the main reason why the NZ tax system is less “redistributive” than in most developed economies.
As expected, the TWG has recommended against changes to GST or offering small businesses a discounted rate of company tax.
Environmental taxes such as taxes on petrol and diesel were the “second major issue” the TWG had considered, Cullen said, but the TWG had only looked at the issues in principle.
“Short-term opportunities” included expanding the Waste Disposal Levy, strengthening the Emissions Trading Scheme, and advancing the use of congestion charging, the TWG said.
The TWG has until February to come up with the answers the ministers want. Then any changes to the tax system would be subject to the legislative process—and who knows what Winston Peters will have to say at that point?
Still, Labour would have something to campaign on—providing the TWG succeeds in framing something which is “fair”.