The taxing issue of capital gains – and the prospect of hostility on the hustings

Reports  from  working groups undertaking  reviews  for the government   are  thudding  on  to   ministerial  desks – and several of them already are  stimulating the kind of backlash which  any  government  intent on protecting  its poll ratings  could  find  disturbing. 

In implementing their recommendations,  the  Ardern  coalition could write itself into  NZ’s  political  history as  reformist  as  the first  Labour   government  led by  Michael  Joseph Savage.  Then again, if  it  did have that ambition, it might nosedive as  rapidly  over the political cliff as   the David Lange   government did in  the late  1980s.

The education changes proposed  by the  Bali Haque-led review are stirring fury  among  principals and  trustees.  The reforms to  industrial  law  from the Jim Bolger-led panel, expected to give fresh powers to  trade unions in  wage bargaining, are  likely to  despatch  any good will the business community has entertained towards the Ardern  administration. 

But the one issue  which  will test  the nerve of   even the boldest in the Ardern   coalition  is  the  capital gains  tax  which the working  group chaired  by Sir Michael  Cullen  was set up  to  formulate.

No matter how it is framed by Sir Michael, one of the cleverest politicians  in  NZ’s  modern history, “expect to  see the debate go  nuclear”,  as  Liam  Dann in the  NZ  Herald  put it.    

Reports  from  working groups undertaking  reviews  for the government   are  thudding  on  to   ministerial  desks – and several of them already are  stimulating the kind of backlash which  any  government  intent on protecting  its poll ratings  could  find  disturbing. 

Here’s a  taste  from media headlines of  early  speculation   about  the  CGT:

* Capital gains tax ‘valuation day’ will cost Kiwi businesses billions of dollars

* Tax Working Group papers highlight concerns over ‘inequality’

* Properties give owners a tax-free windfall – is that fair?

* Bach plan a wealth tax that will rob Kiwis of their dream

Although supporters tend to over-simplify the case, there is a strong, possibly compelling, argument for capital gains to be taxed.

If a person is taxed for what they earn from their work, it seems only reasonable that they also be taxed for what they receive from their assets.

Equality writer Max Rashbrooke went so far as to suggest a capital gains tax should be called a “fairness tax“.

The problem is that no-one is proposing the type of tax which this implies.

And as  Brian  Fallow  argued  in the  NZ Herald’s business pages, the focus  on  capital gains  puts  growth at risk. “Why would the Working Group take aim  at  capital  gains, when more capital is the very thing NZ  needs?”

In its interim report the working group signalled  an extensive  expansion  of the range of capital income that should be taxed, and  at the  taxpayer’s  full marginal  rate. 

“To  start with the bleeding obvious, income  has to be earned before it  can be taxed”, Fallow  wrote.

“As a nation  and as a people, we are not particularly  good at that. On the crucial measure  of  labour  productivity, NZ  ranks with  Slovenia, Slovakia and Turkey, and is  20% below the OECD  average”

A crucial  reason for this is capital shallowness, or too low a ratio of capital to labour. Since  1996  capital deepening has been running at half the pace across the Tasman, helping to explain  why the average Australian produces one third  more per hour  worked than  the average NZer.

But  of  course   the Tax Working  Group  is  not  interested  in  why low productivity is such a  drag  on the   NZ  economy.  Its  task  is to make the  tax system  “fairer”.    And if the “rich  pricks”   (as Sir Michael   once  described them)  have to  pay,  isn’t  that  only “fair”?

It won’t be only “rich pricks” who are captured  by  the  broadening of the  CGT,  however, but  a broad swathe  of   New Zealanders.

That’s where  the  political  nerve of  the   current  coalition  will be put to the test.

 Just where Deputy  Prime  Minister  Winston Peters  stands  on  the   CGT issue   is  not  known,  but he  may find  the    donors to his   party  from the racing industry   less  generous   next time  round if he endorses it.        

The government has suggested  the new tax proposal  should be  revenue-neutral,  but  if it is broad-based  it  will  capture all asset classes  other than the family home, which means businesses, sharemarket investors and  retirement  savers will be  targeted.

Most CGT regimes in other jurisdictions contain   exemptions and  concessions,  but you can bet Sir Michael won’t be in favour of carving  out  even  the smallest concession.

The Tax Working  Group is not expected to  deliver a working piece  of legislation. That  is where the heat will go on  Cabinet – and how  well  equipped  is it for  the task?   The financial  brains   are   with  Grant  Robertson and  David  Parker,  who  have   campaigned  before for   a CGT, and it fits   with  Labour’s  social  democratic philosophy.

In political terms,  it  may seem a  no-brainer  for the  Ardern  government.  But  will  NZ  First  see  it that  way? 

Almost certainly Peters would be   sounding the  death-knell  of  his party  if, for example, the family bach falls within the scope of the Cullen   proposal. That elderly cohort which has been the backbone of  NZ First support  will flee in other directions if Peters doesn’t blink when called on to put the legislation through Parliament.  

Here’s where the rubber hits the road.  The government has said  a CGT   won’t come into  effect   until  after the 2020 election. Even so it will  be  central  to  the  next election  campaign.

It is the kind of issue which  any  Opposition  party craves in the months before  voters are asked to  decide. Already National MPs are  salivating  at the  prospect of  Ardern  being grilled on  television.  Kindness  and  compassion  won’t  be  working too  well  at that  point.

So Labour  has  lit the fuse   on a barrel  of  political  dynamite.  First it has to   frame and  pass the legislation,  which in itself   will  be no  easy task. Then  it has  to  face  the probability of   hostility on  the hustings.

Of  course,  it  could find it all  too  hard  – or even  accept  the  evidence  that it puts   economic growth at risk.  But such pusillanimity  would  invite political  ridicule