Political Roundup: Why the CGT had to be ruled out

by Dr Bryce Edwards

The soul-searching and blame-game over the surprise demise of the capital gains tax proposals continues to occupy politicos and commentators over the long weekend. Allegations of betrayal continue, while some are also pointing to the inevitable problems with the proposals – why the CGT was never going to fly.

On Friday I put together some of the reactions – mostly from the political left – about Jacinda Ardern’s capitulation on introducing a capital gains tax. See: Progressives despair over the CGT decision. Much of this concentrated on a critique of Ardern and Labour’s failings to have the courage of their convictions.

This included my own suggestion that maybe Ardern and Labour were much less committed to implementing a CGT than they let on, but were instead going through the motions of the working group process simply to keep leftwing supporters onside.

This argument has been made before by Heather du Plessis-Allan, who said back in February the whole exercise was “all talk. There’s no chance it’s going to happen” and that Labour was actually relying on New Zealand First to veto anything substantial – see: Big tax shake-up or big PR job? For du Plessis-Allan, it was more likely that Labour had to look like they wanted a CGT without actually having to implement one.

du Plessis-Allan writes about this again today in the Herald on Sunday, dealing with the explanation that many leftwing loyalists and commentators want to believe – that it was Winston Peters’ fault. She says: “Let’s stop with this nonsense of blaming New Zealand First for killing off the capital gains tax. NZ First didn’t kill it off. Labour did.  Labour killed it off the moment they stopped fighting for it. And that was pretty much the moment Labour got into Government. Labour gave up on this policy long ago. They euthanised it through neglect. If they really wanted to introduce a capital gains tax, they would’ve fought for it” – see: Don’t blame Winston for Capital Gains Tax U-turn.

She calls it a “cynical political decision” by Ardern, and one that the Labour voters should feel let down by. And as to the idea that it was New Zealand First that killed off the chances of a CGT, du Plessis-Allan concludes that the blame is clearly with Labour: “Jacinda Ardern didn’t just rule out a CGT this term while NZ First is still there to oppose it. She ruled it out for the rest of her leadership. If she really believed in a CGT, and really wanted to do it, she would have left that door open to try again once NZ First are out of the picture. She’d have done that if she really wanted a CGT. Labour will be grateful that we’re all blaming NZ First for this backdown. It means they don’t have to take the blame themselves for doing something I suspect they have wanted to do for a while.”

Labour-loyalist Lizzie Marvelly also pondered this yesterday in her Herald column, suggesting that the decision to capitulate had actually been made a long time ago: “The announcement on Wednesday wasn’t exactly surprising. Both the Prime Minister and the Finance Minister appeared to distance themselves from the idea of imposing a capital gains tax when the working group’s report was released. Such a lukewarm response was hardly accidental. I wonder whether the decision to throw the policy to a working group was actually an effective strategy to allow Labour to kick the issue to the kerb once and for all; something they couldn’t do before now, given they campaigned on the issue in 2017” – see: Forget capital gains tax, we need a new plan.

Business journalist Fran O’Sullivan concurs that it wasn’t really NZ First’s decision, saying, “It is simplistic to blame New Zealand First for this defeat. New Zealand First did not rule out a capital gains tax within the Coalition Agreement. But neither did Labour specifically require New Zealand First to commit to empowering legislation by making it a confidence matter” – see: PM’s leadership missing on CGT issue.

Ardern’s explanation for her capitulation was “disingenuous” according to O’Sullivan. And the PM’s failure to even try fighting for a policy that she says she believe in “is a total cop-out on her part. It is also a failure of leadership.” To make this clearer, O’Sullivan outlines many ways that the CGT proposals could have been modified to assuage the critics. She says it was clearly not that Labour and Ardern “can’t” make the case for a credible and convincing CGT, but that they “won’t”.

For many, the timing of Forbes magazine highlighting Ardern’s political leadership was a bit galling. According to O’Sullivan, “Fortune praised her rallying skills. Ardern has those in abundance. Pity they were not used this week.”

Similarly, Duncan Garner said yesterday we now need to “put to one side all this nonsense talk of Ardern being an international leader above all others, the latest being from Fortune magazine. She’s not. Or it’s downright meaningless marketing. She’s best to ignore it. If you can’t put in place a policy so central to Labour’s economic plan, then why have this lot in power at all? What’s the point? Remember the slogan? It’s about fairness. It runs through everything they talk about. All that political capital or credit after Christchurch and Ardern doesn’t spend a cent?” – see: Hard to believe Ardern didn’t spend a cent of her political capital.

Garner pushes back against the lines from some supporters and commentators that “it’s the nature of MMP that you win some, you lose some”, pointing out that this was supposed to be the central priority of this Government: “If ever Labour was going to scream transformational government then the one policy it had in the shop front window was the capital gains tax. It was the panacea, the holy grail on the way to Jacinda’s socialist nirvana.”

He suggests the CGT was the one policy that Labour had to implement to live up to its own leftwing credentials: “Did she fight for a capital gains tax? Did she put her best foot forward? Did she give examples of where it works? No. No. No. Does she believe in it? Who knows? She no longer cares. Sure it’s the nature of MMP that you win some, you lose some, but this was not the one to lose. This goes to the very DNA of this Government. If this Government is who they say they are, and I’m now doubting that big time, wouldn’t they keep a CGT alive? Was this a point of principle or something that played well to the Left until they got caught flip-flopping like a matchbox toy in a Cook Strait southerly?”

Why Labour’s version of the CGT was also a non-starter

In understanding the abandonment of the CGT, there needs to be an acknowledgement that, even from a leftwing perspective, the proposals put forward by the Tax Working Group were heavily flawed and it was questionable that these particular proposals would realise any great leftwing policy goals. I explained this in an earlier column: The biggest problem with the CGT – it won’t do enough. Essentially the way that the Government had set up the terms of the review, and what the working group had come up with were a huge compromise of a policy that would be neither effective nor efficient, especially in dealing with wealth inequality.

This was explained on Saturday by economist Shamubeel Eaqub who is favourable towards a CGT, because a “pure, broad-based capital gains tax makes a lot of sense”, but says what Labour had engineered “just didn’t measure up” – see: Good riddance to Capital Gains Tax and a (slightly) fairer system.

Here’s Eaqub’s main point for why this particular CGT was a non-starter: “The process was also hamstrung from the beginning. It would not be a theoretically pure CGT – the family home, and no doubt other assets over time, would be exempt. The Tax Working Group was to be revenue neutral and the CGT would have only raised small amounts of money. Hardly worth the bother given the cost and complexity to set up a new system of tax. The supporters and opposers were polarised in their vehemence. But international experience shows CGTs don’t do that much. They do not stop housing bubbles or speculation.”

A key problem with the CGT proposal was the exemption of the “family home”, which leads to all sorts of loopholes and anomalies, and reduces the real effectiveness of such a tax. Yet Labour, and particularly the Greens, had argued emphatically for many years for such an exemption, which might have proven to be the downfall of the proposal.

Economist Geoff Simmons, now the leader of The Opportunities Party, has long argued that going down the path of CGT exemptions would make such proposals worthless and perhaps even counterproductive to dealing with inequality. In the wake of the Government’s capitulation, he says: “Federated Farmers were right to call a Capital Gains Tax a mangy dog, and in the end it had to be put down. The Labour led Government excluded the family home from the outset. This meant any tax wouldn’t have much impact on house prices, which was supposed to be the point” – see: Capitalism can work, but only if it is a level playing field.

Simmons makes the point that if you go down the exemptions path, as the Government did, then you end up with more and more concessions, leading to a swiss-cheese type CGT that is more hassle than it’s worth: “Businesses rightly squealed about their inclusion when the problem was so clearly the housing market. New Zealand First were no doubt going to make sure that farmers were exempt. So that would have left… investment property. Such a tiny proportion of our economy that it would barely have been worth the administration costs. And ultimately the poorest people in our society would have ended up bearing the brunt in higher rents.”

This follows on from a very good earlier piece in which Simmons explains how the Government’s CGT proposals would lead to more inequality – see: Davidson is wrong: capital gains tax will hurt the poor.

Here’s Simmons’ main explanation: “Some landlords will sell up and leave the market. These houses will be picked up by those people that can afford to buy a first home – the middle class… This leaves fewer properties for rent. We know that rentals have more people living in them than owner occupied dwellings, so this increases the pressure on the remaining rentals by a lot. Rents will rise, probably by quite a lot. Here’s the kicker – the Capital Gains Tax excluding the family home doesn’t raise very much money. So there isn’t enough money to compensate poor people for the higher rent costs. The result is that more than half of new households would be worse off, especially the poor ones.”

Another economist, the University of Auckland’s Tim Hazledine also injected his own views into the debate earlier this month, saying that it was essential to include family homes: “I, and many other economists, just have to point out that a comprehensive, no-exemptions tax system gets the two ticks for efficiency and fairness. And perhaps our politicians are actually underestimating the basic good sense of the citizens on this matter. I do hope so, for all our sakes” – see: No-exemptions CGT is efficient and fair.

Political commentator Liam Hehir therefore concludes: “Labour came to the only logical conclusion, with a little help from its friends. A Capital Gains Tax was little more than scratching an itch of its voting base, but would have done little for the country and the government” – see: CGT: A bad idea finally put to bed once and for all.

In the end, there were too few promised benefits from the tax: “It would not have generated substantial new revenues for spending. It would not have materially diminished house prices. It would, it was conceded, put some upward measure on rents. All the while the building of more expensive family homes would be encouraged. The construction of affordable rentals, on the other hand, would be discouraged. The compliance costs would have been an expensive nightmare for the majority of New Zealand businesses already burdened by the accumulations of decades of regulatory creep.”

And for Hehir, it all comes back to the Labour/Green insistence on the tax exempting the family home: “Some of these problems arose from the compromised nature of the CGT put forward. To have a chance of being palatable, however, the tax had to include exemptions on things like the family home. The minute you go down that path, however, you create a whole new suite of distortions and encouragements for tax minimising behaviours.”

Finally, for satire on the tax capitulation, see Andrew Gunn’s The CGT debate: what they really said and Steve Braunias’ Secret Diary of the Capital Gains Tax.