by Dr Bryce Edwards

What is a leftwing political party and government for? Ultimately, they exist to ameliorate inequality, making the world better for working people, the poor, and marginalised. The point is to transform society – restructuring in favour of the powerless, against the wealthy. That’s the theory, at least. 

In the wake of the Labour-led Government’s capitulation on introducing a capital gains tax there are now broader questions being asked about whether this Government, and the Labour Party in particular, are committed to or even have a plan for dealing with inequality. The post-CGT conversation has now moved on to the question of “what now?” and “how will this government make progress towards greater economic equality?”

The Government is certainly not off the hook according to political journalist Henry Cooke: “Labour has spent the last nine years telling voters the economy is in desperate need of change, with inequality high, house-prices skyrocketing, and wages stagnating. With the CGT off the table and the restrictive budget responsibility rules holding off borrowing, it’s hard to see how exactly Labour is going to deliver on that change” – see: Capital gains tax: Jacinda Ardern took a lifeboat off a ship she could have saved.

He says although “changing the tax system is unpopular”, “it is also probably the biggest lever government have to shape the economy”.

Of course, tax reform that is focused on addressing inequality doesn’t have to mean a capital gains tax, which is the point made in the weekend by the Herald’s political editor, Audrey Young: “A capital gains tax is not the only way to address inequality. Helen Clark and Michael Cullen rejected a CGT during their nine years in Government, opting instead for direct transfers of wealth through Working for Families” – see: Lay off Jacinda Ardern over capital gains tax.

Young nominates one particular tax reform: “If Labour wants to target rental property owners in the future, there is nothing to stop Ardern and Robertson promoting a tax policy to achieve that without it being a capital gains tax – such as the risk-free return method promoted in the minority report”.

This method, “the risk-free rate method (RFRM) or net equity approach” has also been strongly advocated for by University of Auckland economist Susan St John – see her post-CGT blog post, Grasping the chance to do it better.

She explains that this would require “each person’s total equity in housing and residential land after deducting registered mortgages [over the threshold of $1m], to be aggregated and treated as if it was earning interest, say in a bank term deposit. The implied taxable income would then be taxed annually along with other income.” According to St John, this would actually be superior to a CGT, without the complexities, and would produce better use of housing.

She also says “the existing bright lines tests must be strengthened, extended and properly policed to catch short-term speculation”. But overall, St John stresses that doing nothing isn’t an option, as the original problems which led to the CGT debate, “have not gone away. These are housing unaffordability and increased inequality, both of which are highly damaging to New Zealand’s future stability and prosperity.”

The Chair of the Tax Working Group, Michael Cullen, has also come up with some suggestions for a way forward, saying “Where to now with no new tax base? All is not lost” – see: ‘Vested interests’ sunk Capital Gains Tax idea.

Cullen’s main proposal is for some serious tidying up of tax collection on businesses, especially those employing creative accounting to avoid tax: “The Government and IRD need to come down hard on such artificial tax avoidance schemes. There needs to be more test cases taken to establish what are the current limits in the law on such behaviour. And there needs to be legislative changes to ensure that the more egregious examples are dealt to.”

Also at the more minor end of the scale of reform, it’s worth looking at some of the other proposals that came out of the Tax Working Group. Back in February, Catherine Harris covered these well in her article, Five things that the Tax Working Group considered apart from capital gains. According to this, “the report also gives considerable thought to taxing shares, empty houses, gig workers, business assets and vices like sugar.”

The leading alternative to a capital gains tax continues to be a “land tax”, which economist Shamubeel Eaqub advocates as a better solution to the housing crisis than the proposed CGT – see Newshub’s The tax that’s better than a CGT, according to economists.

In this, Eaqub explains: “The way we charge rates is the tax is on the improved value of the land, but really it should be on the unimproved value of the land, because that would force people to use their land.” So, instead of a CGT, he says “the Government should look at a land tax, which would involve revamping how local councils are funded.”

However, many have lost faith in the ability of this Government to lead and implement anything like this kind of bold thinking. Writing today for Newsroom, Anna Rawhiti-Connell argues that Ardern and her colleagues are willing to pay a high price for choosing “political reality” and compromise: “The environment is in serious trouble. Child poverty and inequality look to have increased not decreased since this government took office. The housing crisis is still very much a crisis, teachers are still underpaid and overworked, productivity and wages remain static – we work more hours and get no further ahead and the fate of our mental health system rests in the hands of yet another working group” – see: ‘Was it naive to expect a change Govt?’.

Rawhiti-Connell concludes that true transformation is more likely to come from the private sector.

David Cormack thinks there is still a slim chance of bold reform from the Government: “maybe there’ll be a different adjustment to our tax system. Like a land tax. Or a wealth tax. Or nationalising the banks. But I’m not holding my breath” – see: Labour Govt had better be more than meets the eye.

Cormack is holding out hope for progressive change coming in next month’s Wellbeing Budget, “which I’ve been assured has strong demonstrations of progressivism in it”. But he says the Government needs to deliver more than just rhetoric about kindness: “All this talk of governing in a new way and doing the politics of kindness is great. But you can’t eat kindness. Kindness doesn’t afford you a house. Kindness doesn’t redress the imbalance where one generation got huge amounts of support to get houses, jobs, education, and healthcare while those coming next have been left fighting over scraps.”

For a scathing critique of the government’s failure to make good on the promise to be transformational and tackle inequality, see former Labour Party activist Joe Pagani’s What is the Labour Party for? He argues that most of the progressive reforms of the Ardern administration “could credibly have been introduced by a Bill English-led National party with a centrist partner”.

A proper leftwing party and government, Pagani says, would be implementing much more radical changes to taxation: “Labour governments aren’t elected to ban plastic bags. They are elected to shift the balance from capital to labour. From those who own, to those who earn. By raising taxes on those who own for a living and lowering them on those who earn for a living, the Government would shift the balance between labour and capital.”

And here’s Pagani’s own proposal for reform: “The Government should now come up with a better means of switching tax. A tax on the unimproved value of land – traded off with income tax cuts (say, an income tax-free band that would extend some benefit to every taxpayer) – would be efficient, and effective. By definition, it would redistribute from those who own, to those who earn.”

Changes of this magnitude are unrealistic under the current leadership of the Labour and Green parties according to union leader Mike Treen, who argues the CGT reforms failed because workers are already overtaxed, and a more fundamental shift was needed to make any new taxes politically-achievable – see: There is a lot of noise but little light being shown on the debate over a capital gains tax.

Treen puts forward two proposals as the way forward for dealing with inequality. First: “The solution to the challenge the government faces is to go straight for a wealth tax that targets everyone with an asset above $5 million. The government could design a tax that can’t be avoided in life or death. Working people would not care a bit because almost none of them would have an asset above $5 million.”

Secondly, Treen argues that the current ACC fund of $40b is entirely unnecessary to be kept as a reserve, and instead: “the government could take and use over the next decade to fund urgent needs in health, education and welfare and still have a billion dollars a year to build 10,000 state houses a year.”

Finally, if the three coalition government partners aren’t willing to deal properly with inequality, they might face the rise of a new political force that takes the issue more seriously according to Bernard Hickey – see: Jacinda Ardern just did a John Key. He sees a generational war emerging: “Young voters are unlikely to just sit there and take it. They may have been disappointed by Ardern’s promises of transformation and action to improve tax fairness, but they will find a home to vote for. At some point there will be room for an anti-Winston party, or more likely a party to agitate for the interests of generation rent.”

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.

by Dr Bryce Edwards

It really was a shock for the political left. The capital gains tax, in some form or another, was accepted as a major part of the battle to create a more equal New Zealand. It had come to symbolise the struggle against much of what has gone wrong in our society in recent decades. So there was a lot invested in people’s minds about the necessity of some form of capital gains tax that would hit the wealthy, and level a playing field that had become so distorted.

Of course, it was widely recognised prior to yesterday’s announcement that any new capital gains tax was likely to be watered-down. In fact, many on the left were already critical that the Government had set up the Tax Working Group with a heavily watered-down remit in which major exemptions were expected, including the expectation that a CGT would be fiscally neutral.

But few expected that the Government would reject any form of CGT – let alone Jacinda Ardern’s outright rejection of even revisiting the issue in the future.

Anger and disappointment on the left

For many on the left, the decision is an indictment of the whole idea that this Government will be transformational. Danyl Mclauchlan argues that the CGT programme was one of four key policies agendas for this Government – the others being KiwiBuild, the Carbon Zero Act, and the Wellbeing Budget – and there are clear problems now in delivering them – see his column, Four months in, Labour’s ‘year of delivery’ is a disaster.

He despairs that Labour axed the tax after first initiating “one of the most bafflingly disastrous public policy debates imaginable, making John Key’s flag-change campaign look like the Normandy landings”.

He says any strategic wins from ditching the tax, will come “at a cost of one of Labour’s most important, long-term policies, and it was their failure to control their coalition partner or even attempt to make the argument for taxation reform that forced them to pay such a bitterly high price.”

Mclauchlan argues that Ardern could have won the debate and got a mandate for the changes, but simply didn’t bother. In contrast, even John Key, managed to use his political capital to campaign on and win unpopular policies.

Other leftwing bloggers are very unhappy. No Right Turn is now calling for a leftwing boycott of the Labour Party: “If you want change, don’t vote Labour, don’t donate to Labour, don’t volunteer for Labour. Give your vote, your money, your time and effort to another party, any other party that promises change, than the one who betrayed you. Because if you don’t, Labour will continue to treat you like a fool, and continue to promise change while delivering none” – see: Don’t get fooled again.

They also argue the decision means the Government won’t have the money to afford many of their future policy goals: “Effective policy costs money, and this government has just robbed itself of that vital tool. Remember this next time they plead “poverty” as an excuse for not doing something: they chose to be poor. They chose to have a government which could not afford things. They chose to not be able to do the things they promised” – see: The cost of cowardice.

This idea is expounded in detail by inequality researcher Max Rashbrooke, who argues that many other Government priorities will now be hamstrung by the lack of future revenue: “building more state homes, eliminating introduced predators, and repairing mental health services, among others – also require significant funds, again well above what will be generated under existing tax settings” – see: Capital gains tax shutdown threatens govt’s other plans.

In particular, “Consider the Prime Minister’s pledge to halve child poverty within a decade, possibly the political priority closest to her heart. It is very difficult to see how that can be achieved without the $3.4 billion a year that the capital gains tax was, according to the most recent estimate, going to raise.”

Of course, some are suggesting that the left shouldn’t be too hard on Ardern and Labour, because they had to deal with the reality of MMP and it was New Zealand First who wouldn’t budge on the CGT.

David Farrar debunks this idea: “The reality is Labour choose not to proceed. How do we know this? Simple. Ardern’s announcement that Labour won’t implement a CGT ever ever ever while she is leader. If this was simply about NZ First, then Ardern would have said we don’t have the numbers in this Parliament for it, but we believe this is important and we’ll try again when we do get the numbers. This is what National said when they didn’t get the numbers for RMA reform” – see: Analysing the CGT back down.

What’s more, Farrar argues that if Labour had really wanted to, they could have got their coalition partner onside: “A deal could have been done with Winston. If Labour really wanted to get the numbers to pass it this Parliament, then of course a deal could be struck for some form of a CGT. This is what politics is about. Look at the oil and gas ban decision. That went against NZ First’s interests just as much as a CGT would. NZ First backed it because they did a deal in exchange for their waka jumping law. Labour could have offered NZ First some other wins if they had wanted to.”

So will Labour Party activists now lose some of their faith in Ardern and their government? One news article provides mixed reports on this – see Jason Walls’ Long-time Labour activists don’t think the party will be too hurt from CGT rejection. For example, former Labour Party President Mike Williams suggests that although there are “elements of, particularly the unions and the extreme left of the Labour Party, which would be annoyed”, he “did not think the wider Labour Party base would be too worried about the CGT rejection”.

But Newshub’s Anna Bracewell-Worrall reports that “Labour is facing a massive backlash from its base for ditching any hope of a capital gains tax (CGT) – even Young Labour and the ever-loyal unions are fuming” – see: Young Labour furious at capital gains tax backdown, leak reveals.

According to this report, “Newshub’s been leaked a discussion from a secret Young Labour Facebook group revealing they’re frustrated with the decision. The Labour Party faithful say they’re ‘mighty disappointed’ and ‘exponentially angry at New Zealand First’s role’, and complaining of ‘unfulfilled promises’.”

Questions about political leadership and courage

It’s not just the political left expressing surprise at Labour’s capitulation on the CGT. Some media have also challenged Ardern on why she has given up on what was supposedly a central and principled part of her philosophical agenda.

At the Prime Minister’s announcement, Newsroom journalist Thomas Coughlan asked the very pointed question of Ardern: “Are you worried you now lead the party of capital, rather than labour?” And now he’s followed this up with an article suggesting that rather than Ardern and her Government implementing transformation, it’s actually them who are transforming – into a cautious and weak government not willing to make the hard and necessary decisions – see: Capital gains tax: Let’s not do this.

Newspaper editorials have also challenged the convictions of the Government. Yesterday, the Dominion Post asked if the decision came out of “cowardice or pragmatism”, but suggested the two are indistinguishable anyway. The editorial suggested more debate and leadership had been required for the CGT proposals to get off the ground: “Labour voters were evenly split on the pros and cons of a capital gains tax. It is a situation where brave political leadership and persuasion were required but for whatever reasons, a deep and thorough debate about fair and unfair tax failed to eventuate” – see: Capital gains tax: Political capital but for what gain?

The newspaper says that Ardern had a “a failure of nerve”, and laments that an opportunity has been missed: “If there was ever a moment when significant change to the tax system could have happened, as the fairness and transformation her Government promised, that moment was now.” And there’s the question of “if the Tax Working Group was merely an expensive waste of time with a predetermined outcome.”

Likewise, according to the New Zealand Herald, “The decision has the hallmarks of pragmatism rather than strong leadership”, leaving “little evidence so far that Ardern will make tough but unpopular decisions to deliver on her convictions” – see: Capital Gains Tax surprise raises doubts on coalition.

The newspaper, which mentions its own support for more capital gains taxes, complains that the decision-making process on this vital issue leaves a lot to be desired: “If laws were introduced only when there was a mandate, we might as well be governed by a series of weekly referenda.”

Many political commentators are quite amazed at just how easily Ardern has capitulated on the issue. For example, Tim Watkin, says the decision “is truly remarkable. She didn’t deliver what Labour wanted. She didn’t get even a compromise version. She got nothing. Zip. Nada. Nil. What good is power if you are unable – or too cautious or too timid or not savvy enough – to wield it? If Ardern can’t stare down or cajole Peters now, with the world at her feet, voters are left to assume she will never be able to. And if she is not able or prepared to go to the wall for a policy like this – a Labour passion and bugbear, something she made a ‘captain’s call’ on, a policy with inter-generational ramifications – then what will it take?” – see: Jacinda Ardern thuds back to earth thanks to NZF’s ‘carefully generated torpedo’ (CGT).

And one commentator says that this episode proves Gareth Morgan was right to argue in 2017 that Ardern wasn’t up to producing transformational change, but was just “the lipstick on the pig” of a conservative Labour Party – see Jamie Ensor’s ‘Lipstick’s come off the pig’: Sean Plunket blasts PM Ardern’s capital gain tax backdown. Plunket says: “She was never really committed to it in the first place. She was just lipstick, there was no substance” and now the “lipstick has come off the pig”.

Finally, although many are viewing the CGT capitulation as a failure of leadership and conviction, there’s an argument to be made that it was actually worse than this – and the entire exercise was executed in bad faith. Writing on the RNZ website, I suggest that perhaps there was never any real intention to implement a capital gains tax – see: Signs Labour didn’t intend to implement capital gains tax.

Perhaps the public has looked at the Tax Working Group proposals for a capital gains tax and come back with a “no”. Certainly, the opinion poll published last night about the tax proposals looked quite definitive – the headline for Tova O’Brien’s Newshub scoop was: Large majority of New Zealanders don’t want capital gains tax – poll.

According to Newshub, a poll by Reid-Research – the polling company contracted to TV3 – “shows an overwhelming majority of voters – 65 percent – don’t think a CGT should be a priority for the Government. The poll found that just 22.8 percent think it should be a priority.”

More importantly, nearly 50 per cent opposed a capital gains tax on housing (with the family home exempt), against 39 per cent in favour. On the issue of businesses and farms being included, 54 per cent disagreed and 32 per cent agreed. And 69 per cent disagreed with a tax on shares, and 90 per cent disagreed with another tax on KiwiSaver.

Based on this poll, Newstalk ZB’s Mike Hosking has come out this morning to say the Government will ignore this poll at its peril: “If these numbers don’t wake them up, it might well be the break National have so badly been waiting for” – see: Numbers don’t lie, time for the Government to wake up over CGT.

In particular, Hosking says, it’s New Zealand First who will be most concerned: “these numbers, I would have thought, are about the final nail in the coffin for New Zealand First, who most see as the moderator of any excess that comes out of the Cullen report. If they weren’t hesitant to sign up before, surely the polling we’ve seen now is about as rock solid by way of proof as you could ever possibly want.”

Business NZ’s questionable data

However, Newshub’s Reid-Research poll wasn’t actually commissioned by them, but was instead paid for and set-up by Business New Zealand, a lobby group which is strongly opposed to the introduction of the full capital gains tax proposals. And, as always, the polling questions help determine the type of data produced.

So not only did Newshub report the survey in a questionable way, but the actual survey questions are rather unusual. For example, the headline figure is based on whether New Zealanders see the capital gains tax proposals as a priority. It is a useful question, with useful results, but it’s far from indicative of whether New Zealanders oppose the proposals.

Likewise, questions about whether the issue has harmed the government – 48 per cent say it has, against 33 per cent who say it hasn’t – are interesting, but not entirely useful. Similarly, it’s difficult to interpret the fact that 25 per cent of respondents say the issue would change how they vote, against 58 per cent who say it wouldn’t.

In general, when looking at the poll results, keep firmly in mind that the source is a lobby group with an interest in slanting the results a certain way. Similarly, the business group recently released research to show “estimates the ‘economic drag’ over the first five years of the proposed CGT regime at between $2.75 billion and $6.81b” – see Liam Dann’s Capital Gains Tax could cost NZ economy billions – Business NZ.

The head of Business NZ, Kirk Hope, explained that these concerning figures had been independently assessed by economists, and that the assumptions and estimates were actually “conservative” – i.e. the real figures are likely to be worse. However, this is all strongly challenged by Tom Pullar-Strecker in his article, What’s behind BusinessNZ’s claim CGT would cost $5 billion?

It turns out that many of Business NZ’s claims are less than rigorous. In fact, one of the economists, Chris Evans, who is cited as emphasising the likely high compliance costs of the new tax has been quoted out of context. Evans actually said “that the compliance costs would not be excessive”, and Pullar-Strecker reports his belief that the proposed CGT “would compare favourably with those in other countries, including Australia”.

Pullar-Strecker concludes his investigation into the lobby group’s report stating “BusinessNZ says it wants to start a debate, accepting its numbers aren’t perfect. But its figures may be better viewed as politicking dressed up as a study.”

This doesn’t mean that Business NZ are the only ones who might be accused of massaging the figures and evidence to suit their own arguments. Even the Tax Working Group and Treasury are being criticised for their questionable use of wealth inequality data to make their arguments in favour of change – see Troy Bowker’s Why argument of Capital Gains Tax fairness is based on unreliable data.

According to Bowker, the CGT report was based on wealth statistics gathered by Statistics New Zealand, which were used to show that few New Zealanders would be subject to the new taxes. However, “By the Department of Statistics own admission, it contains data that is so unreliable they cautioned against its use.”

Other capital gains tax surveys

There has been some other public polling about the tax proposals that provide additional and alternative information. The most recent was published just over a week ago, by the Horizon Research company, and this is best covered by Liam Dann in his article, More Kiwis support capital gains tax than oppose in new poll. Most notably, this survey showed much stronger support for the tax proposals: “44 per cent of New Zealand adults supported introducing a capital gains tax and 35 per cent opposed it. A further 16 per cent are neutral on the new tax, while 6 per cent did not know.”

This poll was particularly interesting and useful, because it also indicated how different voters and asset-owners felt about the proposals. Here’s the different political party supporters in favour and against: Labour (60 per cent support; 14 per cent oppose), National (23 support; 62 oppose), Greens (75 support; 14 oppose), and NZ First (30 support; 55 oppose).

In terms of asset owners: those with shares (56 per cent oppose), with rental properties without a mortgage (66 oppose); with rental properties with a mortgage (74 oppose); and those with farms or large lifestyle blocks (90 oppose).

Some farmers are actually showing increased support today for a capital gains tax on farms, particularly when the asset is brought and sold in a short space of time. Newshub reports today that “Federated Farmers vice president Andrew Hoggard told Newshub people’s gains from quickly selling on farms need to be targeted first” – see: Farm flippers should be taxed – Federated Farmers.

It’s also interesting to look at a survey of business owners, which was carried out by the MYOB company, and showed that opposition from this sector wasn’t as clear as might be assumed: “Most business owners are against a capital gains tax but a survey found fewer than half were strongly opposed and a fifth were supportive” – see Tom Pullar-Strecker’s Capital gains tax compromise inevitable, accounting body believes.

This article shows that “Backing for a CGT was strongest among ‘Gen Y and Z’ business owners – with more than a quarter of them happy to stomach the tax – and from business owners in Wellington, while ‘baby boomers’ were more likely to be opposed.” In addition, research in New Zealand from the Certified Accountants Australia found that “there was a minority of business owners who did not like a CGT but who felt it would be necessary to meet the country’s future social and economic challenges”.

New public debate on CGT

A new campaign was launched yesterday to provide a pro-CGT perspective in the current debate. The Tax Justice Aotearoa launch at Parliament is best covered by Tom Pullar-Strecker, who points out that “Much of the lobbying over a CGT to date has come from groups opposed to the tax, which include the Taxpayers Union”, and the new campaign is meant to even up the disparity – see: CGT supporters and Taxpayers Union take tax wrangle to Parliament.

The article reports concerns about the political independence of the new campaign, as well as whether taxpayer funds are being used to assist it, especially because of the involvement of the Public Health Association, which receives funding from the Ministry of Health. The article reports: “PHA chief executive Prudence Stone clarified it had not provided any cash or resources for Tax Justice Aotearoa to date but did not rule out doing so in future.”

The campaign has established a petition: Tell Jacinda we want a capital gains tax. It’s time to join the modern world, which currently has 1,200 signatures.

Although Tax Justice Aotearoa’s petition appears to implicitly support the Government’s Tax Working Group proposals for a capital gains tax, including the exemption of a family home and the package being fiscally-neutral, two of the campaign’s organisers explain in more detail their advocacy of tax reform, which involves going further than what is currently proposed – see Paul Barber and Louise Delany’s Why we’re shouting about a capital gains tax.

In line with some of these messages, it’s also worth reading today’s opinion piece by Alison Pavlovich who emphases some of the selling points she believes are missing from the debate on the current proposals, such as the importance of equity in the tax system, and pairing of tax cuts with the CGT – see: The point being missed in the capital gains tax debate.

Finally, for humour on the tax proposals, see my updated blog post, Cartoons about the proposed capital gains tax.

by Dr Bryce Edwards

The capital gains tax debate is a huge political issue, and a great deal rides on the outcome – especially the chances of the Labour-led Government being re-elected next year. So far, it’s not looking great for the Government. At this stage it appears very unlikely that they will be able to implement the full capital gains tax that Labour and the Greens clearly want. Instead, at best, a watered-down capital gains tax (CGT) compromise seems likely.

Writing on the RNZ website today, outgoing Morning Report co-host Guyon Espiner – who will be replaced on the show by Corin Dann – has expressed his disappointment at what is shaping up to be a less than satisfactory new tax, saying a compromise might help the governments re-election chances but “it’s not the transformational government we were promised” – see: Politics punches holes in the tax net.

According to Espiner, “already Jacinda Ardern is buckling” on the issue, and appears to be positioning the public for a likely back down on how comprehensive any new capital gains tax will be. Reporting on the Prime Minister’s Monday press conference, he says “her main goal was to soften the ground for exemptions” to the tax, with farmers and businesspeople likely to be allowed to continue without paying such a tax. He says “It sounds as though after all the pet constituencies are protected we may end up with a CGT on residential investment properties only.”

Espiner makes the case that providing lots of exemptions to such a tax weakens it, to the point where it may end up almost meaningless: “we can run into real trouble by granting concessions in the tax system in order to please constituencies. Fairness and kindness are subjective concepts so tax systems have to have strong and consistent principles underpinning them. That’s why GST works. No exceptions. Even drug dealers pay GST, as David Lange famously observed… We are heading into that territory now with the CGT where you puncture the IRD’s net with such large holes that it becomes useless.”

Other commentators are also critical of providing too many exemptions to the CGT. For example, Newstalk ZB’s Mike Hosking: “Do remember the more they cut out of this, the more people they exempt, the less sensible a CGT is. If you’re taking farms and businesses out, you open the Pandora’s Box of the fast burgeoning industry that is tax avoidance. Not to mention the fact the more you exempt, the less you actually raise. And the less you raise, the more questions are asked about the cost of compliance and chasing the returns” – see: Capital Gains Tax a train wreck driven by a naive Government.

Hosking suggests the Tax Working Group process simply didn’t work out, and now the Government is in disarray over the whole project: “The working group was specifically tasked with finding a way to make a CGT work, they couldn’t. They told the Government they couldn’t, they were then told to go away and try harder. All the while the Government stalled, pretending they hadn’t made up their mind. They’re still stalling, pretending they haven’t made up their mind and in that is the naivety, they’re taking their issue, and making a complete and utter hash of it.”

Newstalk ZB’s political editor Barry Soper argues that Ardern has miscalculated the whole CGT strategy, and only now is she “wide awake to the political damage it’s doing to Labour” – see: Prime Minister Jacinda Ardern in state of shock at reaction to Capital Gains Tax plan.

Certainly, there will be plenty of disappointment if Ardern and her government backs down on the CGT. For example, Anna Connell says that a back down on the CGT would indicate that this government isn’t really going to deliver: “I hope the CGT stays if only to signal that Labour isn’t crippled by short-termism and that working groups can effect change. Because we have a lot of them and while I applaud rigorous thinking in decision making, at some point we’re going to need to see some transformation from this government. They have already spooned out a lot of transformative rhetoric and backed working groups to do a lot of the heavy lifting for them” – see: Capital gains tax – should we care?

A back down would be reminiscent of Ardern’s earlier CGT retreat during the 2017 election campaign when she first promised the new tax would be implemented and then changed her mind and promised no such tax would come in during the next parliamentary term.

According to RNZ’s Tim Watkin, back in 2017, “Having made the hard political decision, she choked”, and he can see her doing this yet again – see: Capital Gains Tax – now it’s a numbers game.

Here’s his main point: “This is a weakness for Ardern; the sense that she can talk the talk, but is timid when it comes to the walk. She has consistently talked about a CGT as a “fairness” issue, implying that the current regime is not fair. Will she balk again? If she does, there is a serious risk that a narrative of timidity will begin to form around her. I’m not sure she can afford to do the all groundwork – again – and then not ride into champion the fairness she has indicated she wants.  The kindness doctrine she aspires to comes with a cost – political and fiscal. At some point she needs to stop just humming the tune and start paying the piper.”

Such a back down on CGT by Ardern and her finance minister is simply not tenable according to John Armstrong: “They have made it their mission to address inequality. The means of doing so has now been laid out in detail in front of them. For Ardern in particular, the implementation of a capital gains tax is the ultimate test of her willingness not just to talk about doing the right thing, but to actually do the right thing” – see: Failure to deliver capital gains tax would see Ardern reduced to a laughing stock.

Armstrong says that “having declared 2019 to be the year in which Labour will deliver, the failure to deliver a capital gains tax would see Ardern reduced to laughing stock.” He thinks this is unlikely though, and that there “will have to be tempest-level tumult from all parts of the electorate… for Labour to abandon the working group’s key recommendation…The reality is that even if their nerves get the better of them, Ardern and Robertson no longer have the option of engaging reverse gear.”

Perhaps, however, Ardern and Labour never had any intention of introducing a full capital gains tax, and the whole exercise has been a face-saving one in which the party manages to signal its virtue to its supporters without actually intending to burn up any political capital. This is the argument from Heather du Plessis-Allan, who says the exercise is “all talk. There’s no chance it’s going to happen” and she says Labour is actually relying on New Zealand First to veto anything substantial – see: Big tax shake-up or big PR job?

She explains why the Government has gone through the motions with the CGT exercise: “A CGT was a Labour election promise. It’s all about making the tax system fairer. It’s a Government looking after the poorest Kiwis. Robertson and Ardern have both spent too much time repeating that message to now walk away from their one chance to fix the system.”

And then Peters and his party can be relied on as “Labour’s get-out-of-jail card”, because Labour can “happily drop a CGT and blame it on him. They could trot out the old you-win-some-you-lose-some argument. They’ve used it before.”

Clearly the government parties will risk losing votes if they implement any sort of CGT. And Bernard Hickey has a useful column outlining how the electoral maths is against a CGT being implemented. He says that many citizens who are most inclined to vote have a strong financial interest in preventing such a tax being implemented: “The dirty little secret of the whole debate is that property-owning voters are almost completely dependent for their retirement security and their small business survival on over $500 billion of untaxed and leveraged capital gains from their land over the last 15 years” – see: Capital gains debate’s dirty little secrets.

Hickey says that “voting rate imbalance is especially wide between older Pākehā property owners and young renters that are Māori, Pacifika or new migrants”, but Labour “will be hoping the electoral mathematics of the low voting rate of young urban renters can be changed just enough to swing the balance.”

Chris Trotter is even less optimistic, and argues that polling data and any study of New Zealand political culture shows that introducing a CGT would simply lead to the current government being defeated at the next election, and therefore cheerleaders for the change are suffering from “a peculiar kind of political tone-deafness” – see: Dying in a ditch for a capital gains tax that half the country doesn’t want. Trotter also suggests that the CGT on offer is far from radical, and progressives have more important issues that “are worth dying in a ditch for”.

There are definitely some big questions about principle versus pragmatism over the issue, and for Magic Talk radio’s Ryan Bridge, Jacinda Ardern “must decide what’s more important for her politically, principle (we all know Labour believes a CGT is what’s right), or electability” – see: Jacinda has poked an angry tiger.

Bridge reports from talkback-land that “you’d be forgiven for thinking a bomb went off given the amount and heat of the reaction to a comprehensive CGT. I’ve not seen anything quite like it in my time hosting drive-time radio. Jacinda Ardern has well and truly poked the tiger.” But on the other hand, “then the left won’t be happy” if the Government only implements a watered-down CGT: “It’d be like going to a strip show where the main attraction keeps her pants on the whole time.”

However, the Herald’s political editor Audrey Young argues that “even a limited version would be an extraordinary political achievement for Ardern and Robertson” – see: Michael Cullen has given the Government exactly the kind of report it needed. She points out that “It is already quite an achievement politically that a Labour Party that could not sell a 15 per cent capital gains tax at the 2011 and 2014 elections now stands a reasonable chance of imposing an even bigger one at 33 per cent on residential investment property”.

Young has focused on the elephant in the CGT room: New Zealand First. In her column, A limited capital gains tax may not be such bad news for NZ First, she reports on statements last week that Winston Peters made on The Country radio show, in which he ruled out farmers being affected by any CGT.

This is a sensible position, Young suggests, because “New Zealand First would be dicing with death if it supported a comprehensive CGT on small businesses, including farms.” She also argues that Peters can benefit electorally through pushing for such major exemptions: “If New Zealand First can stop the Labour-Greens this term to have a CGT apply to farms and business, it will have a strong case to argue it would similarly be needed next term.”

For more on NZ First’s likely role in watering-down the CGT, see veteran press gallery journalist Peter Wilson’s Capital gains tax: Winston Peters holds all the cards on changes. Here’s his main point: “The party’s leader, Winston Peters, is on record as a strong opponent of a CGT. He has said it doesn’t work in other countries and won’t work here. In recent days, some of his MPs have been saying the same thing privately. Mr Peters doesn’t swallow dead rats. There’s no way he’s going to change his mind to the extent necessary for the government to get this through in the form presented by the Tax Working Group.”

Wilson is worth quoting further: “Peters will play this for all it’s worth. He’ll want concessions, and his demands will be focused on NZ First’s voter base in the regions and among older people. He’ll almost certainly insist that farmers are exempt, and perhaps small businesses as well. We’ve seen it before with the changes Labour had promised to employment law, which NZ First watered down to a level that greatly reduced their impact. If Mr Peters goes through a similar exercise with a CGT he’ll be a hero to those he has saved from it and his party could reap the rewards at the ballot box. It will also test Prime Minister Jacinda Ardern’s leadership.”

Finally, for humour on the political backlash against the capital gains tax proposal, see Andrew Gunn’s Hysteria and hubris: the CGT files.

by Dr Bryce Edwards

Are the purported benefits of the Tax Working Group’s proposed capital gains tax an illusion? So far, questions about the potential effectiveness of the tax are the biggest challenge to the proposal, as there are strong doubts about whether the new tax would really achieve its desired aims. 

The best arguments in favour of introducing a capital gains tax centre around the need to fix problems of economic inequality in New Zealand. I outlined these yesterday in my column, The arguments in favour of a Capital Gains Tax.

But would the proposed CGT actually achieve much in this regard? At what cost? And are there better ways of dealing with some of the problems of economic inequality? They’re some of the questions being asked by commentators across the political spectrum at the moment.

The biggest challenge to the Tax Working Group’s proposal is whether it’s “too little, too late”. In the context of the huge problems of inequality, especially in terms of housing, the solutions do seem comparatively weak.

This has been best expressed by Anna Connell in her Newsroom column yesterday, in which she says she has been underwhelmed by the proposal’s lack of vision or ambition: “The recommendations just don’t seem that radical or go far enough to address some of the enormous challenges we have looming on the horizon. There’s a limit to what tax policy can achieve but when it’s the main source of revenue for the entity in charge of which direction we travel and where we spend our money, it’s pretty high up the list of things I’d like to see properly future-proofed” – see: Capital gains tax – should we care?

Connell thinks that both the strong pro- and anti-CGT factions fail to appreciate the extent of the problems the tax is seeking to tackle, and have an exaggerated idea of how much impact the proposed tax would have: “when you live in a world where the odds seem increasingly staked in favour of the overtly wealthy, where tech companies pay little or no tax and the gap between rich and poor seems beyond closing, I don’t necessarily view a CGT as any kind of real leveller. I just can’t get that het up about it – as a blow for fairness or an assault on the individual’s right to reward for hard work. I reserve most of my apathy for the politics of it all. Because I think it’s past it’s use-by date as a political lightening rod”.

Economist and TOP leader Geoff Simmons believes something similar, lamenting that inequality problems will be barely touched by this proposal: “Our tax system should be the central tool in fixing these problems. Sadly the best we can hope for following the Tax Working Group’s recommendations is that these problems will continue to get worse; only a bit more slowly” – see: The Tax Tweaking Group.

Simmons says that at the heart of worsening inequality lies housing, particularly with home ownership and renting becoming unaffordable: “The Tax Working Group was supposed to make our tax system fair. Sadly the Government tied their hands at the outset, ruling out the biggest tax loophole we have – the ‘family home’.”

What’s more, according to Simmons, the effect of the CGT will be to drive more investment in family homes: “it reduces the incentive to invest in businesses (which produce jobs and incomes) rather than sticking all our money into housing. As a result, under a CGT Kiwis will probably end up sticking even more of their money into housing than ever before, particularly the family home. This is known in Aussie as ‘the Mansion Effect’.”

Simmons and Connell aren’t the only ones wondering if the CGT will actually have any impact on inequality. An Otago Daily Times’ editorial has a long list of good questions that need to be addressed when assessing if the tax is worth supporting – see: Jury must deliberate on tax reform.

The ODT’s questions boil down to: Will it really fix inequality? Is there a better solution to inequality? Will the tax really be fiscally neutral? Will all the compliance and efficiency costs be worth it? Will there be too many exemptions and therefore possible loopholes? Will it reduce investment and rental housing?

Even a lot of CGT supporters are expressing reservations about the likely effectiveness of the proposal. For example, inequality researcher Max Rashbrooke says that it’s a mistake to make the scheme revenue-neutral, given that the Government urgently needs to spend money to implement its kindness policies. He also says that greater egalitarianism would be achieved from a more radical inheritance tax: “Fairer still would be a tax on gifts received – to compensate those not fortunate enough to inherit wealth – and a more thorough wealth tax that acknowledged the benefits people derive from their assets every year, not just at sale” – see: Capital gains tax: A test of our national myths and Labour’s mettle.

Similarly, many on the left and right continue to question why the “family home” is being exempt from the CGT, suggesting that this creates all sorts of problems with the scheme as well as reducing its potential to fix inequality and unaffordable housing.

For example, at the pro-Government blogsite The Standard, Matthew Whitehead writes In defense of taxing the family home. Here’s his main point: “National is right about one thing. The exemptions proposed by the Tax Working Group leave ridiculous holes. We should close them. It’s wrong that a $5 million dollar home, whether it belongs to an accountant, a union-busting director, a politician, or a business owner, somehow doesn’t get taxed because it’s a family home. Let’s tax it, and use that money to discount other taxes, or to nationalize the ambulance sector, or to partially fund NZ Super, or a million other things that will be worth the tradeoff. They’re right that it’s ridiculous that selling an art collection would be free from a capital gains tax. Let’s tax it. Hell, let’s set a reasonable threshold, and tax the real realized gain on every asset over it.”

Others have criticised the political decision to exclude the “family home” from the CGT, including economist Cameron Bagrie who was reported yesterday as believing “a CGT should be implemented, but it should be across the board and include the family home” – see Jason Walls’ Economist Cameron Bagrie is not convinced a CGT would do much to improve living standards.

According to Bagrie, “the impact of the CGT would be more negative than positive. This was mainly down to the way small businesses would be hit by the tax.”

There is plenty of concern that economic investment will be discouraged by the CGT. This was one of the main problems raised by the three dissenting members of the Tax Working Group. And for a high quality and in-depth discussion of such concerns it’s worth listening to Kathryn Ryan’s 33-minute interview with former Inland Revenue deputy commissioner Robin Oliver: Could capital gains tax proposals encourage dis-investment?

Similarly, Brian Gaynor argues that under the CGT there will be much more incentive for New Zealanders to invest overseas, because of inconsistencies in taxation rates – see: Tax plan likely to go the way of the Titanic. He points out that the new tax could also negatively impact on the non-wealthy in another area: “There is a widely held belief that capital gains tax only impacts the wealthy, but this is incorrect if we include the 2,926,821 KiwiSaver members. All KiwiSaver funds holding New Zealand and Australian equities, either listed or non-listed, will have lower investment returns if the proposed CGT is introduced.”

For other arguments about who else will be negatively or inequitably impacted by the tax it’s worth reading David Farrar’s Who will be affected by the proposed CGT?  and Liam Hehir’s How the capital gains tax affects the average New Zealander.

Will house prices go up or down as a result of the CGT? There is no consensus on this question, but certainly there’s no strong suggestion that the CGT will be any elixir for the problem. Likewise, with rental properties, it’s hard to see that the tax will result in cheaper rent.

It is clear that there will be some headaches caused by the tax in terms of compliance costs, especially in terms of valuing the price of assets when the CGT is first introduced. For the best discussion of this, see Ben Leahy’s Automated mass valuations could be used to value Kiwi properties ahead of a capital gains tax. As this article – and others – make clear, there will certainly be a bonanza for tax consultants and accountants, who will be advising the wealthy on how to structure their assets to avoid the CGT.

There will be many complicated situations that arise from the CGT and often there will be inequities as a result. This is dealt with well in David Snell’s Implementing capital gains tax will be ‘incredibly difficult’.

Finally, for humour on the tax proposals, see my blog post, Cartoons about the proposed capital gains tax.

by Dr Bryce Edwards

During the last decade, there has been an explosion of concern around the world about economic inequality. Here in New Zealand there has been a growing debate about how to deal with this, and virtually all parts of the political spectrum now pay attention to this problem. It is in this context that the Tax Working Group’s proposal for a relatively comprehensive capital gains tax (CGT) has been produced – as an attempt to help rebalance inequalities in New Zealand, and improve our society.

The best arguments in favour of introducing a comprehensive CGT revolve around inequality, and Michael Cullen, who chaired the Tax Working Group (TWG), has been clear in his defence of their proposals that they are fundamentally about fairness.

He’s pointed to the great economic inequality that exists in New Zealand and suggested that a CGT would help ameliorate that, because it would result in the rich paying more tax based on their wealth and income. He has argued that it is wrong that wage-earners are taxed on their full income while the wealthy “can earn income from gains on assets and not be taxed at all”.

The proposed CGT would have a 33 per cent tax applied to rental properties, baches, company shares, farms and other businesses. Cullen has argued that the additional $8bn that might be raised from the new tax over the first five years would allow tax cuts for the poorest New Zealanders.

Straight after the release of the report on Thursday, leftwing blogger No Right Turn elaborated on this: “At the moment we have a situation where ordinary New Zealanders are taxed on every dollar they earn, while the rich are not. And that is simply wrong. Income should be treated equally and taxed no matter what the source – and that means taxing capital income. If it has the side effect of removing distortions in our economy – the housing bubble, or farmers farming for capital gains – then that is a bonus, but fundamentally it is about fairness and making the leeches pay their fair share for once” – see: For a capital gains tax.

For a more in-depth discussion of the inequality driving the CGT agenda, see Max Rashbrooke’s Capital gains tax: A test of our national myths and Labour’s mettle. In this he says: “most of all the proposed tax is a test of the stories we New Zealanders like to tell about ourselves. Fairness and egalitarianism are supposedly our touchstones. Yet we have allowed inequality in income – our salaries and wages – to soar to such a point that we are among the developed world’s most unequal. When it comes to wealth – the assets we own – our wealthiest tenth have 60 percent of all assets while the poorest half of adults have just 4 percent. At the moment, that vaunted egalitarianism looks a lot like a myth. But a capital gains tax could make it something more real.”

Reinforcing that the CGT is all about dealing with inequality, John Armstrong also argues that the case for such a tax has been well made by the Government and the TWG: “They have made it their mission to address inequality. The means of doing so has now been laid out in detail in front of them. For Ardern in particular, the implementation of a capital gains tax is the ultimate test of her willingness not just to talk about doing the right thing, but to actually do the right thing. And without question, it is the right thing to do. Taking into account the current inconsistencies and anomalies in the way assets are treated, the logic for the introduction of a capital gains tax is compelling. The economic logic in terms of removing distortionary factors impeding investment decisions is similarly persuasive” – see: Failure to deliver capital gains tax would see Ardern reduced to a laughing stock.

Similarly, according to The Press newspaper, the debate “is about fairness. Is our tax system as fair as it could be? If your definition of ‘fairness’ boils down to the reduction of income inequality, then the answer is no… But we have heard little about fairness since the report was released on Thursday” – see: The pains and gains of tax reform.

The editorial condemns opponents for “political hyperbole” that has become “absurd”, especially the suggestion that “ordinary New Zealanders” are going to be worse off under the proposed new tax: “The reality is somewhat different. Rather than the ordinary Kiwi battler, it’s the wealthiest 10 per cent who would overwhelmingly be affected by the proposed capital gains tax. It is bizarre to hear hokey lines about the mythical Kiwi way of life trotted out by politicians who own as many as eight properties.”

Another newspaper editorial, in the Whanganui Chronicle, says that the CGT is an appropriate response to the growing divide in society between renters and landlords, and can help “correct an economic imbalance that threatens to tear our society apart” – see Simon Waters’ editorial: Why shouldn’t you pay tax, the rest of us do?

The editorial argues that the CGT should be implemented despite pushback from those negatively impacted by it: “We have become a nation of landlords. And tenants… Half the country is now crying like children who’ve had their candy fix taken away by mum. The other half, the tenants and the ones who can’t get on the property ladder because the investment frenzy has driven house prices too high to afford, wait. They wait to see if the Government has the gumption to turn those recommendations into reality. Will it cost Labour votes? Most likely. Would it be a politically savvy thing to do? Nope. Is it the right thing to do? Absolutely.”

For TVNZ’s Jack Tame, the deciding question is whether we “value fairness” in society. He supports a CGT and points out that perhaps it’s not in his interests to do so: “I work hard. I don’t sleep much. I work six days a week. I have sacrificed a lot in my life to get ahead. And I earn a lot of money. Most accountants would agree, a capital gains tax is absolutely not in my personal interest. But I do think it’s fair” – see: Why I think a capital gains tax is ‘fair’.

Tame says it’s all about consistency: “why if we value fairness, do we have an economy where every form of income is taxed tax, except one? Where, if someone buys a property, rents it out for a decade to cover the mortgage, then sells it for $400,000 more than they bought it for… that person gets to keep every single cent of that profit, while you working down the street and slogging away in a job, lose as much as 33 cents on the dollar.”

Even bank economists seem to agree that the CGT proposal is a positive step in dealing with inequality. For example, Jarrod Kerr and Jeremy Couchman of Kiwibank told The Spinoff on Thursday that “This is at a time when the concentration of wealth is shifting to a declining share of the population, and if nothing changes, wage and salary earners will likely have to pick up an increasing share of the country’s tax bill” – see: Five commentators weigh in on the Tax Working Group’s recommendations.

Similarly, Salvation Army social policy analyst Alan Johnson explained: “The taxation of wealth is past due in New Zealand if we’re to address the inequity that income from labour – and especially the labour of wage and salary earners – is taxed comprehensively, while the taxation of income from capital is taxed lightly”.

Another important part of the argument for introducing a CGT is the simple fact that most other similar nations have them. For a discussion of the various international tax rates and configurations, see Zane Small’s Capital gains tax proposal: How it compares to the rest of the world.

Cullen has been keen to push this line, and appeared on The AM show on Friday to say: “Everybody else has [a capital gains tax]. The United States, the United Kingdom – these rabid ‘socialist’ countries like the United States have a capital gains tax… France, Germany, the Nordics – they all take it for granted. Many of them have higher productivity than we do. The world doesn’t collapse with the introduction with a capital gains tax” – see Dan Satherley’s Judith Collins says capital gains tax will ‘make Simon Bridges the Prime Minister’.

On the question of whether it is fair to include cribs or baches in the CGT, Cullen also said: “Let’s be real about this – most families in New Zealand don’t own holiday homes. We never did – most families never did. We certainly don’t now. Holiday homes now are often bigger than the houses most people live in, in the cities. And if they’re not taxed, then it’s unfair to tax the ma and pa investors in rentals.”

Finally, so far National’s major attack-line against the proposed CGT was Simon Bridges response that the recommendations “are an attack on the Kiwi way of life”. For responses to this, see Megan Harvey’s Kiwis roast Simon Bridges on social media for his ‘Kiwi way of life’, and Hayden Donnell’s Once more unto the beach house: Simon Bridges and the Kiwi way of life.