A tax on baches? Don’t count on it

Owners of holiday homes clearly got a hell of a shock from a recent column suggesting that ‘‘buried’’ in the first report from the Tax Working Group (TWG) is a proposal that would lead to an annual wealth tax on second homes and baches.

It’s not buried. It’s discussed at length and all but dismissed. But don’t let the facts get in the way of a good story.

The comments section on this somewhat mischievous commentary ran to 31 printed pages before editors closed them off. Commercial radio commentary fizzed with outrage over ‘‘the bach tax’’.

The author, NBR Rich Lister Troy Bowker, constructed an emotionally charged example in which an ‘‘ordinary Kiwi family’’, Tony the electrician and Janet the teacher, could end up paying tax annually on the value of the bach that Janet’s father had gifted them.

He based this on the TWG’s discussion of a ‘‘risk-free rate of return’’ (RFROR) approach to taxing capital assets, including ‘‘nonowner-occupied housing’’. Theft of the Kiwi dream was invoked.

Sigh. It’s no surprise to see the capital gains tax debate revived with a spray of alarmist buckshot, but it’s tedious de´ ja` vu all the same.

Yes, the TWG report does discuss taxing assets annually on their capital value, irrespective of whether or not they’ve been sold or whether their value has gone up or down.

As Bowker noted, that idea was shot down in the early 2000s, when TWG chairman Sir Michael Cullen was Minister of Finance. Cullen remains just as sceptical today.

At the TWG report’s launch in September, Cullen noted that ‘‘nobody in the world manages to run an accruals-based capital gains tax’’, of which the RFROR approach is an example.

The report notes the biggest problem about taxing unsold assets on their deemed value is that taxpayers have to stump up money they may not have.

Since the Government has promised it will pass any broadening of the existing capital gains tax regime into law before the 2020 election, it is almost a no-brainer that it won’t have a so-called bach tax in it.

Think about it. Would NZ First – let alone many Labour MPs – support such a proposal? And if not, how would it pass?

Perhaps Bowker can be forgiven for a selective reading of the TWG report to justify blowing a dog-whistle. After all, if the ‘‘bach tax’’ doesn’t have a dog’s show, why even include it in the report?

Cullen acknowledged the problem of being a lone voice of realpolitik in a roomful of tax policy wonks in his remarks at the recent Chartered Accountants of Australia and New Zealand tax conference on the same day as the bach tax piece appeared.

There was an emerging discussion in the group about ‘‘comprehensiveness versus acceptability and sellability’’, he said, and ‘‘nitpicking’’ over tax policy purity was a recipe for political mischief-making. No kidding.

There will be more bach-tax-style scaremongering, which underlines how risky the Government’s cunning plan is to legislate before the election for any new capital gains tax policy.

By promising that the changes will only take effect if a Labour-led government is reelected, it risks making the next election a referendum on the capital gains tax – an issue that has tripped Labour up at each of the last three general elections.

Labour’s principled determination to broaden the existing capital gains tax regime stems from its deep-seated belief that the current, somewhat ineffectual, regime contributes to inequality by favouring people who own assets over people who just earn income.

They’re right, but it’s a difficult political argument to win. Turkeys don’t vote for Christmas, and even people who don’t own many assets have proven easily convinced in the past that they’re headed for the roasting pan, too.

The argument is that legislating before the election will prevent misrepresentation. But in pursuing this approach, the Government is also ensuring this proven electoral poison will be front and centre through much of next year and into election year as proposals are developed, legislation drafted, submissions aired publicly, and legislation debated and passed.

Unless the argument about rampant inequality in New Zealand society – and the contribution to that of undertaxing capital gains – has been won, it’s far from clear that this is politically wise at all. –BusinessDesk